Posted on January 9, 2015 @ 08:49:00 AM by Paul Meagher
In my last blog, Ecological Business Design, I promised more blogs to explore the idea of using ecology to inform business design. One point I should make first is that by "Ecological" I do not mean Green Business Design or Environmentally Friendly Business Design. You can find books that explore energy saving and low-impact business practices, but that is not what I mean when I use the term "Ecological". I use the term ecological to mean that we are designing a business using central concepts, ideas and observations from ecology to help guide us. If you google "Ecological Business Design" you will find that it is used to mean green or environmentally friendly ways to run a business. I'm not using it in this sense, although the outcome of ecological business design might produce that result.
One central concept in ecology that has spilled over into business is the concept of a niche. We have all heard the advice that you have to find your niche in business in order to survive and thrive. In ecology,
the concept of a niche is defined by referencing it to the competitive exclusion principle which Joseph Grinell formulated in 1904 as "Two species of approximately the same food habits are not likely to remain
long evenly balanced in numbers in the same region. One will crowd out the other". This principle was given experimental validation by Russian ecologist Georgy Gause who raised two types of Parameciem micro-organisms in a dish and gave both organisms the same water and nutrients. Eventually only one of type of Parameciem micro-organism remained leading to the conclusion that two species can't simultaneously occupy the the same niche in the same place at the same time. One will be competitively excluded by the other based on factors such
as differential reproduction rates, growth rates, etc...
So when designing a business one of the first things you need to do is make sure you have the potential to occupy a niche, that you won't be competitively excluded by another business focused on the same customers or the same resources as you are who might have a competitive advantage, otherwise you will be competitively excluded from entering that niche.
If you are looking for inspiration on how niches are defined then the best thing you can do is study birds. Theoretical development of the niche concept has been most heavily influenced by studying bird behavior and
a classic study was by Robert MacArthur on different species of warblers in northern forests. MacAurthur observed 5 species of warblers in a plot of white spruce on Mt. Desert Island in Maine. He observed their feeding behavior and recorded what part of the tree they spent their time feeding upon. He found clear differences in which part of the tree the different species of warbler fed from and he used this to explain why competitive exclusion didn't cause one type of warbler to wipe out the others. Each type of warbler feed from a different part of the tree, they partitioned the resource in such a way that there was less potential for a competitive interaction.
The niche concept is important because it helps to define what we mean by competition. We compete because we are trying to occupy the same niche. We avoid competition by creating a niche were there is less overlap in the resources we feed off. When two businesses try to occupy the same niche at the same time is when the need for competition arises which leads to the need to develop competitive abilities to remain in that niche.
The niche concept was formalized by one of the most important theoretical ecologists, G. Evelyn Hutchinson, who talked about n-dimensional niches. Although this involves a bit of math notation, I think it is worth reproducing a bit of his writings on this matter because they have been so influential in formalizing the concept for ecologists.
Consider two independent environmental variables x1 and x2 which can be measured along ordinary rectangular coordinates. Let the limiting values permitting a species, S1 to survive and reproduce be respectively x'1, x''1 for x1 and x'2, x''2 for x2. An area is thus defined, each point of which corresponds to a possible environmental state permitting the species to exist indefinitely. If the variables are independent in their action on the species we may regard this area as the rectangle (x1=x'1, x1=x''1,x2=x'2, x2=x''2)
but failing such independence the area will exist whatever the shape of its sides.
We may now introduce another variable x3 and obtain a volume, and then further variables x4....
xn until all of the ecological factors relative to S1 have been considered. In this way an n-dimensional
hypervolume is defined, every point in which corresponds to a state of the environment which would permit the species
S1 to exist indefinitely. For any species S1, this hypervolume N1 will be called the
fundamental niche of S1. Similarly for a second species S2 the fundamental niche will be a similarly
defined hypervolume N2.
So finding a niche according to Hutchinson involves defining the limits for each of the N environmental factors which would permit your business to exist and making sure that another business does not substantially overlap in the same hypervolume area with respect to those N environmental factors and their limits. If there is overlap your choices are to add a new dimension, adjust the preferred range on one or more of the dimensions, or develop competitive abilities so as to occupy the space better than your competition.
Hutchinson distinguished between the fundamental and realized niche. When designing a business we will often be defining the fundamental niche we would like to exist within, a niche that does not overlap with our competitors perceived fundamental niche. The reality, however, is that there will be some overlap and some interactions with competitors that lead to your realized niche. This could be construed as a warning that your business plan will likely need to be altered in light of overlap and competition so that the niche you might have wanted to occupy is different that the one you will find yourself occupying. This does not mean that the niche concept is useless, but it does help to warn you to expect divergence and perhaps anticipate it a bit better so you can
react better, perhaps by adding another dimension to your niche, occupying a different range on a dimension, or anticipating some of the competitive abilities you might need to develop.
An illustrative example might be opening a crossfit gym. If you are the only crossfit gym in town then you might not consider other types of gyms as competition because you occupy different niches. This is a nice position to be in if the resource base is there to support multiple fitness outlets. Likewise, many startups are potentially free to grow rapidly because they occupy a niche that no other business as currently occupying but for which there is a need. What happens, however, when another crossfit
gym opens up across town motivated perhaps by your success? The niche you envisioned occupying may now need to change to deal with the competition or you may need to develop better competitive abilities or you may not need to adjust your gameplan very much because there is enough resource for two crossfit gyms to exist in the different locations they occupy. It might be useful to do market analysis at this point to determine how many crossfit gyms are able to serve a population of size N in other cities to determine how worried you should be and how you might want to react given the size of your city or resource base.
In ecology, species entering a new territory are often referred to as being 'r-selected' and have fast growth attributes to take over the resource quickly, however, there might come a time when that resource is becoming more scarce and the species that survive need to develop other attributes associated more with efficiency than growth. These successional species are often referred to as being 'K-selected'. This might be another concept to keep in mind when designing your business - the niche might be wide open at first for a startup and you need r-selected attributes to exploit it but you will eventually need to plan for a time when the niche becomes filled with potential competitors and how your business will have to change as a result. Your realized niche can change over time as competitors come in and different sets of business attributes become more important to remain in that niche.
So my objective in today's blog was to begin to demonstate that ecological concepts might be useful in designing a business. One such ecological concept is the concept of a niche. The concept of a niche helps you to reason about your market, about your competitors, and about how you might maneuver your business over time to survive and thrive. The associated concepts of competitive exclusion, n-dimensional niche, fundamental niche, realized niche, resource partitioning, r-selection, K-selection are all potentially useful in designing your business and in managing it over time. If reading business books is not your thing, you can learn more about the niche concept by reading about and observing how different species of birds coexist. Nature, in particular the study of bird behavior, has something to tell us about we might think about and find a niche.