Quantitative and Physical History
By Mark Ciotola
First published on February 27, 2019
Bubbles Involving Business
Businesses are interesting cases to study. There are many businesses, both large and small. Some are long-lived, many are short-lived. They utilize many different types of opportunities. They all involve people. Many involve money, which is quantifiable and often the figures are recorded.
Many businesses can also represented as bubbles, using the approach of a heat engines (or collections of heat engines). A business faces a new market opportunity of fixed magnitude. Businesses exploit the market opportunity, producing both work and entropy. The business or its industry reproduces exponentially, increasing the consumption of potential entropy exponentially. Eventually, it becomes increasingly difficult for the business or industry to locate new customers or orders, resulting in increased competition and decreased margins, hence lower efficiency. As efficiency decreases, the business will expand at a slower rate and eventually stop functioning.
Lifecycle of a Business
Some businesses can endure for longer than many dynasties. Yet most businesses go through common sorts of life cycles. They usually start small and are founded by an innovative entrepreneur. They get bigger and become efficient but start getting institutionalized. Eventually the overhead of their bureaucracy becomes more of a drag than help on overall efficiency. At the same time, the company has a harder time adapting to change. Eventually the opportunity the company originally exploited is gone, management can’t adapt and the company ends.
Companies don’t exist in a vacuum. They are dependent upon their government for law and security, the the population for revenues. So a business can find new opportunities, be bought by another business, be regulated out of business, etc. The business does not progress on the same precise lifecycle as an animal, but there are frequent patterns.
The Opportunity and Conception
The business opportunity (potential) is identified. The opportunity could be one-time in nature, such as the discovery of a deposit of gold. It could be ongoing, such as a new technology that will be adopted for a long period, such as the commercialization of electricity in the 1800s or the internet.
A means (engine) to exploit it is identified. The means could be a new mechanical invention, the building of a factory or construction of a mine. The development of the engine will require some initial “seed” resources, and literally has a “start-up” cost, called an initial investment (fixed cost).
The business begins. Revenues are received and marginal costs are incurred.
The company embarks upon exponential growth, which often starts slowly and then becomes rapid. Either the engine gets bigger or more engines are built. Often profits are reinvested in growing capacity.
The growth slows as it approaches its peak then levels off. Also, both the engines and developing bureaucracy involve maintenance (overhead) costs.
Decline, Acquisition or Transformation
Eventually the business may decline as the original business opportunity declines or ends. The business might be able to take advantage of new opportunities, or may be bought by another company. It might buy other companies who are better at developing new opportunities.
Modeling Business Growth
Businesses as consumers of limited resources
Businesses can be modeled as of consumers of limited resources and therefore as Hubbert curves. A business based upon an oil well or a gold mine is an obvious example. The limited resource can be intangible. Nearly all businesses are ultimately dependent upon a particular business opportunity that is often in turn dependent upon a limited resource. That limited resource might be satiable customer demand for a highly durable product. It might be a technology niche that has a limited lifetime or marketing window in a rapidly transforming marketplace. Other examples include resources can include intangibles such as goodwill and patents.
Business Development Stages
Businesses tend to develop through fairly well-defined stages: start-up, growth, stalling, acquisition of or by other businesses (or decline and then termination).
Business Modes of Operation
Businesses tend to operate in one of two modes, depending upon their current development stage. Growing start-ups are in an exponential growth (EG) mode, while established businesses move to an exponential decay (ED) mode. Operation in the EG mode is characterized by emphasis on revenue growth. Sources of revenue growth include new products, increased sales or acquisition of other businesses. Operation in the ED mode is characterized by emphasis on cost cutting. Forms of cost-cutting include consolidating product lines, reduced R&D spending, and layoffs. (The former case of stable major airline striving to raise profits by removing an olive per salad served is such an example). A firm that is experiencing the plateau of a logistic growth curve will rend to oscillate between the EG and ED modes, depending on short-term events.
The transition from the EG mode to the ED mode can be a dangerous time for a business. Sometimes businesses grow too quickly and cannot make a successful transition. Cash shortages and the inability to fulfill customer orders are symptoms. Frequently the founder and the original management will be replaced at this point.
Modeling Business Managers
Some business managers desire growth, so much that they don’t especially mind the ensuing disorder. Other people prefer order and harmony, even at the expense of growth.
Managers who emphasize getting sales, launching truly new products, and even mergers and acquisition tend to be operating in an exponential growth mode. Managers who attempt to increase profits by focusing on reducing product costs and decreasing workforce size tend to be operating in a plateau of exponential decline mode.
General statements about a society or a category of people within a society should certainly not be taken to apply to individuals. Individuals tend to have a wide range of freedom to act and don’t fit into most generalizations.