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National Presto Industries

Defense segment of the business at National Presto Industries, Inc. provides an excellent example of a reinforcing loop. The main issue at hand here is the dependency of this particular segment of the business on the contracts received from the Department of Defense and the U.S. Army, as the sole supplier of contracts and client for National Presto Industries on this side.

The arguable reasoning can be that as the Department of Defense provides more contracts for the company, National Presto Industries needs to provide more resources in order to be able to fulfill those contracts. While this is a positive element in the present time, in turn, this type of resource allocation is likely to make the company vulnerable due to a lack of diversification.

Understandably, as previously shown, if the U.S. Army finds a different supplier for its ammunition or decides to break off the business relationship with National Presto Industries, then (1) the entire defense segment will disappear and (2) a large volume of resources will remain tied into a part of the business that no longer exists. The latter implies additional, significant costs that are incurred by the need to reallocate. The reinforcing loop is, thus, as follows: an increasing number of contracts from the Army and Department and Defense makes the company allocate more resource to the defense segment, decreasing its capacity to diversify and increasing its dependency on additional contracts for ammunition.

From a learning perspective, one can apply a very simple model of the theory of organizational learning that includes scanning, interpretation and learning (Thomas, Clark and Gioia; 1993). The scanning segment should involve data collection at the level of the entire organization. The data collection phase is important within the learning linkage (including from a reinforcing loop perspective) because it will provide the key data that will reflect the conclusion about the loop previously presented and will emphasize the type of action that will need to be undertaken.

Relevant pieces of information retrieved during the data collection phase will show, for example, that the percentage of revenue that is provided by the defense segment of the business has gradually increased over the past years, pointing to a potential excessive dependency on this aspect of the business. Other relevant data could show a consistent increase of resources being allocated to the defense segment of the business, triggering the potential question as to what will happen with these resources if that respective part of the business disappears. All these are part of the second phase of the learning loop, the interpretation of information and data by which the data is given meaning relevant for the strategic decision making process in the company.

The final phase of this simplified model for learning is the phase where action needs to be taken. This will be later explained and translated into a Balancing Loop. For this phase, the data collection and interpretation phases need to be translated into something palpable, some sort of decision that the organizational management will make in order to reverse a process that has been identified. In this particular case, the data collection and interpretation phases should result into a decision to either diversify beyond a sole defense client or to limit the cooperation with the Department of Defense to a certain, predetermined level.

This learning phase, as mentioned, could be translated and explained into a balancing loop or a negative/controlling feedback. The idea of this loop is as follows: the data collection and data interpretation phases have shown that too many resources are allocated towards a single client, increasing the dependency of the defense segment of the business on that particular client and on the contracts provided by the Department of Defense and, as such, increasing the potential vulnerability of the company. In this case, the perceived gap is positive, which means that there are more resources allocated than necessary and more contracts from a single client than healthy for the company's development in the future.

The leverage points in this case are both the volume of resources allocated for the defense segment of the business and the number of contracts and volume of business received from a sole client. However, if either of these are set too low (either a volume of contracts or volume of allocated resources that is too low), the business as a whole will have to suffer as well. In either case, one can expect that the company will eventually lose its contract with the Department of Defense and the entire part of the business that deals with the ammunition and, generally, with the production of military and defense-related equipment.

The reason for this is that the company will no longer provide sufficient resources to be able to fulfill the contracts received in due time and the Department of Defense may choose to relocate in terms of service providers by selecting other companies capable of offering this type of service. In time, most likely, the Army will eventually choose to end the contract with National Presto Industries, Inc.