chain-reaction

Who wouldn’t want a tool that identifies problems early avoiding the inaction or complacency that comes from not knowing and not pinning down where the trouble is?

To respond to this, we introduce here the “business critical mass framework”.

Critical mass is that quantity of something that makes the desired process sustainable.

The term “critical mass” was first used in nuclear physics where it meant the smallest amount of fissile material needed for a sustained nuclear chain reaction (Wikipedia).

In business “critical mass” is the point at which a growing company becomes self-sustaining and no longer needs additional investment to remain economically viable (Investopedia).

Note, however, that the critical mass concept applies to two areas of business, the overall business and the individual processes that comprise it.

  • Business critical mass (overall): It relates to the customer revenues determined largely by the number of customers. They provide the income to back feed, to the necessary degree, all business processes.
  • Individual process critical mass: The individual business processes have also their own critical mass that is the quantity needed to make them efficient. Below that quantity, resources are not fully utilized, and processes underperform consuming more funds and thereby increasing the magnitude of business critical mass. This process critical mass, though important, is secondary.

Customer revenue

Customer revenue is the main determinant of the business critical mass and in its terms the business critical mass is expressed. A company should strive to raise the customer revenue above a threshold, the critical mass, to provide adequate feeds for all the business needs.

Business needs

A business cannot be sustained without covering its production system costs, nor can it survive without keeping current its machinery and other infrastructure, nor without advertising campaigns to attract and maintain customers nor can it survive without new markets and growth.

Therefore, to all the above items or processes, management should allocate appropriate expenditures, and we denote them as follows:

es – system (production) expenditure, a necessary input to produce products or services.

ei – infrastructure expenditure necessary to cover the costs of the business buildings, plant, and machinery

ec – communication campaign expenditure necessary for the advertising to attract and maintain customers

eg – growth expenditure, funds accumulated for growth and risks

These expenditures can be controlled and lowered by the effectiveness of Management, Leadership, Strategy, System design and other similar business soft issues. Also, it is noted that the critical mass of the business may under certain conditions adversely affect the individual process efficiencies as in the case of a small number of customers that cannot provide enough demand to keep the machines working efficiently or the lack of enough investment in technology that prevents reaching modern competitive standards.

The business critical mass framework

It is an analytical business operating model that is intended to assess whether a business has created the “critical mass” for being viable and to show, when the business has not, which processes either are underfunded lacking the necessary expenditures or are themselves part of the cause of the problem because of the way they are designed or managed. The framework is presented below:

critical-mass-business-framework

Can executives get some useful operational meaning out of this framework? We think they can, and to this end, we provide some indicative cases:

A business in its early times, first one or two years, may set eg to zero as a result of its policy to gain customers by lowering prices. Care, however, should be exercised as such a policy, if prolonged, can result to damaging the long-term viability.

If expenditure – es – needed to pay for direct production costs is assessed as lacking, management should realize that it has a major problem in its hands and must urgently act.

Expenditures for ei and ec cannot for long be kept on the low side. When ignored, they will next affect a more pivotal issue, the necessary input for the production expenditure.

The critical mass criterion CR – es – ei – ec – eg 0 is controlling the feeds into the operational systems. If this condition is not satisfied, the flow cannot be kept positive, meaning inadequacy, and causing underfunding of the business processes leading possibly to a spiral negative business result.

Conclusion

The business critical mass framework encourages executives to examine both customer revenues and the feeds to all critical business processes. The framework, we believe, can serve as a good analytical tool in identifying problems early that could arise either because of the organization’s inability to raise customer revenue (external) or because of the poor efficiencies of organizational internal processes and systems.

 

About the author: Panikos Sardos is the Managing Director of P&E Sardos Business Solutions Int., a management consulting firm that offers advisory services, coaching and training. You are welcome to communicate with us by email: psardos@sardossolutions.com or telephone: +357 99640912, +357 24400884, or visit us at www.sardossolutions.com