Friday, June 7, 2013

A system that governs a community can either dissolve or exist for many years. Different systems attempt to allocate scarce resources in different ways i.e. land, labor, capital and entrepreneurship. These resources that are used to manufacture goods and services are called the factors of production.  A system that allocates these resources in the most effective manner can maximize profits. There have been many economic structures that have failed miserably in allocating resources and accomplishing its core goals. However, there are few that have used an alternative system of production which are successful. One of the few is the Mondragon Cooperative System. Co-operative Economics is an idea of people co-operating with each other to achieve a common goal using organization, governance, equity financing, operations and economics that are unique to cooperatives. The most recent financial crisis has threatened the reliability of Cooperative System nonetheless this system has sustained enough to be discussed among economists. The problem today is that we have gotten into a very vicious cycle in thinking about the relationship between business and society, the purpose of capitalism, and benefits of capitalistic system to society. Increasingly companies are being perceived as creating profit at the expense of the community, not creating profit that benefits the community. When questions like such come up, it is wise to re-think the system.
In 1956, Jose Maria Arimendiarrieta and a few graduates started a firm called Ulgor. At first they made paraffin heaters and cookers, all sold well. Their brand name became established but they realized that further developments required a company structure. Jose Maria, in his studies had read of a 19th century attempts to set up workers cooperatives. He was inspired by the work of Robert Owen but less so with the ideologies of Adam Smith or Karl Marx. Owen was a social and education reformer. In his cotton mill at New Lanark, he promoted industrial efficiency and the welfare of his workers. He was successful in reducing waste and raising productivity. He set up a school for child workers believing that through education people would eventually be able to govern themselves in prosperous cooperative community. He believed education was the key to a happier society, and universal harmony. Having profited enormously from the early Industrial Revolution, he did not care much about the profits, rather focused in the well-being of the workforce. The basic principle for organizing cooperatives are open membership, democratic control (one man, one vote), distribution of surplus in proportion to trade, payment of limited interest on capital, political and religious neutrality, cash trading, and promotion of education. These principles were known to Jose Maria. In 1959, Jose Maria recommended that Ulgor should adopt a cooperative structure and this was the beginning of Mondragon Cooperative Corporation.
            In Mondragon, the primary focus is in the labor which is highly related with capital. Workers earn a good salary and each worker owns a share of firm’s capital as the means of production. Salaries depend on the tasks they perform. The highest paid never gets more than three times the lowest. In addition, annual interest is paid on each capital holdings at a fixed rate of 6%. If at the end of the year the co-op makes a profit, this is divided in fixed proportions. 10% must be given back to the community for schools and activities, 20% goes to the co-ops reserve or reinvestment funds and 70% can be divided amongst the worker members. Each member share is proportional to his salary. The profits are added to his capital holdings where he earns cumulative interest. If a cooperative makes a loss, 30% of that loss is absorbed from the reserves. But the balance has to be taken away from the capital holding accounts of the individual members. When a member leaves, he must take his capital holdings out. In this way the cooperatives protect themselves from external controls.
Mondragon Cooperatives are stable and powerful. Their highly motivated workers result in higher productivity. There is no need to employ managers to supervise the workers. In fact they supervise the amount of quality of each other’s work. In doing so they get away with costly supervises which is an important gain in efficiency. 90% of all the profits are retained in the firm as either collective or individual capital. During a recession, workers are sent back to school. Once the production picks up, they go back to work. This makes them better qualified to cope with the changing shape of industry. However there have been some disputes caused by lack of communication. Consequently, it was decided that no cooperative would be allowed to exceed 500 people.
            Jose Maria was horrified by the human cost of the Spanish Civil War. There were endless disputes between management and labor. Even services like hospitals and schools were no longer exempt from strike. Jose Maria saw labor blaming the management and management blaming the labor. There were no incentives for anyone to work. He wanted to put a system together by which he would be able to create a happier society and greater productivity. When a new system comes along, it tries to solve the problems of the society. In Jose Maria’s case, he had seen companies taking advantage of workers to maximize their own wallets. Companies were creating profit at the expense of the community and not creating profit that ultimately benefits the community. Owen had faced similar issues. He had seen child labor during the industrial revolution which he was strongly against. He did not see workers getting what they deserve. He believed if every worker in the community makes a reasonable salary, the community can create its own self-regulating economy. He ran an experiment of his ideas in Harmony, Indiana. The experiment was established in 1825 and dissolved in 1829 due to constant quarrels. From 1828 Owen lost his partnership in the New Lanark mills due to increasing friction with some of the wealthy philanthropists who were co-owners. His dreams of making a happier society never came true.   
             America is facing tough times right now. With thirteen million Americans unemployed, 42 out of 50 states facing budget deficits, the gap between the rich and the poor getting wider and wider, American companies need to really reconsider reinvesting back in the country and create jobs. Robert Owen and Jose Maria did not believe that you can build a sustainable enterprise with the singular goal just on profit. The best part of business right now is trying to create the balance between profitability and social consensus. We are living at a time where citizens, business leaders, and corporations must do more to serve the communities that they live in and work in. Recently we have seen weaknesses in the capitalistic system. We must re-think capitalism to solve the problems that we are facing now. 

Thursday, March 24, 2011

Will Amazon Help Change the Way we Read?

Innovation, both technological and methodological, is the key to progress in any industry. How has Amazon’s innovations changed the book selling industry? Introducing books to the internet, pioneering e-books, the Kindle, and current trends have all led to Amazon being a innovative component of the book selling industry.
Innovation can be defined as a new way of doing something. This has been Amazon’s strategy since its inception. Ever since was found by Jeffrey Bezos in 1995, it has been steadily growing to become the largest online retailer in the world. Bezos, who majored in physics at Princeton University, saw an opportunity in e-commerce, which was growing at an astonishing rate of 2,005% a year (Rivlin, 2005).  It is after this observation that he started drawing up a business plan for an internet based book selling company. Initially, his company, which he named after the largest river in the world, got off to a slow start, as compared with other companies which were making millions of dollars overnight. Soon enough, after the “e-bubble” burst and many online companies went bankrupt, persevered and became the world largest online retailer (Rivlin, 2005). Bezos applied his method of selling books to selling everything one can imagine on the internet. Now Amazon sells not only books, but everything from laptops to toys, making it have the most diverse inventory of any online retailer. However, Amazon’s initial success can be contributed to Bezos revolutionary idea of introducing books to the internet.
Bezos essentially revived as well as renewed the way books are sold. Just a few years back, the only way to purchase them would be to go to independent book stores. These stores often had an extremely limited selection of novels; in addition they were expensive and often inconvenient for customers to purchase because it would involve the customers to drive to their location. Bezos innovative idea was to incorporate book selling to the internet in the late 1990s. This idea was revolutionary in that it not only expanded the book selling market nationwide, but also offered lower prices and made it extremely convenient for anybody to purchase them, since the products would be delivered usually within a week. Currently, nearly all online retailers follow this strategy, making it easier than ever for consumers to purchase goods. To help expedite sales, and make their website more efficient, Amazon implemented the “One-Click Checkout”. At the time, no other online retailer had this feature (Rivlin, 2005). The one-click checkout would allow the user to save all billing and shipping information, meaning that when a customer was ready to purchase a product, they just had to press one button for the transaction to go through the system. This featured offered consumers more of an incentive to buy from Amazon than anywhere else that required the customer to enter their information at every transaction. These features made it possible to achieve Bezo’s goal of entering a nationwide market.
Bezos was able to achieve this nationwide market very cleverly. Instead of storing his inventory in one warehouse, he made contracts with warehouses all over the nation (Vogelstein, 2003). When a customer put in an order, the nearest warehouse would ship the product not only at a cheaper price, but the product would also be delivered to the customer much quicker than conventional methods (Jobs Boost as Web Warehouse Opens, 2006). Companies have ever since adapted this strategy of having affiliated warehouses all over the nation. Companies such as use the same strategy to ship its nutritional products, with similar success as  Having multiple locations for storing inventory has tremendous advantages, first of all, if one warehouse encounters a disaster such as a flood, fire, etc, there are many backups, so the inventory ratio (rate at which inventory is sold) still will remain relatively high despite the loss a warehouse. Another innovation which Amazon implemented in its website to help raise sales was its information gathering system. This system would collect information from customers and help customize a list of products which the customers might be interested in (Rivlin, 2005). This list would be sent sometimes on weekly basis to customers, who would often buy Amazon’s products even when they never intended to. This revolutionary feature has contributed to millions of dollars of revenue for Amazon ( Annual Report, 2009). However, there are some which find this system to be an invasion of privacy, because in addition, this system also collects information on the topics which its customers are reviewing on the internet. An ethical debate took place over whether or not Amazon should be using private information collected from users as a tool to sell its products more efficiently. In response to this heated debate, Amazon recently added an option for customers to choose whether or not to receive these lists of recommended products, showing how Amazon cares about its customers feedback.  
Amazon’s success with introducing books to the internet could be contributed to its lower prices. It is able to offer its products cheaper than anyone else only because of the amount of inventory they have, which is equivalent to 2.1 billion dollars ( Annual Report, 2009). Using basic principles of economics, it is not surprising that Amazon can offer lower prices. The more inventory one purchases, the cheaper it is on a per unit basis. In other words, marginal cost decreases as more inventory is bought, allowing them to sell each unit at a cheaper price than companies who purchase inventory in smaller quantities.  In addition to this, Amazon also sells used books for even cheaper using a system in which customers can actually become sellers on Amazon. This feature is similar to Ebay, were one can list a product they want to sell on a per month or per sale fee. Once a product sells, Amazon received a percentage of the sale, which further increases its revenue. This system is unique because it benefits everybody, the customer received a cheaper than market price product, the seller gets rid of unwanted items, and Amazon gets a percentage of the sale. Indeed Amazon’s innovative website has benefited many people all over the world, but it did come with some consequences.
The consequences of Amazon’s success on the internet are very apparent. Many private businesses went bankrupt, while others struggle to adapt and survive under Amazon’s presence. Amazon effectively wiped out the hole in the wall bookstore which so many people turned to when they needed a good novel (Clee, 2009). It used to be a personal experience to go into a bookstore and browse for products, perhaps even asking one of the employees for recommendations and opinions. The book store of old was what the diner was to hungry customers, until most got replaced by powerful corporations that made it more convenient for consumers. Currently, Amazon’s only competitors in the book selling industry are Barnes & Noble, and Borders. Barnes & Noble is a book retailer whose base remains selling novels at a limited number of locations around the nation. Essentially, Barnes & Noble strives to be an upgraded version of the old style book stores, along with Borders to compete with Amazon. Their locations often have a substantial selection of different novels, and their internet based store is also diverse, however, their book sales don’t come close to Amazon’s because of the reputation it has built over the years coupled with the demographics of its marketing strategy, which is now world- wide. Amazon’s constant development has been able to stay ahead of the curve, giving it an advantage over most competitors.
As a continuously evolving company, Amazon again made an impact on the book selling industry with its use of the innovative e-book. The e-book is a digital version of a novel, which once scanned and processed, could be downloaded on any computer and some hand held devices. The beauty of these e-books is that they are cheaper to produce, it is instantly available, and it is more environmentally friendly (Noam). It is cheaper because no paper or ink is used, eliminating the expenditures needed for printing, which in turn makes it environmentally friendly by reducing the amount of waste paper. It is also instantly available to download at the time of purchase, making it extremely convenient for consumers. There are a few drawbacks however. Most readers prefer the general “feeling” of having a book in their hands, as it has been a tradition that has been part of our culture for thousands of years.  Nevertheless, Amazon paved the way towards becoming one of the leading sellers of these e-books, with over 1,000,000 titles available instantly for purchase and download ( Annual Report, 2009). Is Amazon attempting to drop its original routine of selling the “old” style of books and cross over to the e-book industry? It seems that is the case, as the market for e-books has been growing steadily, with e-book sales jumping from $46 million to $55 in just one quarter in 2009 ( Annual Report, 2009). It is possible that Amazon is venturing to expand on this relatively new industry by constantly expanding its e-book inventory, which is already growing every day. Amazon did however, encounter a problem with its publishers in early April on the issue of pricing its e-books.
Despite the reduced costs associated with e-books such as lack of materials, need for shipping, as well as warehouse storage, publishers are pushing companies like Amazon to raise prices. E-books from a publisher’s standpoint are a real threat; as publishers like Macmillan intend to match the price of its e-books with its printed books, claiming the content of both products carry the same value (Stone, 2010). In response, not only did Amazon reject the publisher’s demands of raising the prices of its e-books, but they completely stopped selling all of its products from Macmillan, claiming that companies like Macmillan set “needlessly high e-book prices” (Stone, 2010). Amazon believes the prices of e-books should be in accordance with the reduced costs of producing and distributing them, staying true to one of their fundamental goals of offering lower prices. Despite its brief moment of power over its publishers, Amazon lost the battle over the pricing of its e-books. In order to stay competitive, Amazon has to raise its prices to stay competitive with Apple’s Ipad which was launched in late March with intent to sell its e-books at $15, severely undermining Amazon’s prices (Slattery, 2010). Although Amazon lost the issue over prices, it might be beneficial for them to develop a strong relationship with its publishers. One of the results of the expansion of the e-book market is the many competitors trying to enter this market, and take away Amazon’s market share. Having a strong, positive relationship with publishers is key in order to secure its place as being the largest retailers of both electronic and physical books. Amazon has effectively secured its place in its industry thanks to its continuously developing strategies and products, such as the Kindle, which fused the old traditions of book reading, with the technology of today’s world.
The Kindle is an e-book reader which was introduced by Amazon’s in late 2007. It was sold out within hours of its introduction, and remained out of stock until almost half a year later (Patel, 2007). What made it so revolutionary was that its content was available for download directly on the device. This means that the user didn’t need to download anything on their computers and then transfer to the Kindle, which so many of its predecessors required. This innovation launched book reading into a whole other level of convenience. Now readers could download any item from Amazon’s database of over 400,000 novels, documents, and texts almost instantly with the Kindle’s built in internet connection. The first generation Kindle in 2007 was able to store approximately 200 titles, with the ability to expand its memory with a memory card (not included!) (Patel, 2007). Another innovative feature of the Kindle is its unique “e-ink” screen, which can be described as a hybrid between a computer monitor and a page from a paperback book. This unique screen is different because it introduces the familiar feeling of reading a book, which a high-tech twist of being a monitor. Truly the first generation Kindle was something to get used to, perhaps may even HAVE to get used to. Amazon is constantly developing its product base and has been working on improving the first generation Kindle, resulting in the second generation as well as the DX version of the Kindle’s. Currently, these devices hold up to 3,500 books, have faster download times, and have a new “Read-To-Me” feature were the Kindle can actually read the text out loud (Silverman, 2010). Being only around 1/3 of an inch thick, the Kindle looks like a promising product which could be utilized not only by an average reader, but could as well be used by college students, businessmen, etc. A current issue facing many college students is the sheer amount of books and other documents they have to carry around every day to class. The Kindle makes it possible to eliminate that problem. Imagine having all your books on one 1/3 inch thick tablet! Amazon’s Kindle is also actually more affordable in the long run for students, as most University bookstores charge substantially more than Amazon to help cope with the high marginal costs mentioned earlier. The same applies to businessmen, who would be able to read reports, financial statements etc. on the go without having to carry piles of documents.
            Truly the Kindle is one of Amazons masterpieces; however, competitors are taking a swing at it by introducing their own versions. Amazon’s largest book-selling competitor Barnes & Noble have recently came out with their own version of the Kindle, called the “Nook”. This device offers similar features such as the e-ink technology, and quick download ability, however most consider it inferior to the Kindle due to its larger size, and limited memory, not to mention its less attractive style (Carnoy, 2009). The media behemoth Apple Inc. is also one of Amazon’s most threatening competitors, as they have also been interested in entering the e-book industry with its recently released “Ipad”, which hopes to revolutionize the way media is looked at. The Ipad is a tablet similar to the Kindle which will feature not only a comprehensive library of books, but a list of other features found on most computers such as watching movies, listening to music, etc (Silverman, 2010). These developments are made with the intent to secure some of Amazons market share, and give it a run for its money.   
Although it seems that Amazon’s Kindle is headed into an uncertain future, its destiny is much less risk than the Nook or the Ipad. Barnes & Noble are relying heavily on the Nook to just be able to compete with Amazon. In addition, the Nook is priced at $260 which might make some consumers speculate its quality. Apple on the other hand, has to worry about its highly speculated Ipad. The long term success of Apple’s Ipad is hard to determine because it was just introduced. It also has a excessively high price and shares vast similarities to a earlier product, the Itouch (Fox, 2010). Consumers are unlikely to purchase a larger version of the same product, which Apple is essentially doing. Meanwhile, Amazon can be comfortable being in between these two competitors in terms of success, effectively placing itself as a medium between all the e-book reader products available. Although more and more companies such as Sony are seeking to get a piece of the market share, Amazon’s is doing a steady job of maintaining its place in the industry.
So what do all of these innovative, technological changes mean for the book selling industry? Current trends of rising e-book sales, coupled with the new e-book readers, and declining physical book sales strongly suggest that e-books will replace the traditional paper books people around the world have used for millennia’s. In an article titled “Electronics and the Decline of Books: The Transformation of the Classroom” by Eli Noam of Columbia University, the issue of physical books becoming a secondary educational tool is discussed. Noam describes how AT&T found and introduced microwave technology in WWII, which later was adapted by individuals and eventually crippled AT&T. Another example Noam uses is how the implementation of ATM’s resulted in banks made themselves useless by “stepping back from the direct link with their customers” by cutting teller jobs. What Noam means with these example is technological change revolutionizes industries. It is very possible for Amazon to develop a similar situation in which publishing a book electronically can be as easy as uploading it onto its database without going through a publisher. The effects would devastate the publishing industry, effectively making them useless, just like being a teller at a bank when ATM’s were first being implemented. Perhaps more importantly, there would be a significant change in how we educate ourselves. Amazon as well as its competitors are paving the way to the future with its e-book readers, which someday might become standard at schools, universities, and businesses.  
The publishing industries take on Amazon’s e-book and its Kindle is very speculative. With e-books on the rise, it seems as though they are extremely wary of how the times are changing, taking every precaution to not lose its role just like thousands of people did in the banking industry when new technologies arose. Eager to adapt and survive, it can be expected that they want to raise prices on e-books. Perhaps the conflict between Amazon and its publishers arose because of the Kindle, were Amazon would discount its e-books as an incentive for more consumers to buy Kindle’s. However, this confrontation raises the question if Amazon should depend on its publishers for its products. With technological processing power doubling every 12-18 months, according to Moore’s law (Kanellos, 2003), it wouldn’t be surprising if publishing an e-book will be just one click away in the near future. Perhaps in a few years, the publishers that have been supplying the public with all of its books will have the same fate as private bookstores, essentially becoming obsolete and wither away.   
It is no question that Amazon’s impact on the book-selling industry has been huge. Starting with wiping out private book sellers, to pioneering digital books, all the way to changing the face of a novel, what could Amazon possibly due next to add on to its innovations? In order to compete with its competitors Barnes & Noble and Apple, Amazon needs to implement a strategy were it would sell its e-books at much cheaper prices than its competitors without going out of business. As pointed out in Noam’s article, technological change often transforms the face of an industry. It is only a matter of time before Amazon makes such a change. Perhaps its dislike of its publishers who promote raising prices of e-books will usher forth a new strategy which will once again put in the spotlight, just like in the late 1990s. The real potential for growth, however, rests oversees, were Amazon has only recently began to expand. Its recent venture into China seems promising after Amazons acquisition of the largest Chinese retailer (Wagner, 2004). Whatever Amazon does, if it remains patient, takes the time to develop a steady business strategy, and continues to develop innovative products, it will continue being the leading force in the online retail industry. 

Wednesday, September 1, 2010

Being a Owner

By JasionoX666X

Holding a company's stock means that you are one of the many owners (shareholders) of a company and, as such, you have a claim (albeit usually very small) to everything the company owns. Yes, this means that technically you own a tiny sliver of every piece of furniture, every trademark, and every contract of the company. As an owner, you are entitled to your share of the company's earnings as well as any voting rights attached to the stock.
Example stock certificate

A stock is represented by a stock certificate. This is a fancy piece of paper that is proof of your ownership. In today's computer age, you won't actually get to see this document because your brokerage keeps these records electronically, which is also known as holding shares "in street name". This is done to make the shares easier to trade. In the past, when a person wanted to sell his or her shares, that person physically took the certificates down to the brokerage. Now, trading with a click of the mouse or a phone call makes life easier for everybody.

Being a shareholder of a public company does not mean you have a say in the day-to-day running of the business. Instead, one vote per share to elect the board of directors at annual meetings is the extent to which you have a say in the company. For instance, being a Microsoft shareholder doesn't mean you can call up Bill Gates and tell him how you think the company should be run. In the same line of thinking, being a shareholder of Anheuser Busch doesn't mean you can walk into the factory and grab a free case of Bud Light!

The management of the company is supposed to increase the value of the firm for shareholders. If this doesn't happen, the shareholders can vote to have the management removed, at least in theory. In reality, individual investors like you and I don't own enough shares to have a material influence on the company. It's really the big boys like large institutional investors and billionaire entrepreneurs who make the decisions.

For ordinary shareholders, not being able to manage the company isn't such a big deal. After all, the idea is that you don't want to have to work to make money, right? The importance of being a shareholder is that you are entitled to a portion of the company’s profits and have a claim on assets. Profits are sometimes paid out in the form of dividends. The more shares you own, the larger the portion of the profits you get. Your claim on assets is only relevant if a company goes bankrupt. In case of liquidation, you'll receive what's left after all the creditors have been paid. This last point is worth repeating: the importance of stock ownership is your claim on assets and earnings. Without this, the stock wouldn't be worth the paper it's printed on.

Another extremely important feature of stock is its limited liability, which means that, as an owner of a stock, you are not personally liable if the company is not able to pay its debts. Other companies such as partnerships are set up so that if the partnership goes bankrupt the creditors can come after the partners (shareholders) personally and sell off their house, car, furniture, etc. Owning stock means that, no matter what, the maximum value you can lose is the value of your investment. Even if a company of which you are a shareholder goes bankrupt, you can never lose your personal assets.

Monday, August 30, 2010


Stocks Basics: Introduction By JasionoX666X

Wouldn't you love to be a business owner without ever having to show up at work? Imagine if you could sit back, watch your company grow, and collect the dividend checks as the money rolls in! This situation might sound like a pipe dream, but it's closer to reality than you might think.

As you've probably guessed, we're talking about owning stocks. This fabulous category of financial instruments is, without a doubt, one of the greatest tools ever invented for building wealth. Stocks are a part, if not the cornerstone, of nearly any investment portfolio. When you start on your road to financial freedom, you need to have a solid understanding of stocks and how they trade on the stock market.

Over the last few decades, the average person's interest in the stock market has grown exponentially. What was once a toy of the rich has now turned into the vehicle of choice for growing wealth. This demand coupled with advances in trading technology has opened up the markets so that nowadays nearly anybody can own stocks.

Despite their popularity, however, most people don't fully understand stocks. Much is learned from conversations around the water cooler with others who also don't know what they're talking about. Chances are you've already heard people say things like, "Bob's cousin made a killing in XYZ company, and now he's got another hot tip..." or "Watch out with stocks--you can lose your shirt in a matter of days!" So much of this misinformation is based on a get-rich-quick mentality, which was especially prevalent during the amazing dotcom market in the late '90s. People thought that stocks were the magic answer to instant wealth with no risk. The ensuing dotcom crash proved that this is not the case. Stocks can (and do) create massive amounts of wealth, but they aren't without risks. The only solution to this is education. The key to protecting yourself in the stock market is to understand where you are putting your money.

It is for this reason that we've created this tutorial: to provide the foundation you need to make investment decisions yourself. We'll start by explaining what a stock is and the different types of stock, and then we'll talk about how they are traded, what causes prices to change, how you buy stocks and much more