Episode 18

Non-linear causality – Discussion on vicious, virtuous and balancing loops

Category :  Thinking Process

We received a lot of messages, directly and indirectly asking us 'if TOC addresses Non-Linear Causality'. Non-linear causality means that A causes B, then B can also boomerang back to A at some point. Now, these could be either positive loops or negative.

Understanding these loops, as they exist in an organization, is very critical for any change agent. Without understanding the existing causal loops at play, interventions can lead to waste of time and capacity. This is one of the reasons of failure of many organization-wide transformation initiatives.

Transcript
Shubham Agarwal : Hello, and welcome to the Counterpoint podcast. I’m Shubham Agarwal, and we are back with another episode on the thinking processes series. Well, in the last episode that we discussed, we left at the point that we will discuss about mystery analysis in detail. However, given the huge and great response from all our listeners, we have decided to take up a different topic today, because a lot of listeners wrote back asking if TOC can address nonlinear causality. And that’s the topic that we’re discussing with Satya today in this episode of thinking processes. So, let’s go deeper and understand what is this if TOC answers it? And how If yes, so let’s welcome Satya, hi Satya, welcome back, how are you?
Satyashri Mohanty : Hi, Shubham great to see you again. Yeah, so, what you have put forward is an interesting topic about linear and nonlinear causality, we need to demystify these terms for our audience. So, what is linear causality, linear causality is actually a unidirectional cause and effect relationship, which means when we say A is causing B, okay, nonlinear causality is the direction is two ways or what we call as bi directional that means not only A causes B, but B kind of boomerangs back to A okay. So, A causes B and B also causes A, just to give you an example.
Shubham Agarwal : Can you give an example to elaborate
Satyashri Mohanty : Yeah to give you an example. So, so, so, an example would be let’s look at the stock market right? Just imagine that shares of a particular stock is going up. And once it starts going up, people start making more money. And then because people are starting to make more money, even more people come on to buy that stock and the stock prices further goes up and when it further goes up, you know the profit is further higher, and then it you know, gets more people to come on board. So, this is an example where with each completion of a cycle, there is an amplification of two variables, the investors and the and the prices right. And then this creates the nonlinear impact and such a causal loop is called a self reinforcing causal loop. Okay. So, you can you can see it in various phenomenon across, you know, happening across us, for example, you can you can see, the way a stampede happens in a in a crowd, right, it just, like a vicious cycle it it triggers up, or for example, when you hear when the microphone comes very close to the speaker. Right? So, the output of the microphone feeds onto the Yeah, yeah, to the speaker and from the speaker back to the microphone until you hear a amplified screeching sound, okay, it can happen in a relationship for example, you say some hate words, the other side, you know, because you have said some hate words the other side, you know, talks about more hate words, then you have a reasoning that you know, because the other guy said, So, I have to retaliate. And this is kind of, you know, A leads to B, B leads to A creating a self reinforcing loop of more and more amplification of of the, of the variables, right. So, this is what happens, what we call as, as, as a nonlinear, causal loop. By the way, nonlinear causal loops are not just these kind of vicious or a virtuous loop, but they can also be balancing, for example,
Shubham Agarwal : I can guess that. You same something bad to the other person in the relationship and a retaliation starts causing more hate words. It goes on till maybe a break point. You don’t who started it all. Each person feels the other started it.Satya these feedback loops are like a runaway system. But there are systems with feedback loops which stays stable like the controllers. Can you talk about it
Satyashri Mohanty : You know, let’s look at the body, right? So, when you start exercising, okay, you start sweating, okay?
Shubham Agarwal : Yes the exercise increases temperature and one starts sweating.Yeah. Because Because you’re sweating, the temp, the, you know, body cools down, and and then the temperature drops. So here, temperature impacts sweating, and the sweating also impacts temperature. So it’s like a bi directional, causal loop.
Shubham Agarwal : Yeah this is a good example of a birectional causal loop which stays stable. For a strange reason, this kind of loop is also called non-linear loop in systems thinking. But we will not go there.I have a different point
Satyashri Mohanty : So you’d see this, these kind of, you know, causal loops all around us. And also in business, by the way, it’s not just in nature or it’s also in business problems, you will see A lead to B and then B boomerangs back to back to A.
Shubham Agarwal : Right, right. So we’re going to talk more about it, but you know, before we go ahead, I must tell you that the reason I love this philosophy and the concept that we discussed so much, is because they relate to my daily life. So well you know, these these these examples are so simple to understand. And I relate to them really well. Great. So, but Satya what is so great about it, you know, is it not obvious to look into nonlinear causality where it exists?
Shubham Agarwal : These example look naïve and obvious. I am not still not getting the big deal here. What is so great about these loops?
Satyashri Mohanty : Yeah, see, the real issue out here is, you know, once we describe this kind of nonlinear loops, it looks very obvious and we say as we understand, but it is very important to understand that nonlinear causality is does not come natural to our way of thinking, we mostly think in linear causality. Let me give you an example. Suppose you meet your friend and he kind of confides with you about his weight issues. Right?
Shubham Agarwal : Okay.
Satyashri Mohanty : And he says no, no, you know, my weight is going up. What would be your immediate reaction when somebody confides you about his, you know, weight issues, what kind of you know, advice you would tend to give.
Shubham Agarwal : I would say look at your eating habits, you know, look at the kind of food that you are having, do some exercise, put some put some work out. I think so. Yeah.
Satyashri Mohanty : Yeah. See, yeah, mostly, we will react to it and say, you know, you should control food, eat less of carbs, do some exercise. Now, on the face of it, this looks like a very good causal thinking, Why? Because you know, that it is the imbalance of calorie intake versus calorie spend, which leads to a weight issue. So the easy way out, is to cut out on the high calorie food and burn more through exercise, and then you should be okay. Yeah, but, but let me tell you something, a larger system that your friend is operating, to understand that there could be actually a nonlinear causal loop under play. And the first sign of that existing is that your friend is is knows about the solution, but he’s not implementing it, which means there is a bigger problem at play here, it is not that he does not know that, you know, cutting down on food, rich in carbs, or fat, and doing some exercise is the way out, right? He knows about it, but still is not doing it, it is the first sign that he’s kind of caught up in some nonlinear causal loop. Okay, so let me build up this case as you know it is a hypothetical case to tell you that.
Shubham Agarwal : Yeah interesting very nice to look at it from a different perspective, yeah.
Satyashri Mohanty : Yeah, yeah, take a take a step back and try to analyze that is this guy caught up in some kind of a nonlinear causal loop. So I’m trying to build up a case here. Now just imagine that when I asked this guy of how he is working, you might find out that the kind of job this guy does, he has to work late hours. So he comes home very tired, sleeps late in the morning, and by the time he’s ready, the you know, he’s kind of rushing to his office. So and then again, because he starts his work late, he’s forced to stay late. So his life is kind of caught up in this vicious loop, like, you know, coming late from the office, most of the time, he is tired then he sleeps late in the morning, by the time you know, the office time he begin late to the office, then he has to kind of catch up so he’s caught up in this loop, he is caught up in this loop, right. And similarly, if you look at his, you know, eating habits, the way the meetings are arranged, he he skips key meals and then his body craves for sugar forcing him to you know kind of eat food which is rich in carbon sugar and which in turn, you know, creates hormonal imbalance right and hormonal imbalance could be you know, the feeling of being full is is kind of those hormones like leptin or insulin which you know, you become a you know, resistant to this hormone, so, you stop having that feeling of being full. Okay, so you start eating even more so if you see here the entire thing because you know, his eating habits are a little haywire, his body is craving for more sugar and and because such sugar rush in the body, right and when he eats a lot of food, which is rich in carbon sugar, there’s a sugar rush causing the you know, the insulin overdrive, which could lead to insulin resistance and and and then, you know, making him wat even more sugar. So it’s kind of a vicious loop that he is caught into.
Shubham Agarwal : Yeah a terrible vicious loop. I have read about how skipping meals and then eating food rich in carb can lead to release of too much insulin , causing insuline resistance and again a craving for more sugar and carb.
Satyashri Mohanty : So now that the way he is working and the way he is, you know, eating his food, you got a very different perspective, isn’t it?
Shubham Agarwal : Yeah. Yeah,
Satyashri Mohanty : Your first solution was so naive. Your first thinking was so naive. And now when you look into the you know, the deeper causal loops that he’s caught into right? he is caught into this cycle of you know, managing his time or or eating the kind of food that he is eating and and doing more of it and and he’s kind of caught in the rut right, you might then come out with a much different solution because now we have got a much deeper understanding of why he is in the problem that he is in and will not create a very naive solution which comes out from a very linear thinking, single step linear thinking, Okay? You have weight issues, okay, immediate solution is cut down on food and do more exercise. Okay?
Shubham Agarwal : Let’s switch to context of organizations. What do you do when you see reinforcing or balancing loops at play? Can you explain with examples
Satyashri Mohanty : Yeah, so, if you look at balancing loop systems, which have balancing loop, even organizations can have balancing loops, right? Like the example that I gave of, you know, how the sweat controls the temperature and, and then the, it is a bi directional system sweat control the temperature and temperature controls the sweat, this is like, you know, keeps the system very static, like like the, the controller of your AC, which kind of, you know, takes the feedback of temperature from the room and controls the condenser, and hence the temperature stay static. It’s not like a runaway loop. But balancing the system, if you see, they’re designed to resist changes, okay? And, and that’s one of the reason why many organizations have rigidity, for example, you know, if you look at a company where the sales team is trying to increase sales by reducing prices, right, so sales goes up, but the EBITDA margin comes down, once the EBITDA margin comes down, the CFO, you know, gets into the action, and he tries to control the discounting. So that the sales comes back to the normal, right. So here, it is, kind of the budgets, the measures, the performance measures, creates these kind of a balancing loop. Right. And, and this is these, these kinds of companies stay almost at at the same place, growing gradually at the pace of the economy, right.
Shubham Agarwal : From the episode on conflicts , I can relate that the balancing loops are because of underlying unresolved conflicts which pull the organization in two counter directions, making it eventually stable at one place.So the way out of this , is a break thru solution which meets the seemingly conflicting needs.

 

And, and, and that’s why, you know, these companies, when they, when they become, that’s where, you know, many of these balancing loops are also because of, of a conflict that is, you know, underlying the entire organization. And this, this kind of a conflict, which is around at the example that I gave about margins versus the sales, right, these kind of a conflict keeps the organization static at at one place. And one of the ways to break out of these kind of, you know, balancing loop is to is to create a breakthrough where both the needs are met, remember the conflict cloud that we talked about.

Shubham Agarwal : Yeah, yes, yes.
Satyashri Mohanty : So in this example, of a balancing loop, as I said, conflicts create balancing loops, balancing loops, what you have to do is like, in this example, you have to create a solution, which is like a breakthrough, you kind of meet both the needs in a, in a much more amplified way, the way to do it, in this case, is to create a competitive edge, right, where you can get more margins as well as you know, get more sales, right and creating a virtuous loop because you create more sales, you do more branding, because you do more branding, you can further you know, improve upon your margin. So you can create a little bit of virtuous loop and so companies with a decisive competitive edge, Apple at one point of time, created this kind of, you know, competitive edge around some of their products. Okay, but if you have a virtual reinforcing loop, a reinforcing loop means a loop which is positive, right, with every cycle getting completed, it’s actually a positive way forward. Now, such companies are on a run right on a roll,
Shubham Agarwal : Yes such companies are rare.they actually don’t need much help, right? And but yes, remember, a reinforcing loop is is not a is not a point of equilibrium, these kinds of companies will hit the point of equilibrium, for example, your sales profits, everything is going up, but one day you will hit a capacity constraint, which is either internal or you know, market as a constraint. Till you know, then you hit the balancing loop again, right, that that’s, that’s what can happen in a virtuous reinforcing loop.
Shubham Agarwal : Oh so you end up at the same place again. What about companies which are on a downward spiral? The same reinforcing loop which is of a vicious type.
Satyashri Mohanty : But the other thing that can also happen. Yeah, so the other thing that can happen is what we call as a negative reinforcing loop, which is like a same amplified loop, but it’s like going down the drain an example would be a company having a severe working capital issues, which is preventing him from buying raw material. And because you are not buying adequate raw material, your billing is getting affected and your billing gets affected. Even your working capital gets even more aggravated. Okay? And then no investor is willing to give you more funds and then you kind of you know, it’s like a death spiral. And you are all you are, you know, you, if you don’t do anything, then you hit the ultimate equilibrium point which is, you know, the death itself.
Shubham Agarwal : What do you do then. You can’t just sit and see it happeningRight? So when you face a vicious loop, which is kind of a downward cycle, right, and not the upward cycle, it’s a negative cycle, what you have to do is you have to find a way to reverse the cycle, okay. So, when you understand what kind of a loop that the organization is facing, is it like a balancing loop? Is it like a, you know, virtuous, positive reinforcing loop? Or is it a vicious downward loop? Okay, vicious downward loop, you have nothing but a finder, again, innovative way to reverse the entire cycle. And in this example of, you know, we get some companies like that with a severe working capital issues, and telling us, you know, get us out of this rut, okay. And they can’t even borrow money and and we have had cases a CDR case a textile company, almost on a CDR case, banks not willing to fund more and and, and you’re almost like close to your deathbed, right? If you don’t do something, you’re gone because every cycle as I said, you’re not able to pay your workers, workers are leaving, capacity trims down as capacity trims down your orders are late, as the orders are late, more orders are not coming in. So you would start losing people customers, you know, investors, and it’s almost like a downward cycle on on every thing that you’re trying to do. So, these companies what we try to do is how to reverse this cycle of the the negative cycle of cash right, and then we find out innovative ways to generate cash from within the operation, okay. So that then you start buying adequate raw material, then to improve the billing then so that you’re you know, you start getting more cash, then you know, the organization becomes more and more into an, you know, from a negative cycle, it starts leaking into equilibrium, and then we say, can we create a virtuous cycle now towards positive.
Shubham Agarwal : Can you share how we in vector analyze organizations?so, so, with the TOC thinking process, what we try to do we try to analyze the organization, through these kinds of, you know, loops, what is the, what is the loop that the organization is caught into? Is it the balancing loop where you are kind of stuck on all directions, you take a step on one direction, the other step, you know, kind of pulls you back, or you are caught in a, you know, a negative spiral. If you’re on a, you know, a positive, virtuous loop, you don’t need any help, you’re like, no, you’re having the best of times.
Shubham Agarwal : Should managers learn this type of thinking?
Satyashri Mohanty : Yeah, as I said, you know, the, we as human beings, don’t think in terms of nonlinear causality, our default mode of thinking is, you know, short step, you know single step, linear causality, right. And that’s why we have bigger problems around us whether the climate conditions, the climate crisis that we have, because our ability to understand these loops is very, very important. or, for that matter, if you look at the reasoning that is now being offered behind 2008 financial crisis, the bubble that God created, you can see, it’s, it’s actually a reinforcing loop that created it, right?
Shubham Agarwal : Even the 2008 financial crisis was because of reinforcing causal loop of speculations, which lead to a bubble, only waiting to be burst.
Satyashri Mohanty : It’s very important that as managers, we need to understand these loops. Otherwise, you know, we will waste a lot of money. And I want to give you an example of one company, which is it’s a large company billions of dollars. Yeah, it had it had two divisions. One division is supplying raw material, which is close to about a $1 billion division, which is supplying raw material to the other division, which is, you know, close to about, you know, about $10 billion. So it’s like a large conglomerate. So one of the things that this company came up to us and said that, you know, we have spent close to 300 crores in digitization we have, we have our ERP. We have put in advanced schedulers, we have kind of tied up everything digitally, but I don’t know why people are still working on Excel. So one of the things that I asked is so what’s wrong if people are working on Excel,
Shubham Agarwal : An often heard a lot is well
Satyashri Mohanty : What can you just elaborate on the, yeah, can you elaborate the problem? And then then he said, You know what, I have a demand file. I have a capacity file all in the system, right? And you have to take the demand file loaded onto capacity file, understand the loading quote a due date. That’s what a supply chain solution does. But he said that you know what the demand file, even it’s in the system, people have a parallel Excel sheet to understand what is the real demand. And then nobody the capacity file is is is not being used at all. And, and that’s how I am and the entire system is just used to generate some, you’re on the MRP and generate some PRs. And anyway, the PRs also people don’t follow it, they create their own manual PR.
Shubham Agarwal : this is quite common in many organizations. Many organizations have wasted money in supply chain solutions but continue to work with manual with excel based systems.

 

So I’m in this world. So I said, How did you approach this problem? He said, we approached this problem that we have to do digitization, right, we have to do automation. And and

that’s what happens when you don’t define a problem properly and don’t understand the causal loops, you will make these kind of, you know, errors, right. And what we found out is, you know, we had a lot of discussion to kind of zero down on what’s the problem statement here. And then what we found out is that, you know, this company was the people who are supplying it continuously complained about, you know, the plant, being under continuous expediting mode, okay, and you think we make some schedule, then it keeps on changing, and then that is so disruptive for our plant. And while you talk to the recipient department, the other view, they talked about, you know, the supplies are very unreliable, things mostly come at the month end, it’s so unreliable, right. And one of the things that you then see is that if you want to, you know, implement a good supply chain solution, the thing that you want is a stability of the demand horizon, right. Otherwise, if your demand keeps on shifting, your production schedule keeps on shifting, so, so you need some kind of rigidity of the demand file. And that’s when you can use a demand file from the system. So they had a forecasting model, and they forecasted for, you know, two, three months. And typically, people say, you know, you got to make some period as rigid, otherwise, you know, the things keep on changing. And the funny part was, they were not able to keep things rigid, even for a month. Even though their total lead time was about two months, they needed two months of kind of stability, they were not even stable for a month. Now, here is the problem. So the plant was complaining. And when, when we went and they said, What’s your problem? Saying boss these guys keep on changing the forecast. Okay, which is looking like you’re gonna whatever I make, they keep on disturbing when you go to the other party and you say, boss, why are you keeping on changing forecasting he said who told you I changed forecast, I don’t change forecast. It is a supply, which is the problem and I’m and because when the supply is so unreliable, obviously, my demand will change. So you supply what I’m asking for, you know, things will be okay.

 

Shubham Agarwal : I see a causal loop, which says reason why plant is unstable is because demand on plant fluctuates. And because the plant is unreliable, the recipient department keeps changing forecast numbers , like adding buffers, etc to manage it. Classic case of A causing B and B Causing A. I think this leads to the classic bullwhip effect. We have a podcast dedicated to it.if you don’t understand this, you know, the deeper causal loops at play, you will have a problem, you can’t have a naive solution. In fact, you know, the naive solution there was please make a rigid plan for at least two months. Now, just by saying it make a rigid plan does not become rigid, right? Because if your the recipient department has an issue in their production planning, they are going to disrupt it to you, right?
Shubham Agarwal : Correct. It is like the example of weight issues and giving a naïve solution of eating less carb.
Satyashri Mohanty : And so, you can’t you can’t force solution you can’t say boss please be reliable or you can say please make the plan rigid, this kind of are a very naive solution very simple, very similar to say, you know, the, if you have a weight issue stop eating food rich in carbs, right. So, we might have a different podcast around this topic, but this is just to tell you that it is very important that when you draw the causal loops, you get a totally different perspective. Okay. And and you will understand that if there is a balancing loop at play that it must be because of an underlying conflict a conflict creates a balancing loop always okay. And or is it like a vicious loop which is going down the drain a company almost there, a very few companies who come up like that almost on their deathbed, right? And what you need to do about it, and or is it like a company which is on a roll, right, a company which is on a roll. They are they will be they don’t need any thinking right now. Right? They are not not thinking the sense of, of trying to do a diagnostic they’re on a roll. They just have to implement what, what plan they have in in place, and that’s working right till the time they hit the roadblock of some kind of a constraint where it is an equilibrium point and you get a balancing loop coming in between now.
Shubham Agarwal : Great. Satya I think this is extremely helpful. And what we started with is the question that does TOC answer to nonlinear loops or nonlinear causality.. And not just that it answers it has wonderful solutions or breakthrough solutions, that can you know, help break these loops and make a loop which is positive and which is virtuous in cycle so that you grow from wherever you are, which I think we will discuss in another podcast and target and address the solution part of it or the or the way forward part of it, and come back and discuss more about it right.
Satyashri Mohanty : Yeah, we will we’ll spend some time in the later podcast of how exactly we approach when we face this how what is the way out or the or the solution. How do you build a solution face seeing this kind of a loop that we are seeing?
Shubham Agarwal : Great, thanks a lot Satya. Thank you for being there with us. And thank you to all the listeners in case you have any doubts again on this topic, you can please write to us on our social media handles, or you can also write to us on our website. The links are in the details to this episode. And keep following us keep liking us and keep supporting us like this. Thank you. Until the next episode. This is Shubham signing off. Bye Bye.
Satyashri Mohanty : Thanks Shubham
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