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.

Fierce Competition Skews Distribution of Company Sizes

When competition over resources sours in a population, the size distribution of its individuals tends to become skewed, giving rise to a large number of small size individuals and a few large ones.

In the business world, fierce competition may result in a similar pattern. A large number of small size businesses working in a specific over-saturated market tend to show up while a few very large players emerge.

Building Mathematical Models to Understand the Dynamics of the Economy

In ecology, as with other sciences, it is useful to attempt to build mathematical models of the real world. One can start with very simplistic models, compare them with real life stats and see how closely they comply with results in the real world then refine the model to more closely reflect results observed in the real world. The mathematical model after several rounds of refinement still does not have to be perfect and does not have to provide us with the ability to create a perfect simulation of the real world yet is still useful in making us understand the dynamics of the real world and grasp a great part of its complexity. It can also help in prediction and to some extent in control.

Similarly, in the business world, even if it was not possible to create perfect models of the economy and the markets in which businesses are working, it is still useful to attempt to create mathematical models for them that reflect the real world dynamics of businesses as closely as possible and as much as the data available would allow. Such mathematical models can be used for decision making and help one understand the economy and dynamics of the business world much better thus aiding in effective decision making once again.

The Huge Informal Parking Business in Cairo

In the streets of Cairo, a huge informal parking business is thriving. The parking business is pretty informal and can fluctuate widely with time and place. A person just goes and stands near a parking lot, which is actually nothing but a normal pavement in any busy street, and employs himself as the valet of that portion of the pavement. In Arabic, the word for valet is "sayes" سايس or "monady" منادى.

Some informal valets like to select pavements that are in front of supermarkets or other shops. The frequency of cars parking, staying for a short period of time to shop from the store, then leaving is high thus guaranteeing the informal valet a high stream of cars parking during the day. As the car owner parks or leaves from the parking area he gives that informal valet 2 EGP. The exact amount might vary from one place to the other. The valet himself usually does not specify the exact amount but it is left to the car owner. It could be 1 EGP only or it could be 3 EGP. In some higher class areas it might jump up to 5 or even 7 EGP such as in front of City Stars in a busy weekend day on a Friday or Saturday. The amount is usually not tied to the period of time spent but is fixed regardless of how long you stay.

In case of longer pavements, usually there is more than one valet. They work in groups, dividing the long pavement among themselves. Each valet is responsible for part of the pavement and has a defined starting and ending point. The interesting thing about this informal job is that the same pavement may have different people working on it at different times of the day or even different days of the week. The amazing thing about the informal parking business in Cairo is that despite it not being regulated yet you never find valets fighting with one another and it is all run in harmony. The clash if it happens would not be among the valets themselves but between a valet and a car owner that did not want to pay or wanted to pay less than expected.

The huge spontaneous informal parking business in Egypt is worth studying. It is a thriving business that is run by a large number of independent individuals with nothing to hold them together except for informal rules and regulations they create themselves and which have nothing to do with the actual laws of the country!

Oscillation Patterns of Businesses within a Market

The degree by which the size of a population is sensitive to density varies from one population to another. Some populations are more sensitive to density than others. A population that is completely independent from density would keep growing in number till infinity, which is not something we observe in nature. The pattern by which a population grows or decreases in number depends on the effective rate of birth and its dependence on density. A population may oscillate till it reaches a stable size.

In the business world, similar patterns may also emerge. The number of businesses working in a specific market may increase or decrease in an oscillating pattern depending on the degree to which the size of this 'population' is dependent on its density in the market.

When Should a Business Pullout From an Overcrowded Market?

The density of living organisms of the same species living in a specific area may affect the growth, development, reproduction and death of those organisms. The higher the density of such population the higher the death rate and the lower the growth and reproduction rates. The density of a population may thus determine the growth and death rates of such population. The effect of the density is not instantaneous, but witnesses a sort of time lag. The growth, birth and death rates within a population is affected by the density of such population but it takes some time for such effect to appear.

Similarly, in economy, the effect of crowding of businesses in a specific market may not show instantaneously. A time lag can be witnessed between the actual crowding of businesses in a market and the effect of such crowding showing on the growth and death rates of such businesses. This phenomenon can be used to the advantage of some businesses which can make use of this period of time to make profits before pulling out from a market that has become overcrowded.

Mathematical Models of Business Competition

In the science of ecology, it is possible to establish mathematical models to approximate the effect of competition on a population or community of living organisms. Although no mathematical model of competition would be perfect, yet such models can help us understand, and to some extent predict, the behavior of populations and communities of living organisms.

Likewise, in the business world, it is possible to formulate mathematical models to simulate competition within a market or a whole economy. Despite such models never being perfect, yet that can help us get insights about the dynamics of the market or whole economy.

Intuition Vs. Modeling in Business Prediction

In ecology and other sciences, mathematical models can be constructed to help in prediction and in understanding observed phenomena. No model is perfect. A model is just a way to explain the observations available and squeeze them into a coherent generalized form.

In the business world, no model would be perfect to. If it was possible to construct a perfect model in business, then all we had to do is create a computer program, provide it with such model and feed it with data and it would predict perfectly the stock market and take perfect business decisions for us without our intervention. This is not only not present now, but is not possible to ever reach. The reasons this scenario is impossible to reach is because we can never create a perfect model and we cannot get all the data needed in the real world for a 'perfect' model to operate on. Nevertheless, we can still use models to help us understand the business world and guide our decisions. The feedback we get after applying the model can help us keep refining it. It is the lack of perfect predictability in the business world that makes all the fun. In business, experience and intuition are of very high value that cannot be compensated for with academic or ready models alone.

Competition in Business Can Be Lethal

Competition among members of the same species in a population over resources available in a particular area can become very fierce reaching a stage where not only does growth of the population slow down and even come to a total halt but actually start reversing and the population starts to decrease in number. If such competition becomes even more severe it may reach a point where total destruction of the population takes place and all members of the species in the specified area die.

In the business world, a similar pattern may show up as competition heats up within a specific market. First it becomes tougher and tougher for companies to grow in such market, then growth reverses. If this competition continues it can reach a point where the market ceases to be able to support such fierce competition among businesses and the whole 'population' of businesses operating within such market die completely. It is thus essential to realize the effects of competition and realize that not all competition is equal. The nature of competition and its effects can change depending on the stage at which such competition is relative to the market in which it is taking place.

Will Adding More Cash to your Project Help it?

If you keep adding more seeds within a given plot of land, they reach a point where no matter how many more seeds you add, the final harvest at the end just does not increase any more. This is due to the limited amount of resources present in that plot of land. If more nutrients are added, the harvest may increase further beyond the earlier point when less nutrients were available yet still adding more seeds will not increase the harvest.

In the business world, adding more and more cash to support a project might not always be the wisest idea. a project would reach a point where any additional cash added to support it would just not be increasing the 'harvest' (the profit or even the revenue) of the project at the end. It is thus wise to know when to stop injecting more and more cash into a project because it could have a certain capacity that cannot be exceeded.

Company Growth Slows Down as Company Develops

There is a difference between growth and development. An animal can grow in size after it is born then it reaches puberty. The growth after birth is growth, but advancing to the stage of puberty is development because the organism is qualitatively and functionally different. The same case is with plants. A plant can start growing in size and creating more leaves which is a growth stage. Then it can start giving flowers and then seeds and fruit which are considered stages of development. When a plant transitions to a new stage of development its growth rate is reduced or stops completely.

The same can be said for companies as well. A company can start growing till it reaches a stage where it would develop. This stage would see the halting of slowing down of company growth but the company transitions to a more developed stage that is qualitatively different and has new functionality. The halting of the growth is not something bad, actually, the development into company with further functionality makes the company more able and can thus increase effectiveness and profit after that.

Finding your Market Niche Maximizes your Business Size

The rate at which new companies enter a given market tends to decrease as the number of companies already targeting such market increases till their number finally reaches a top limit (the carrying capacity of the market) above which the number of companies working within this market start to decrease. Besides the number of companies working in the given market, also the size of the companies is also affected. As more and more companies start playing in such market their size tends to become smaller and smaller. A virgin market where few or no companies are yet playing can witness the growth of large companies whereas a market already saturated will more probably accommodate companies of smaller sizes or smaller operations of those companies. It is thus a no brainer to try to market a virgin market or a specific niche in which you can grow without competition in order to reach a large size.

This is the same with living organisms. The size of living organisms tends to decrease as their density within a given area increases.

Businesses Grow in a Sigmoidal Curve Pattern

Many factors affect the growth of a population of organisms. One factor being the competition among members of that species over resources available at a specific area. Other factors may include predators, disease and changes in conditions at the specified area. Competition from populations of other species living in the same area would also be an additional factor affecting the growth of the population under study. A growth rate of a population based purely on competition among its members in a specific area would often follow a sigmoidal curve.

In business, the same sigmoid curve can be observed when observing the growth of businesses within a given market. The competition among those companies targeting the same market would result in a similar growth pattern for such companies as that observed in the case of living organisms of the same species living together in the same area.

When to Invest in a Company?

A company may go through three stages starting with slow growth followed by rapid growth and finally a stage of slow growth once more that may ultimately lead to downsizing and even death of the company altogether. This process may take anything from a few years or a few decades to a few centuries. Ultimately each company dies same as with living organisms.

In nature, a population witnesses slow increase in number at first when the population size is still small, followed by a stage of rapid increase in numbers as the population increases in size and so does the number of births then this is followed by a third stage of fewer and fewer organisms being born and surviving due to lower rate of birth and higher rate of death ultimately resulting in the decrease of the size of the population.

It is thus wise to invest in a company during the period where it is witnessing rapid growth, this is the most fertile period in which the highest returns on investment can be made. It would be wise also to pull out from such company right  before its growth rates starts to dwindle.