We are told over and over how important brands are and many of us who work for companies know about their brands. One of the reasons brands are so important to an investor is pricing power – can they raise prices and retain market share or make more money? Scott Barlow (sbarlow@globeandmail.com) recently wrote a column called Brands with true pricing power. In the column he started with a research report by Merrill Lynch chief quantitative strategist Savita Subramanian. The research about pricing and brands was two indicators are gross margins which are stable or increasing and brand equity. She wrote companies that with gross margins that have remained constant or increased have outperformed companies whose gross margins decreased by almost 40%. As an investor you are asking which stocks are those?

Mr. Barlow took the 100 top brands as nominated by Forbes magazine and listed them.

Some were private (IKEA), some belong to companies which have multiple brands (Porsche, ESPN, Rolex, Pampers, Frito-Lay) but he could bring the total to 70 companies and the world’s most powerful brands. Mr. Barlow then ranked the companies by standard deviation of gross margin results over the past 5 years using Bloomberg

Company                                        5 year standard                Gross         3 year annual    P/E

deviation of GM              Margin      return%             Ratio

Wal-Mart                                         0.27                                   25.13             0.48                  15.22

Home Depot                                    0.43                                   34.19            25.95                 24.02

Colgate-Palmolive                      0.65                                    58.62              9.35                  24.23

Coca-Cola                                      0.77                                    60.53               8.45                21.56

Estee Lauder                                  0.92                                   80.51               15.30               29.35

Accenture                                       0.93                                   29.80              14.40              19.90

Deere & Co                                     0.97                                 30.21                -1.83               14.61

BMW                                                1.17                                  21.15                   7.52               8.55

Pepsi                                                1.17                                  54.99                 12.63             21.70

Siemens                                         1.19                                   28.88                   7.66             13.29

Starbucks                                      1.22                                   59.36                 28.71            36.21

Nissan                                            1.29                                   18.76                  6.80            7.93

Daimler                                         1.31                                     21.27                 17.41             8.60

Nike                                               1.33                                    45.97                 32.38             30.00

Adidas                                           1.36                                   48.29                 10.33                30.33

Linking to dividend paying stocks, all the above companies are leaders and make profits, some years are tougher than others but they make money. Starting with best in class or strongest brands because of the advantages in the marketplace which that offers is a great place to start. These are the companies which keep and grow your money over the years as you enjoy the brands.

There are more questions than answers, till the next time – to raising questions.

 

When markets turn or point in a new direction, Wall Street does a pivot and brings about products which will generate income in that direction. The fall of the interest rates lead to investors wanting vehicles to generate income similar to what the governments were paying. The easiest choice was utility companies which sell renewable energy – divide the companies into parts. The developer of the power source would sell the power to the yield company which would offer steady, sustainable dividends thanks to the selling of the power to the government which offered higher rates than selling to the public. Within a short time there were many yield companies and all were happy. Now some stocks have fallen for energy prices have fallen and governments are wondering about their subsidies.

David Milstead wrote a column Yieldcos are not such a safe investment afterall and he quotes analysts Andrew Hughes and Brian Chin of Merrill Lynch is that after dislocations (stock price going down) you should own the tail with the strongest dog. What they mean is a yieldco is often only as good as its sponsor or parent, that is selling assets to it. For the company to grow it needs a good pipeline and sometimes its parent had some wonderful assets but there is a delay in building more. Companies such as TerraForm Global and TerraForm Power spun from SunEdison had lots off problems. Companies similar to NextEra Energy Partners sponsor is Florida based NextEra Energy Inc and NRG Yield from NRG Energy Inc of New Jersey are able to have good flow throughs from parent to yieldco.

Linking to dividend paying stocks, when energy prices are high, people look for alternatives and governments want to encourage less energy usage from oil which can be a good thing. It usually takes a couple of years to see if companies business model makes sense for a longer period of time. While you may love the concept, only nibble to see how the business model works; when you see it does for the longer term jump in. Patience is often a virtue in keeping money.

There are more questions than answers, till the next time – to raising questions.

 

 

In a global world, anyone could be your customer, and invariably some will for reasons you likely do not understand. One person trying to understand why people buy the way they do is Jan Chipchase who wrote the book Hidden in Plain Sight – How to Create Extraordinary Products for Tomorrow’s Customers published by Imprint, NY, 2013. Mr. Chipchase specializes in figuring out how customers are for in the communications industry. This is important because roughly 80% of the world lives on less than $10 a day, yet more than half the global populace owns a mobile phone and every year people around the world can do more with their phone.

With design, there are two standards – one the one the company thinks people will use and the one people actually use. Mr. Chipchase’s company tries to determine how people use products in “real life” settings. For example, Tata the car company in India has a car priced around $3,000; yet lower income Indians are not buying it. Why? some of the world’s toughest customers are the lower income because they can not afford to buy poorly designed products. It would be too expensive to repair it for the Nano was designed cheaply and had a reputation for catching fire.

Another example is how do people in the city send money back to their village? Remembering the branch system in North America does not exist. One method was to send it with someone (hopefully they are trustworthy). The method that grew up was to buy mobile phone airtime credits; the person who had the phone in the village (the operator of a small business) would redeem the airtime,  which she would then charge villagers to use. As villagers used the phone money would be paid to the family. No one knows who devise the system, but it works and money is sent to the villages.

The world’s busiest commuter station is Shinjuku Station in Tokyo where 3.64 people pass everyday. If you watch closely very few put paper ticket at the ticket gate – they use their phone which has a prepaid commuter card built in. Many other uses have flowed  from the need to move people quickly. Using your phone to pay at vending machines, etc. You can imagine with that many people, carrying bulky knapsacks is not something people do, but they can use their phone.

If you want to see a creative industry, check out how porn is delivered to meet customer demand. Try not to watch the porn, but concentrate on how it is delivered.

As you observe people you will see human behavior can be framed, decoded and analyzed well beyond what is articulated. You may even start to enjoy the things left unsaid more than those are expressed outright. For when a new technology comes along, you will have a sense of long-lasting benefits that point to a permanent shift in behavior or it is a novelty? How will they use your product?

Linking to dividend paying stocks, every day or every week new products are launched and many go by the wayside. There are reasons for it, some are designed that way, some are designed poorly. Trying to understand the end user of the product can make the success more likely. Generally, what you think people will do, is not what people actually do. Look at the products of the companies you own stock in – how did they do? or is it a good thing the original brand worked really well?

There are more questions than answers, till the next time – to raising questions.

 

 

 

Continuing along the theme on how to do more with less, is a book called The Frugal Innovator by Charles Leadbeater published by Palgrave Macmillan, London UK, 2014. In the ideal world there is lots of money; in the real world we have finite resources. Frugal innovation tries to provide better solutions for more people by using fewer resources by doing things completely differently. If you never dared to dream the impossible dream or were not afraid to ask for something seemingly impossible this book is for you. While resources are very important, it is never about the amount of resources but doing with what you have and adapting.

Make allies, share value – successful innovation is rarely just about creating a standalone product. Remember Edison built the first working lightbulb but he also created a means to generate and distribute electricity (there is a reason why the electrical system was Edison. Make the product but work with others to make it work in people’s lives.

Stay flexible – frugal innovators have to be able to look for different ways forward when they hit an obstacle. In basketball it is called pivoting. You have a wonderful product start, learn from others about the weaknesses and work on them. What systems does it need to go forward? More often than not, pivoting means to looking for a different way to engage consumers and create a business model.

Creative muddling through – you do not know everything. Things happen, life happens.  Everything cannot be planned in advance through analysis and rational planning. You can creative muddle through by ensuring you are focused on using your scarce resources effectively; and going with the flow.

Thrive on constraints, use crisis to be creative – Use constraints to work in your favour. Use the crisis to unlock new solutions by enabling new thinking, making people drop their ingrained habits and forcing a sense of urgency. Try to see the world differently.

Frugal innovation can be done by many and that is what is exciting about it. The process asks what is the impossible? and start working on it. As you work on it, the resources are likely to be scarce, but simplify, share your work, try not to invent the wheel again, and results will happen.

Linking to dividend paying stocks, frugal innovation can be done by all employees, how does your company take advantage of the ideas of its employees? How are ideas unleashed?

There are more questions than answers, till the next time – to raising questions.

 

 

 

 

 

Continuing along the theme on how to do more with less, is a book called The Frugal Innovator by Charles Leadbeater published by Palgrave Macmillan, London UK, 2014. In the ideal world there is lots of money; in the real world we have finite resources. Frugal innovation tries to provide better solutions for more people by using fewer resources by doing things completely differently. If you never dared to dream the impossible dream or were not afraid to ask for something seemingly impossible this book is for you. While resources are very important, it is never about the amount of resources but doing with what you have and adapting.

There are 8 rules of thumb for frugal innovators:

Get real – work in the real world to solve real problems in the world. Move from the lab to the real world quickly.

Design – but do not overdesign – there is a difference between a wonderful looking product and being able to use it easily. ideally consumers want both, the ability to use it will overrule the shiny, new product.

Stay close – understanding the lives of the consumers, how they will adapt a product and what else they need to complement it are vital. Often times the success is the what else they need to complement it or the easy part is the product. For example, in Mexico a cement company sells large quantities to big companies; the frugal part is selling small packets for small homeowners to do it themselves. To make that work, the cement companies works with architects and financing companies so people can do what they wish to do.

Borrow – rapid, real world learning encourages innovators to borrow from existing proven approaches rather than inventing from scratch. Frugal innovators reuse and recycle because it is a more efficient and effective way to learn. Learn to look sideways – what exists that we can use? what simple ideas were discard for more complex ones?

Linking to dividend paying stocks, your company does research and development, how much is linked to frugal innovations and how much is linked to increasing the budget?

There are more questions than answers, till the next time – to raising questions.

 

Continuing along the theme on how to do more with less, is a book called The Frugal Innovator by Charles Leadbeater published by Palgrave Macmillan, London UK, 2014. In the ideal world there is lots of money; in the real world we have finite resources. Frugal innovation tries to provide better solutions for more people by using fewer resources by doing things completely differently. If you never dared to dream the impossible dream or were not afraid to ask for something seemingly impossible this book is for you. While resources are very important, it is never about the amount of resources but doing with what you have and adapting.

Frugal people have to use the resources available to them – you can wish for something wonderful, but what is around them that can be used for their ability to solve the problem. The people tend to start with the people the large companies overlook (what are their problems often times it is the ability to pay); they prefer to do radical things with proven, often quite old fashion technologies which are known to work, familiar to consumers and easy to maintain. They welcome borrowing ideas and putting to a new use. They recycle, reuse, repurpose, remediate. They like nothing better than finding a new use for discarded, overlooked or wasted resources. They prefer simple, shared, social solutions. Simple because they are easy to use, make and maintain. Social to make it more affordable. Shared solutions to help people to learn from another. Frugal innovators have 4 main common features: they are lean, simple, social and clean. They learn from trail and error, experimentation and trying again. In many ways, frugal innovators are people who come from the family farm – on the farm there are all the problems and opportunities in running a farm. Most farms do not make a lot of money, so people learn to improvise or adapt or use what is on the farm. How does the land

There are many problems in the world, there are many solutions in the world. There will be readily available solutions at the top income level sector. The are more opportunities to help at the lowest income level sector but to start the innovator must ask for the impossible.

The first step towards creating a simple solution is to crate a simple product by reducing it to a basic core: the 20% of the features that create 80% of the value. For example: if you fly a low cost airline all you really want is cheap, safe and reliable. If you stayed in a Travelodge you received a clean bed, cupboard and shower. Complex products show off their multi-functionality; simple, frugal products hide their complexity.

When new products borrow from the old they are easier to learn how to use.

Frugal innovation creates better outcomes for more people, while using fewer resources, by developing completely different solutions.

At the core of frugal innovations are the four linked design principles: lean and simple, clean and social.

They are lean to eliminate waste in all forms. To be lean, frugal solutions have to be simple. Simple solutions can be used by more people, more easily. Innovations that can be lean and simple can be low-cost without being frugal. To be fully frugal they need to be clean – the rethinking, reuse, recycle, repurpose and remediate. In addition the solution needs to be social.

The reality is the frugal innovation is hard to manage because there are many moving parts, consumers may or may not see the benefits right away and frugal innovators are generalists who see connections between products.

Linking to dividend paying stocks, when investors heard about research and development it is generally aimed at the middle and upper income groups who can pay their bills. The process is rarely aimed at the lowest income groups of the world – although many could benefit. The great advances in technology – smaller size, more powerful chips movement from desktop to laptop has changed the abilities of people to access all the great things about the web. The reality in most of the world, the infrastructure to be on the web does not exist or is too expensive for many in the world. Frugal innovation can help make lives better for the world, but it starts with some resources.

There are more questions than answers, till the next time – to raising questions.

 

 

 

 

Have you ever used a microwave oven? The technology evolved from radar detection of planes during WW II. Prior to this time period no one really knew where planes were until they heard them overhead. The defense department in the England could see the German war production was increasing and eventually those planes would be turned on their country. The Ministry sent out a proposal to zap the pilots when they came across. We still cannot do that except in the comic books, however one person can up with the idea of trying to detect the planes – the analogy used was tying a string between 2 trees with bells on it and it and when something touched the string you could hear it. The theory was if planes could be detected 20 minutes flying time before they reached the border that was enough time to send up the British planes to defend and shoot down bombers. It took a lot of work – many different ideas but the core of the group was 6 people. In other words, the research and development team which was working on a seemingly unsolvable problem or trying to make the impossible possible was a small one. The movie Castles in the Sky starring Eddie Izzard produced by the BBC distributed by Warner Home Video in 2014 outlines the ups and downs of inventing of radar technology. The person who led the team was Robert Watson-Watt who was knighted for his work. Radar technology makes the invisible visible. The story is a typical start up with not enough money, borrowed resources, but staying focused on the goal, the obstacles were overcome one by one. Since the setting is a large organization (the defense department) there are competing visions – committees to control funding and to push along the way. There were many technological innovations to be used but cunning, using what exists pushes the project along the way. One of the many solutions is determining the new TVs have the smaller and more powerful tubes which are needed to do the job – learning to use what there is not what there is not.

Linking to dividend paying stocks, while much is said about research and development, the reality for most companies expanding the uses of what exists is more profitable. The team in the movie invented radar, but the growth in the economy was using the technology for other uses such as microwave ovens and tracking passenger planes. There will always be a competing visions in companies or there should because people are people and we do not know what will happen until it happens. Ideas can transform but implementation and rolling out the idea takes organization and that is where the larger company has the advantage. Dividend companies may or may not lead in ideas but they have a great advantage on implementation and rollouts.

There are more questions than answers, till the next time – to raising questions.

If you are an investor, chances are you will look at oil companies whether they are big or small; particular as the price of oil was approaching $100 a barrel for there was plenty of money to be made. Over the past 5 years, one of the approaches the oil industry used is  called fracking and it proved to be successful in extracting more oil and gas from the ground. On the other side because issues tend to have good and bad sides was the fracking sometimes caused water problems, earthquakes, and methane explosions. Most of the time, investors focus on the good side which is using technology to enhance the production of the oil. However, listening or reading about the other side is important. One of the many books about the concerns is called Slick Water by Andrew Nikiforuk published be Greystone Books Vancouver/Berkeley, 2015. The book tells the story of one woman’s struggle against the oil industry and its regulators because in the area where she lived the fracking caused methane to get into the water supply. In Flint, Michigan the water supply has lead which means all the pipes need to be replaced. In rural area or away from cities, most people depend on wells for their drinking water. As long as the oil companies take the oil, pay their royalty the system works reasonably well. When the methane gets into the drinking water the first line of defense is denial that the company caused it.

When you deal with the environment, you deal with many theories because the environment is not static, the earth and weather change. What is the route cause, no one really knows, but it is possible to say some actions have a more direct cause than others. One of the direct cause of methane going in the water supply was fracking. For those who may not know, conventional oil production is to send down a pipe directly into the earth and using pumps bring up the oil. This process does a good job, but there will be oil left; fracking is designed to loosen the earth to collect the rest of the oil. When prices of oil go up, it does a very good job of collecting the rest of the oil. We have seen the use of fracking in North Dakota, Montana, Texas and Pennsylvania where oil is found in shale structures. At the beginning of the oil boom in Pennsylvania – fracking was used but it was very dangerous and not effective. The years have gone by to improve the effectiveness of fracking.

One of the problems with the book is the regulators. As citizens we know regulators have a bias towards the industry because they report to politicians who prefer the industry be productive and have few problems. However, it was disappointing to read as a citizen how tough the regulators made the process. The fight to have clean water in the rural area brings memories of the movie Erin Brockovich movie and the fight against Pacific Gas & Electric.

Linking to dividend paying stocks, no matter what industry you invest in there will be some negative implications as well as many, many positive reasons to invest. There will be industry practices which can be better and when things go wrong how does the company and industry react? and who pays for the damages? As an investor you see a role for government to help pay (or even to pay the bulk of the costs) for in the case of fracking – the water table is not changed every time. There are problems but they change with the different structures below the surface which we can not see until there is perfect information and there is rarely ever perfect information with the earth.

There are more questions than answers, till the next time – to raising questions.

 

This year the Olympics are in Rio de Janeiro, Brazil and if you heard or read about the leadership of the country, you would know there are many scandals going on. This means the leadership of the country is less than stable. A recent article in the Globe by Mark Pastin who is the CEO of Council of Ethical Organizations gives lessons to staying ethical.

Mr. Pastin is a ethics consultant and offers 5 practical lessons from ethical leaders:

Say less, but say the truth  When the CEO speaks every work is measured by your employees, doubted by journalists, parsed by analysts, and weighted against laws and regulations by a hungry plaintiff’s bar. CEOs do not offer their opinion, for when they speak, they are speaking for the company. They have to limit what they say to what they know or think they know to be true.

Know the stakeholders While shareholders are important, companies have a wide range of relationships which they depend on. CEOs should try to balance them all so they align in support of the company.

Surround yourself with truth tellers This will one of the hardest tasks of the CEO, find direct reports or people in the organization who do not want the top job but will tell you the truth about what is happening in the company, even when it is uncomfortable to do so. Many of your direct reports will not tell you the complete truth, because if they did they would be out of the running for the promotion or bonus.

Learn for yourself   Nothing beats field trips to the offices where policies are put into place and what works and does not work from corporate.

Pass on some opportunities  In all companies, there will be opportunities that seemingly could make money, but are rejected because they are iffy situations. For example who gets the big bonus? money shouts volumes about what is said to be policy and what is reality.

Linking to dividend paying stocks, most large company executives are in bubble, think about tours of the President to offices or stores to see. What do they see? When a company goes off the rails, such as you see in Brazil, the good money will move to the sideline. If you see the company is not ethical (lawsuits result which means senior management is managing the lawsuits rather than new or existing business). There are many challenges for a company, it is easier to be on the ethical side and more long term rewarding if they are. How does your company respond to problems?

There are more questions than answers, till the next time – to raising questions.