You have seen what a simple NaviMap is. This section will illustrate how a reinforcing and counterbalancing loop interact with each other to produce interesting results and valuable insight by systematically using a few simple rules from NaviThink. This is an example of the New Economy.

Exhibit 1 displays two basic NaviMap forms. A reinforcing loop on top of a counterbalancing loop below.

Let's begin with the loop above. The solid arrow from Box 1 to Box 2 describes the intense competition among firms to succeed at delivering a one-to-one product or service to customers. As they competed furiously, they also lose pricing power. And as some firms begin to get better at approaching one-to-one, others also learned how to do the same. This is represented as the solid arrow from Box 2 back to Box 1.

With the exception of business like private banking for the highest net worth individuals, it is too costly and impractical to provide a true personal product or service. Box 2 is the holy grail few industries achieve.

The counterbalancing loop beneath the first loop is actually the flip side of the reinforcing loop we just visited.

As the customer base fragments into increasingly smaller niches (box 4), unit costs of producing for small markets will rise (box 3). Rising unit costs (box 3) will set a limit on how far a supplier can proceed with Box 4.

Standalone, these two loops are uninteresting, but not if we combine them as we have done in Exhibit 2.

Exhibit 2 shows how we combine the reinforcing loop and counterbalancing loop. But let's briefly discuss a principle of NaviThink before continuing with our story.

One of the most basic rules of NaviThink is that no reinforcing loop of the positive sort can continue indefinitely. At some point it must slow down, stop or reverse. It is the same as saying you can't keep growing at the rate a baby grows, otherwise many of us could achieve a 10 m height. All reinforcing loops will be checked.

Back to the story in Exhibit 2.

As the reinforcing between Box 1 and Box 2 accelerates, the 'limit of growth' arrives in the counterbalancing loop above it. Box 2 produces Box 4, and Box 1 and Box 4 result in Box 3, which you have already seen checks the growth of Box 4 (Dashed arrow from Box 3 to Box 4)

Box 4 is in a very uncomfortable and tense position. Box 2 is promoting it, but Box 3 is demoting it. The result is many competing firms are highly stressed, and they continuously seek relief. Under normal or Old Economy conditions, this is a set up for industrial consolidation where marginal players exit the business. If that happens, the system of logic of the NaviMap in Exhibit 2 becomes dismantled as consolidation would weaken Box 1.

But what we saw happening in the last few years with the US was hardly normal or Old Economy conditions. Falling prices and rapidly improving IT equipment helps to support the New Economy. We want to explain that in a simple way with NaviMap.

A principle of NaviThink had suggested that the situation in Exhibit 2 was not sustainable. So as a NaviMap builder, we have two choices on how to move forward.

1. Consolidation led to many suppliers going out of business so that Box 1 cease to exert as much pressure as before. In extreme situations, Box 2 may even disappear from this NaviMap, and that would take out all the boxes following.

2. Take advantage of falling IT prices and improving capabilities. Use it to spur invention and innovation (Box 5), thereby creating another reinforcing loop between Box 5, Box 2 and Box 4. And of course, this new reinforcing loop will by the same basic NaviThink principle eventually experience 'limits of growth'. When that happen, it will bring on the first downturn in the New Economy. The onus is on policy makers to figure out how to return Box 1 to the scene when the economy picks up again. If they fail, its detractors will say that the New Economy was just a figment of our imagination.

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