Investing is a science, art and skill; in that order. It is the mistaken idea of many to think that we can move straight into technical charts and easy techniques and start making money from the stock market. Investing involves an understanding of the basic concepts of business, and to do that, we need to go to the very foundations of our modern economy.
This blog has touched many times on the basic building blocks of modern capitalism which forms the basis of all investment; namely, the factors of production. Traditionally, these have been Land, Capital and Labour.
You buy land, and you can use it to produce money by building houses or planting crops on it.
The owners of capital can use it to generate interest.
When you rent the labor of employees, you can direct their efforts towards making money for you.
In recent times, a newer form of Factors of Production (FoP) has taken prominence. It is known as Intellectual Property (IP). There has always been some form of recognition for this type of FoP, mostly in the form of Goodwill, but in the 21st Century its importance has grown in proportion.
Intellectual Property deals with things which add value to a product which cannot be easily seen or touched. The purest form of IP would be software, books and music. But for the purposes of this article, we are more interested in less obvious forms of IP which add a lot of value; or in other words, intangible ideas and concepts which are embedded into the goods and services we buy.
Branding
The most interesting would be Branding. Branding adds PERCEIVED value to the product. This means that the product is not better than rival products if you look at the technical specifications alone. It only becomes more valuable in the eyes of a consumer who has gone through the company’s ‘brainwashing’. Here, instead of adding value to a product by working on the product, we add value by working on the buyer. We make the buyer look at a product through our favored ‘lens’.
For example, if you meet a consumer who likes class and elegance; you can be quite sure this guy will choose your offering as long as you are able to make him feel that your product is classy and elegant.
Starbucks brands itself as the coffee place for young, sophisticated yuppies; with the result that people who want to be seen as young and successful will choose Starbucks. They did not wake up one day and suddenly find that young people liked coffee. They worked more on the ambience and styling; then proceeded to project this image on the target market; thus MAKING young people like their coffee.
When a successful brand is created, it becomes a money-machine as valuable as Land.
Design
However, regardless of how powerful the brand is, the product itself cannot be under par. Once the branding begins to attract the fish, you must now have the right fishing rod to haul them in. The design of products and services (yes, the provision of services can be designed too) must be consistent with the image projected by the brand. Then, it must be convenient, fun and effective.
Business Processes
Once the above two items have been achieved, efficient business processes are required to keep everything in order. Companies have to deal with government regulations, accounts have to be kept, and machines have to be maintained. These ensure that the company is sufficiently free of clutter which may hinder growth.
Implications to Investors
Investing in modern-day companies require that we have a good grasp of intellectual property. We can never effectively gauge the future growth of a company if we are clueless about the strength of its brand, product design and business processes.
For example, if you are considering buying into two different banks, consider which one has the better image, which image identifies more with affluent customers, which one has the better loan and credit packages, and which one has better systems and controls which are less likely to break down. A study of financial statements alone is not enough.
Implications to Entrepreneurs
Do not make the mistake thinking that only the knowledge industry (software, publishing, music) requires IP. Regular businesses will also do very well to ride the IP train to success. In fact, all of business success is attributable to IP.
If you have seen the lines queuing up for Chatime you will see what I mean. Tea has been around for thousands of years. Why are people suddenly so excited about tea now? There are hundreds of tea shops which sell better tea, but you don’t see lines upon lines upon lines of people there. What’s up? It is a right combination of branding, product design, and business processes. From the distribution of tea leaves and other ingredients to its worldwide chain of stores to the way each cup of tea is made to the advertising and promotion activities; everything is packaged within an effective system.
In short, if you are an investor, invest in a company with the IP comparable to Starbucks and Chatime and McDonald’s and Google (at the right price, of course). If you are a businessman, strive to build the IP which will power your business, also in the mold of these legendary companies. It is not just about what you sell, but how you sell it.
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