7.1. A Conceptual Model of Market Growth and Capital Investment

Most new companies fail. Some grow for a while and then stagnate. A few manage to grow but experience periodic downturns leading to crises of confidence and turnover of top management. Only a very small number of firms seem able to grow rapidly for extended periods of time. A classic model in the field of system dynamics, known as the 'market growth model' (Forrester, 1968), directly addresses this issue and arose from Jay Forrester's experience advising entrepreneurs and fledgling companies in technology-based firms around Boston, Massachusetts. Though compact, the model contains nearly everything of interest in dynamical business models such as multiple interacting loops, non-linearities, expectation formation, delays, bias and distortion in management information channels, and bounded rationality in operating policies.

7.1.1. Background to the Case

Imagine a division of a medium-sized electronics company producing specialist navigation equipment for use in luxury yachts and light aircraft. The division has recently launched a new state-of-the art global positioning system and wants to explore the feasibility of various growth plans. The product is sold directly to firms that make luxury yachts and light aircraft rather than to the owners of boats and planes. Sales are generated by a direct sales force with the necessary technical knowledge to sell a sophisticated and expensive electronic product. The division ...

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