Economy Simulations are Never Perfect

In ecology, there can be various mathematical models attempting to explain observed phenomena. Such models are not meant to be perfect, but can help us in understanding and predicting reality.

Similarly, in the business world, it is possible to construct ever more sophisticated mathematical models to simulate the dynamics of the economy. Such models are never perfect yet they do help us in understanding the dynamics of the economy and help us in prediction and thus decision making.

Upon How Many Should you Divide your Charity Money?

What is better? To give your charity money to ten families or instead distribute the amount on one hundred families?

In ecology, when the number of organisms in a certain area increases beyond a specific limit, the population tends to naturally regulate itself and the number ceases to increase either by increased deaths or decreased births or a combination of both. If nature allowed such population to grow in that specific area indefinitely, the size of each individual will keep shrinking and its fitness will keep decreasing since the finite amount of resources in that area will be divided on more and more individuals from that population.

If the amount of charity money you have will be too little when divided on a very large number of individuals, then it is better to divide such charity money on a smaller number of people in need. This will help them survive, grow and develop and perhaps become self sufficient as they develop and some of them may even reach a development stage where they can help others who are still in need.

Two Factors Affecting Business Growth

The potential of an organism to grow and a population to increase increases by the increase of needed resources in a given area in which such organisms are living and decreases with the competition over resources in such area.

In the business world, a similar relationship exists between businesses and the size of a given market and the amount of competition present in such a market from other businesses.

Why Investors Seek to Invest in Startups?

In natural systems, when a population grows in size and number so that the resources available to it are not enough for survival, growth, development and reproduction such population then experiences a a natural decline in the rate of growth and reproduction. The more crowded the population initially is the faster such population reaches the decline in rate of growth.

In the business world a similar phenomenon is observed. The more crowded a specific market is the sooner it reaches saturation and thus business growth rate starts to decline in such market. In such occasions, in order for a business to grow, it seeks fresh new virgin markets to exploit.

This models also gives us insights into startups. Startup companies tend to have a high failure rate yet they grow so rapidly. The potential of growth in such companies is phenomenal. This is what can attract many investors to seek investing in startups, despite their high risk they do at the same time show a high potential of rapid growth and thus exceptionally high return on investment.

Market Share Transfers

If a population of animals that had been occupying a certain territory suddenly perishes the same territory is quickly occupied by other animals that were previously unable to penetrate or come close to such territory due to it being occupied and defended by the previous population of animals that has now perished.

In the business world a similar phenomenon is observed. If for some reason a large organization collapses that has previously had a sizable market share within a certain market then such share becomes available for other businesses to claim quickly.

Territoriality in Business

Territoriality in Animals

Territoriality is a common animal behavior where a group of animals from the same species defend their territory against intruders usually of the same species as well. This phenomenon helps such groups of animals maintain control over resources present in such area and thus be better able to survive, grow and reproduce. Territoriality is one form of competition among members of the same species.

Franchising

In the business world, competition is a norm and so is territoriality. Territoriality in the business world can manifest in a number of different forms. One of the most popular ways in which territoriality is practiced in the business world is through the concept of franchising. A franchisor may offer geographic master franchises to larger franchisees which then may 'slice' them down into smaller franchises also separated location wise. This concept helps the franchisor, the master franchisees and the smaller franchisees under them thrive each within its own territory without competing with its sister franchisees.

Free Trade

The franchising system is one manifestation of the concept of territoriality in the business world. Another manifestation of territoriality can be seen on a higher level in the economy of nations. A country may decide to protect itself from the invasion of cheap merchandise from other countries by adding customs. This practice, although still practiced, is now being reduced. The fight for the so called free trade and open borders for the exchange of goods and services without restrictions has been lead by developed countries that have the power to compete with their advanced products and services.

Territoriality in Business

Aside from franchising, there are formal and informal ways for enforcing the practice of having a territory for a business. An example of a formal practice is for instance mandating a minimal distance between pharmacies. Other informal ways for protecting a territory also exist. A large business may defend its 'territory' by a sudden drastic reduction of prices to collapse a new small fledgling business trying to enter the market within the territory of that large business. In some places, even force can be illegally used to 'convince' competitors to back off from a business's long established territory.

Why New Small Companies need a Virgin Market Niche

In cases of great competition over available resources, the distribution of size and fitness of individuals within a particular population tend to be skewed. There tends to be a few very large, and highly fit, individuals within such population and a large number of over-dwarfed individuals. It is interesting to note that individuals who are able to set foot early and establish themselves first tend to have a chance to grow first and thus preventing the other individuals to grow well. This gives a sort of age advantage, those who come first get an 'unfair' edge.

In the business world a similar phenomenon shows in cases of high competition. The first comer tends to get an advantage over the alter comer. A business that starts in a new relatively virgin market tends to have time to build itself and establish itself there within such market. A later comer business would find it difficult to compete in such market, if the resources of such market are limited, and if such new coming business is still young and small. Therefore, for a new small business to have a chance to grow it should only try to target a relatively virgin market hence the talk about a market niche.