ADM 1100 Chapter Notes - Chapter 5: Limited Voting, Sole Proprietorship, Complete Control

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18 Sep 2016

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Several factors affect how a business is organized: how easily it can be set up. Its strengths and weaknesses: the strengths and weaknesses of competing firms. Studies have shown the majority of canada works for or owns businesses that have fewer than 100 people, and or are self-employed. Usually defined as an independent business having fewer than 100 employees and revenues not more than million. Government offers benefits to smaller companies to help them compete with the large firms. They account for two thirds of the employees in canada. Many small businesses have been bought out by large firms and replaced with larger operations. They meet the needs of individuals in a way the big firms cannot. Small businesses play a major role in agriculture. Home-based businesses: firms that operate from the residence of the business owner. Small businesses have become more competitive because of the internet. Small businesses generate more than 29% of the nations gross domestic product.

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What valuable company is nobody building? This question is harder than it looks, because your company could create a lot of value without becoming very valuable itself. Creating value isn't enough -- you also need to capture some of the value you create. This means that even very big businesses can be bad businesses. For example, U.S. airline companies serve millions of passengers and create hundreds of billions of dollars of value each year. But in 2012, when the average airfare each way was $178, the airlines made only 37 cents per passenger trip. Compare them to Google, which creates less value but captures far more. Google brought in $50 billion in 2012 (versus $160 billion for the airlines), but it kept 21% of those revenues as profits -- more than 100 times the airline industry's profit margin that year. Google makes so much money that it is now worth three times more than every U.S. airline combined. The airlines compete with each other, but Google stands alone. Economists use two simplified models to explain the difference: perfect competition and monopoly. "Perfect competition" is considered both the ideal and the default state in Economics 101. So-called perfectly competitive markets achieve equilibrium when producer supply meets consumer demand. Every firm in a competitive market is undifferentiated and sells the same homogeneous products. Since no firm has any market power, they must all sell at whatever price the market determines. If there is money to be made, new firms will enter the market, increase supply, drive prices down and thereby eliminate the profits that attracted them in the first place. If too many firms enter the market, they'll suffer losses, some will fold, and prices will rise back to sustainable levels. Under perfect competition, in the long run no company makes an economic profit. The opposite of perfect competition is monopoly. Whereas a competitive firm must sell at the market price, a monopoly owns its market, so it can set its own prices. Since it has no competition, it produces at the quantity and price combination that maximizes its profits. To an economist, every monopoly looks the same, whether it deviously eliminates rivals, secures a license from the state or innovates its way to the top. I'm not interested in illegal bullies or government favorites: By "monopoly," I mean the kind of company that is so good at what it does that no other firm can offer a close substitute. Google is a good example of a company that went from 0 to 1: It hasn't competed in search since the early 2000s, when it definitively distanced itself from Microsoft and Yahoo! Americans mythologize competition and credit it with saving us from socialist bread lines. Actually, capitalism and competition are opposites. Capitalism is premised on the accumulation of capital, but under perfect competition, all profits get competed away. The lesson for entrepreneurs is clear: If you want to create and capture lasting value, don't build an undifferentiated commodity business. How much of the world is actually monopolistic? How much is truly competitive? It is hard to say because our common conversation about these matters is so confused. To the outside observer, all businesses can seem reasonably alike, so it is easy to perceive only small differences between them. But the reality is much more binary than that. There is an enormous difference between perfect competition and monopoly, and most businesses are much closer to one extreme than we commonly realize. The confusion comes from a universal bias for describing market conditions in self-serving ways: Both monopolists and competitors are incentivized to bend the truth. Monopolists lie to protect themselves. They know that bragging about their great monopoly invites being audited, scrutinized and attacked. Since they very much want their monopoly profits to continue unmolested, they tend to do whatever they can to conceal their monopoly -- usually by exaggerating the power of their (nonexistent) competition. Think about how Google talks about its business. It certainly doesn't claim to be a monopoly. But is it one? Well, it depends: a monopoly in what? Let's say that Google is primarily a search engine. As of May 2014, it owns about 68% of the search market. (Its closest competitors, Microsoft and Yahoo!, have about 19% and 10%, respectively.) If that doesn't seem dominant enough, consider the fact that the word "google" is now an official entry in the Oxford English Dictionary -- as a verb. Don't hold your breath waiting for that to happen to Bing. But suppose we say that Google is primarily an advertising company. That changes things. The U.S. search-engine advertising market is $17 billion annually. Online advertising is $37 billion annually. The entire U.S. advertising market is $150 billion. And global advertising is a $495 billion market. So even if Google completely monopolized U.S. search-engine advertising, it would own just 3.4% of the global advertising market. From this angle, Google looks like a small player in a competitive world. What if we frame Google as a multifaceted technology company instead? This seems reasonable enough; in addition to its search engine, Google makes dozens of other software products, not to mention robotic cars, Android phones and wearable computers. But 95% of Google's revenue comes from search advertising; its other products generated just $2.35 billion in 2012 and its consumer-tech products a mere fraction of that. Since consumer tech is a $964 billion market globally, Google owns less than 0.24% of it -- a far cry from relevance, let alone monopoly. Framing itself as just another tech company allows Google to escape all sorts of unwanted attention. Non-monopolists tell the opposite lie: "We're in a league of our own." Entrepreneurs are always biased to understate the scale of competition, but that is the biggest mistake a startup can make. The fatal temptation is to describe your market extremely narrowly so that you dominate it by definition. Suppose you want to start a restaurant in Palo Alto that serves British food. "No one else is doing it," you might reason. "We'll own the entire market." But that is only true if the relevant market is the market for British food specifically. What if the actual market is the Palo Alto restaurant market in general? And what if all the restaurants in nearby towns are part of the relevant market as well? These are hard questions, but the bigger problem is that you have an incentive not to ask them at all. When you hear that most new restaurants fail within one or two years, your instinct will be to come up with a story about how yours is different. You'll spend time trying to convince people that you are exceptional instead of seriously considering whether that is true. It would be better to pause and consider whether there are people in Palo Alto who would rather eat British food above all else. They may well not exist. In 2001, my co-workers at PayPal and I would often get lunch on Castro Street in Mountain View, Calif. We had our pick of restaurants, starting with obvious categories like Indian, sushi and burgers. There were more options once we settled on a type: North Indian or South Indian, cheaper or fancier, and so on. In contrast to the competitive local restaurant market, PayPal was then the only email-based payments company in the world. We employed fewer people than the restaurants on Castro Street did, but our business was much more valuable than all those restaurants combined. Starting a new South Indian restaurant is a really hard way to make money. If you lose sight of competitive reality and focus on trivial differentiating factors -- maybe you think your naan is superior because of your great-grandmother's recipe -- your business is unlikely to survive. The problem with a competitive business goes beyond lack of profits. Imagine you're running one of those restaurants in Mountain View. You're not that different from dozens of your competitors, so you've got to fight hard to survive. If you offer affordable food with low margins, you can probably pay employees only minimum wage. And you'll need to squeeze out every efficiency: That is why small restaurants put Grandma to work at the register and make the kids wash dishes in the back. A monopoly like Google is different. Since it doesn't have to worry about competing with anyone, it has wider latitude to care about its workers, its products and its impact on the wider world. Google's motto -- "Don't be evil" -- is in part a branding ploy, but it is also characteristic of a kind of business that is successful enough to take ethics seriously without jeopardizing its own existence. In business, money is either an important thing or it is everything. Monopolists can afford to think about things other than making money; non-monopolists can't. In perfect competition, a business is so focused on today's margins that it can't possibly plan for a long-term future. Only one thing can allow a business to transcend the daily brute struggle for survival: monopoly profits. So a monopoly is good for everyone on the inside, but what about everyone on the outside? Do outsize profits come at the expense of the rest of society? Actually, yes: Profits come out of customers' wallets, and monopolies deserve their bad reputation -- but only in a world where nothing changes. In a static world, a monopolist is just a rent collector. If you corner the market for something, you can jack up the price; others will have no choice but to buy from you. Think of the famous board game: Deeds are shuffled around from player to player, but the board never changes. There is no way to win by inventing a better kind of real-estate development. The relative values of the properties are fixed for all time, so all you can do is try to buy them up. But the world we live in is dynamic: We can invent new and better things. Creative monopolists give customers more choices by adding entirely new categories of abundance to the world. Creative monopolies aren't just good for the rest of society; they're powerful engines for making it better. Even the government knows this: That is why one of its departments works hard to create monopolies (by granting patents to new inventions) even though another part hunts them down (by prosecuting antitrust cases). It is possible to question whether anyone should really be awarded a monopoly simply for having been the first to think of something like a mobile software design. But something like Apple's monopoly profits from designing, producing and marketing the iPhone were clearly the reward for creating greater abundance, not artificial scarcity: Customers were happy to finally have the choice of paying high prices to get a smartphone that actually works. The dynamism of new monopolies itself explains why old monopolies don't strangle innovation. With Apple's iOS at the forefront, the rise of mobile computing has dramatically reduced Microsoft's decadeslong operating system dominance. Before that, IBM's hardware monopoly of the 1960s and '70s was overtaken by Microsoft's software monopoly. AT&T had a monopoly on telephone service for most of the 20th century, but now anyone can get a cheap cellphone plan from any number of providers. If the tendency of monopoly businesses was to hold back progress, they would be dangerous, and we'd be right to oppose them. But the history of progress is a history of better monopoly businesses replacing incumbents. Monopolies drive progress because the promise of years or even decades of monopoly profits provides a powerful incentive to innovate. Then monopolies can keep innovating because profits enable them to make the long-term plans and finance the ambitious research projects that firms locked in competition can't dream of. So why are economists obsessed with competition as an ideal state? It is a relic of history. Economists copied their mathematics from the work of 19th-century physicists: They see individuals and businesses as interchangeable atoms, not as unique creators. Their theories describe an equilibrium state of perfect competition because that is what's easy to model, not because it represents the best of business. But the long-run equilibrium predicted by 19th-century physics was a state in which all energy is evenly distributed and everything comes to rest -- also known as the heat death of the universe. Whatever your views on thermodynamics, it is a powerful metaphor. In business, equilibrium means stasis, and stasis means death. If your industry is in a competitive equilibrium, the death of your business won't matter to the world; some other undifferentiated competitor will always be ready to take your place. Perfect equilibrium may describe the void that is most of the universe. It may even characterize many businesses. But every new creation takes place far from equilibrium. In the real world outside economic theory, every business is successful exactly to the extent that it does something others cannot. Monopoly is therefore not a pathology or an exception. Monopoly is the condition of every successful business. Tolstoy famously opens "Anna Karenina" by observing: "All happy families are alike; each unhappy family is unhappy in its own way." Business is the opposite. All happy companies are different: Each one earns a monopoly by solving a unique problem. All failed companies are the same: They failed to escape competition.

According to the article above by Peter Thiel do you think perfect competition is best for the economy and for consumers? Why or why not? What does Peter Thiel think about perfect competition versus monopolies?

Read the Thomas article, Squeeze Play, and discuss how long you think the emerging upstart airline carriers in Asia that are featured can continue their competitive role in the face of changing travel patterns and consumer behavior brought on by low cost carriers, the Internet and rising G.D.P.s

IT HARDLY IS NEWS THAT THE EMERGENCE IN THE ASIA/PACIFIC REGION of multinational low-cost carriers modeled on the leading LCCs in North America and Europe has transformed and reinvigorated the inter-Asia travel market. But while most of the attention is focused on the impact these upstarts are having on major network/flag carriers, a less public battle is going on as Asia's niche airlines - SilkAir, Nok Air and Bangkok Airways, for example - find their space being challenged by the low-fare wave as well.

Neither full-service nor LCC, this band of carriers has fulfilled a role somewhat analogous to the holiday and charter airline segment in Europe, albeit on a much smaller scale. Some are standalone entities plying short-haul routes with turboprop and small jet aircraft. Others exist as part of a major airline organization, flying the last leg of a transcontinental journey into an Asia/Pacific vacation destination. The question is how long they can continue in their role in the face of changing travel patterns and consumer behavior brought on by LCCs, the Internet and rising GDPs.

A key year for them is 2015, when Southeast Asia's Open Sky Agreement comes into effect, allowing unlimited flights to all 10 ASEAN members: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam. Any protections they enjoy from restrictive bilaterals will disappear and they will be fully exposed to aggressive competition from today's batch of LCCs and future new entrants.

Perhaps Thailand presents the best microcosm of the wider challenges facing niche airlines. When Thai AirAsia was launched in 2004 with the political support of the government, Thai International Airways, itself government-owned, responded by establishing Nok Air, in which it holds a controlling 39% stake. But as so often happens in such situations (think British Airways and Go or Continental Airlines and CALite), Nok Air and its parent were more at war with each other than with the new entrant. While Thai AirAsia has come from nothing to operate a fleet of 19 new Airbus A320s serving 24 domestic and international destinations, Nok Air has just 10 aging Boeing 737-400s and two ATR 72s serving 17 domestic points.

The future for Nok may be a bit rosier. CEO Patee Sarasin told eTN in 2009 that the airline, which at the time was carrying fewer than 2 million passengers a year, had "buried the hatchet" with its owner and the two now had common goals. "It is true that we had difficulties in the past to cooperate as we lacked a common vision," he said. "We are now ready to cooperate again."
Prior to the makeup, Thai was considering selling its interest in Nok or assuming 100% control to make it a more effective competitor to Thai AirAsia, although in actuality a takeover might not have been possible owing to the refusal of other shareholders to sell. Part of the new agreement was a realignment of missions, with Nok shrinking its route network to only serve domestic destinations along with cooperation on schedules, distribution, marketing and loyalty programs.
The impact was immediate: Nok Air's 2010 passenger count was 3.1 million, with $128 million in revenue yielding a $20 million profit, according to data from the Centre for Asia Pacific Aviation. Although these figures are well behind Thai AirAsia, which carried 5.7 million passengers, generating revenues of $402 million and a $92.4 million net profit, they are improved significantly from Nok's 2009 results. For 2011 it is forecasting a further lift of 22% in passengers to 3.8 million and a 47% jump in revenue to $175 million. Growth and fleet renewal are now front and center.
The airline, which operates from Bangkok's old Don Muang Airport, added four new destinations in April. Last year it took over three routes from Thai. Also on the agenda is expansion later this year of the secondary regional network with the addition of four ATR 72-500s leased from Nordic Aviation Capital. It is discussing the lease of seven 737-800s from 2012 as part of a conversion program to phase out its -400 Classics.
With Nok Air and Thai at peace and the former looking after domestic destinations, the parent did a deal last August with Tiger Airways to form Thai Tiger Airways to compete head-to-head with Thai AirAsia on international routes.
Supply Chain
Bangkok Airways' niche strategy is to control as much as possible of the journeys of high-yield tourists brought in via partnerships with Air France, Air Berlin, Etihad Airways and EVA Air. International tourists make up 80% of the airline's business, and while it has shelved plans for long-haul international operations, it is looking at Australia along with a return to Japan and China in the near term. Closer to home, flights to Malaysia are on the agenda for 2012.
BW, whose origin dates back to 1968, has nine A320s and eight ATR 72-500s serving eight domestic and eight regional international destinations. India has become a near-term focus after ASEAN's free trade area agreement with that country in 2010. Operations to Bangalore started in April and Chennai will follow in 2012. Services have been increased to daily to Mumbai, and New Delhi is on the radar.
nterestingly, the carrier has built three airports in Thailand - Samui, opened in 1989, Sukhothai (1996) and Trat (2002). Its hubs are Bangkok and the exotic resort of Koh Samui. A private airline, it carried 2.6 million passengers in 2010 and posted a profit of $23.3 million on revenues of $276.6 million. This year it expects a far more bullish outcome with passenger numbers up 19% to 3.1 million and revenues growing 28.2% to $352 million.
With some upbeat results under its belt, an IPO is on the radar. Late last year, President Puttipong Prasarttong-Osoth told the Bangkok Post that "next year should be an exceptionally good one for us barring any detrimental events such as renewed political turmoil. There's no set timeframe for an IPO, but we're thinking maybe in three years, as we must show continued profitability to meet set prerequisites."
Another Thai carrier, Orient Thai Airlines, which has had mixed fortunes over the years, ordered 12 98-seat Sukhoi Superjets last November, apparently on extremely favorable terms, to better position itself to compete with LCCs and carve out a stronger niche for itself. The small airline has been in the spotlight over alleged safety deficiencies yet has managed to stay aloft. In September 2007 an MD-82 of subsidiary One-Two-Go crashed at Phuket in a storm, killing 89. In July 2008 Orient Thai and its subsidiaries were suspended from flying for 30 days owing to an alleged poor maintenance record, while the EU banned One-Two-Go from flying to Europe (the ban later was lifted). Its 10-aircraft fleet is made up of MD-80s and MD-90s along with 747-300s and -400s that perform domestic services and one international route to Hong Kong plus mainly Hajj charters.
Delivery of the first two Superjets will occur in November with all 12 in service by 2014. They will both replace older types and enable expansion, although that will not involve One-Two-Go, which was shut down by the parent last year.
The flightpath for SilkAir, a wholly owned subsidiary of Singapore Airlines, is brighter, according to Peter Harbison, executive chairman of Sydney-based CAPA. "SilkAir is doing very well as a regional feeder for Singapore Airlines with a premium product," he says. It has 18 A320s and will receive three more this year and a further three by the end of 2013. It serves 31 of 50 short-haul destinations for SIA Group and its average sector length is just 955 km. While this may be short, it does stretch its legs to Chengdu, Chongqing and Kunming in central China as well as Xiamen and Shenzhen north of Hong Kong. India is also a big destination with services to six southern cities.
Harbison believes that SilkAir, which operates from the same terminals as its parent at Changi rather than the LCC terminal, plays a vital role for the overall network as SIA has no single-aisle equipment. It flies to holiday destinations such as Phuket, Penang and Langkawi but also largely has replaced SIA on services to Kuala Lumpur since AirAsia entered the route.
Less clear is whether the dividing line between SilkAir and LCC Tiger Airways, in which SIA Group holds a 34.4% stake, can be maintained. Whether or not SIA has kept the cat on a short leash - both sides deny it - the fact is that Tiger operates just 15 A320s out of Singapore and a further 11 in Australia, although it has 43 on order. Its JV with Thai Airways and its purchase of a 33% stake in Philippines-based SEAir suggests it may be ready to roar.
Back Where It Started
In the birthplace of Asia's LCC movement, Kuala Lumpur, Malaysia Airlines finally is reacting by turning its niche regional airline Firefly into an aggressive low-cost competitor to AirAsia. Firefly, which launched in 2007, operates seven ATR 72s and three 737s and is based at Sultan Abdul Aziz Shah Airport in Subang just 30 min. from downtown Kuala Lumpur as well as having a series of secondary hubs such as Penang. Late last year it announced that it would acquire 30 737-800s over five years and concentrate more on services from Kuala Lumpur International to take on AirAsia. Nonetheless, it has used its downtown location well and operates flights to Singapore seven times daily with ATR 72s and to Penang 11 times daily. In all it serves 19 destinations in Malaysia, Indonesia, Thailand and Singapore.
Is it possible that niche airlines in the region can find a peaceful coexistence with LCCs? Possibly, but the experience in North America, Australia and Europe suggests it will be difficult. Following deregulation, most US charter carriers folded as travelers and tour organizers found fares just as low on the major network airlines. Wardair, a popular Canadian charter carrier, tried to address the problem after Canadian deregulation by entering the scheduled market but could not make the transition. Australia's East West Airlines did not survive deregulation in the 1990s, caught as it was between Ansett and Australian/Qantas and without a clearly defined market.
The steady growth of US LCCs contributed greatly to the demise of Midwest Express (now part of Republic Airways Holdings' Frontier subsidiary). In Europe, the holiday/charter segment has taken its knocks from the likes of Ryanair and easyJet but continues to hold a large share of the market, although nothing like it enjoyed 20 years ago.
The answer, if one exists, is to identify a new market or find a fresh way to serve an existing one, as Allegiant Air has done in the US. With a route network focused on flying from smaller cites to major vacation destinations with very limited frequency and rock-bottom costs, Allegiant avoids the pitfalls of trying to compete head-on with either the network or LCC segment. Time will tell if such opportunities exist in Asia.

ADM 1100 Chapter Notes - Chapter 5: Limited Voting, Sole Proprietorship, Complete Control

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