Effects of decreased sales volume, number of customers and profit margin in an organization – A system thinking perspective

Following are some typical consequences when sales volume, number of customers, or profit margin is decreased in an organization.

a) Decrease in capacity of the organization to invest in new technology

Decreased capacity of the organization to invest in new technology due to reduced profit margin leads to the decreased capacity of the organization to compete with others in the market resulting decreased market share. Reduced market share results less revenue which in turn decreases profit margin.

b) Decrease in capacity to invest in human resource development and quality improvement

This leads to reduction in quality of product and/or service resulting decreased customer satisfaction which ultimately reduces market share and profit margin.

c) Decreased capacity to stock goods

Decreased capacity to stock goods reduces the capacity of the organization to compete in the market which eventually reduces the market share thus reducing the profit further.

d) Decreased capacity to give incentives to the employees

This leads to decreased staff morale resulting decrease in staff efficiency. Decreased efficiency of the staff may result in reduced quality of products and/or service which ultimately results customer dissatisfaction leading to reduced market share and profit margin.

e) Decreased capacity to purchase high quality inputs

Quality of input obviously affects the quality of products and/or service which ultimately affects market share and profit.

f) Inability to repay debt

This leads to bad reputation with bank or financing institutions which prevent from getting capital in time of investment which consequently reduces competing capacity, market share and profit.

Relationship among above mentioned variables is depicted in following causal loop diagram (CLD).

 Figure: Causal loop diagram showing consequences of decrease in profit margin in a organization