Brief overview for German approximation to the solar power

Germany has probably become the world’s leader in solar technologies. How have they outperformed the concurrency?

First, they pledged for developing a whole value chain in order to maximize the benefit to the German population, instead of just promoting an electrical production. This chain initiates with raw material (most used is Silicon) treatment and transformation into wafers, cells and eventually modules, which will be later sold internally or overseas and installed by partners or third parties. Thus the revenues generated by incentives can be partially retained in the country while new jobs and investments are sustained even by non-German investors, which additionally bring capital, R&D and some other benefits. PV Silicon AG, Wacker-Chemie AG or QCells are some examples of German companies which can cope with not only the commercialization of PV modules but also the primary activities where investments and technical knowledge is essential.

In order to achieve the previous goals, by 2000 Germany deployed a feed-in tariff which provides a 20-year-guaranteed 0.457-0.624 euro/kWh incentive with an annual reduction of 5% per new arrivals, to compensate the constant drop in costs. Besides tax credits and VAT exemptions to commercial PV providers, training support, wage subsidies and R&D incentives, and state-of-the-art infrastructures as roads and IT, Germany has become a leading country in Solars even though his environmental conditions are worse than other Mediterranean countries such as Spain, Italy or Greece. Universities and institutes of research do also play an important role in the system.

Huge investments are done every year in the Eastern regions as part of a larger plan to improve development and reduce the differences with respect to the Western. This process is supported by the many semiconductor’s companies present in this area which would likely provide key synergies at silicon manufacturing.

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2011 shareholder letter from Warren Buffet

February 29, 2012 Leave a comment

Warren Buffet has publicized his annual letter for the Berkshire Hathaway Inc. shareholders discussing its performance in the S&P500 during the year 2011. It is always worth it reading such a great businessman as Buffet, moreover since goes through some burning topics I’d like to comment below. The complete letter is available on the corporate website: http://www.berkshirehathaway.com/letters/letters.html

Even though Berkshire’s outperformed the S&P500 average results, Buffet do not hesitate to admit a few mistakes for miscalculating win/loss ratio in some investments he has done. It’s not common to see such a big fish stating a “major unforced error” and this behavior is maybe a cause for his long term great success.

 

He is fully convinced that housing business will come back, not as soon as he predicted – which has led Berkshire into some losses this year – but in a near future, involving thousands of new jobs due to the importance this sector’s got in America. Is this expected to happen in Spain too? I hope not. Housing meant (and still does) a huge business in the EEUU, boosted by the financial firms, but they have an industrial background we do not. Coming back to housing here in Spain would culminate in a situation even worse than we are facing nowadays. “As is well-known, the U.S. went off the rails in its home-ownership and mortgage-lending policies, and for these mistakes our economy is now paying a huge price. All of us participated in the destructive behavior – government, lenders, borrowers, the media, rating agencies, you name it” he says. Just watching Inside Job to making an idea of what happened – although any film is fully objective some irrefutable figures arise.

When refers to insurance subsidiaries, Buffet describes which four disciplines any insurer should ensure before signing a premium. The last one is do not make the deal if numbers do not work out just because “the other guy is doing it so we must do it as well”. Not every customer does worth and it is something to bear in mind to ensure long-term profitability. We cannot do everything for everyone, trade-offs are as important as our own product’s features.

“Buy commodities, sell brands”. This KISS statement summarizes what marketing means. Buying commodities reduces your suppliers’ control while strong brands let higher margins. You will have to spend a lot of time in focusing on your customer afterwards.

I find Berkshire’s investing philosophy very interesting. While the standard approach is laying out money expecting to receiving more in the future, they focus on purchasing power. An investment can be influenced by many diverse factors such as inflation, currency exchange rates and taxes. Current world’s gold stock is $9.6 trillion, the same than all US cropland plus 16 Exxon Mobils. Obviously since the first produces nothing, the second would have delivered corn, wheat, cotton and dividends. In Buffet’s opinion, a new bubble is forming due to “well-publicized rising prices”, as happened also with Internet stocks and houses last decade.

Categories: business, icons, news, value Tags: , , , ,

Catching generated value: Pricing (I)

February 21, 2012 Leave a comment

With the tough competition currently present on every industry, it doesn’t become easy to run your own business with profitability. Your best chance is developing a true value proposition. If your product can save some money to the customer, why do not try to pick up a piece from this benefit?

When thinking up how to price a new product or service, there are many strategies available (see www.netmba.com/marketing/pricing). Most popular are cost-plus, value-based and psychological pricing. The win-win pricing is quite a mix of the previous ones.

Imagine you have developed a product that allows your customer to save some money with respect to the current situation. Then you must decide if establishing a fixed gross margin or find out how much is likely the market to pay for it, or even mix both strategies by setting the final price on a face-to-face negotiation. If you are running a set-up, these strategies could become quite harder due to your inexperience and your weakness as a new player.

Consider a consumer that pays 100€ for a 10 years product or service, including all the associated expenses he may incur into. Consider also that you are able to cover the same necessity for only 80€. Therefore you can set your price in the range 81€-99€ to both have a positive gross margin and mean a saving to the customer.

Contemplating a 50-50 share in the potential saving, both the provider and the purchaser would get the same profit. In this case, our gross margin would be 10€ and the price 90€. This involves a 10% reduction for the customer with respect to the original 100€ scenario while a 11% gross margin and 12,5% gross profit for us. The lower we can develop our product, the better the margin and profit goes, as shown on the following graph.

In a typical overcrowded scenario, the only way to gain some market share is by reducing prices through a cost and processes optimization. But this reduction frequently leads to less operative margins and consequently to profitability drop. The previous curves show that, since we are systematically catching from the customer some of the value our product is creating, our gross margin and profitability improve as the price goes lower, as well as our competitive position. Eventually we would be avoiding the frightening zero-sum competition.

As the 50-50 share shifts, the margin curve does as well. Any increase on our picked proportion of the saving would lead to higher margins and benefits but also to a lower value proposition. With an hypothetical product cost of 70€ and a 75-25 of the profit taken by the company-customer, the gross margin would be a 20% instead of the 15% on the 50-50 scenario.

To reflect the real weaknesses and strengths of this pricing strategy, let’s use a realistic scenario with a product cost of 70-90€ (current total expenses are 100€). Our gross profit, calculated as the ratio between gross margin and total cost, varies in the range 5%-21%, with a final price of 85€-95€, which leads the customer to a maximum saving of a 15%.

Strengths

  • The 50-50 sharing in the potential profit is an effective way to persuade a customer to purchase our product and also a simple and rapid way to establish a flexible pricing strategy “on-the-go”.
  • Our relative gross margin and profit is always higher than the customer saving percentage, so even though the absolute benefit is shared 50-50, our results are better and it is not expected for the customer to claim for a higher stock.

Weaknesses

  • Since the price is calculated by adding a half-profit to our costs, two threatens may appear. First, our operational costs become “public”, so any competitor could use our business as a benchmark. Second, we must communicate them clearly to the customer so it in no chance for him to feel tricked.
  • A 10-20% gross profit doesn’t allow large further expenses if our target is running a “blue ocean niche”. The customer withstands a portion of the cost considered in the final price, since the shared profit decreases as it rises, so the more flexible and attributably our costs become the better.

Summary

The proposed method allows to set a dynamic pricing strategy in order to effectively communicate our value proposition to the customer, while picking some of the benefit generated in order to avoid a zero-sum competition, reaching profitability even with a price drop by means of any cost optimization.

Categories: business, pricing, value

Differentiate yourself

February 1, 2012 Leave a comment

While thinking of running a new business, trendy behavior consists of improving something it is already done. We usually consider: ‘If offer a similar product but introduce some new improvements, such as better quality, service or price, for sure I will pick up some market share, and consequently my business will be profitable”. This argument is valid but a little detail has not been considered. After regarding your appearance, your competitors would initiate a response that will lead your business to a price-based contest, affecting operative margins and therefore profitability. This is what Porter defined as a “zero-sum competition”, where every improvement developed by the company was directly collected by the customer, the supplier or a different agent, but not by the creator instead. This situation erodes the market long-term profit and consequently their members. For instance, the whole benefit created by the store brands is collected by the customer, by means of a huge margin fall, but not by the market itself.

Fortunately, it is always an alternative for everything in life. The point is: Why do not take a business no one else is currently operating? Why do not consider a completely different way to meet a market’s demand? This argument is the base of the “Blue ocean” theory, created by W. Chan Kim and Renée Mauborgne, whose original article has been included in the HBR Must-Reads on Strategy collection.

They propose you to find an opportunity and deploy a new product/service to meet its demand to instantly collect a market share otherwise not possible to be reached by a start-up company. Furthermore, you will become the market-owner and consequently will shape the competitive forces yourself, instead of playing a game whose rules were already invented a long time ago. Besides the wide range of advantages to differentiate your brand when arriving first, you may define your prices without attending to your competitors and thus getting a profitability many times higher to a crowded scenario, as done by Apple or Facebook.

This idea is not only applicable worldwide but also from a local point of view, since Internet has come to stay and everything is possible. What are you waiting for? Brainstorm new opportunities, evaluate your resources and go after it!

It’s time for Africa

August 24, 2011 Leave a comment

When businessmen think about emerging markets, only a few countries usually come up to their minds. China, India or Brazil have been the “chosen ones” throughout last years, mainly due to a fast growth in the public and private consumption. Africa is often related to poverty, corruption and to a lack of safety, but this is not always true. There are some figures that we must take into account. (Source: The HBR Breakthrough Ideas for 2009)

Growth. The International Monetary Fund’s World Economic Outlook projected an economic growth of 6.3% for sub-Saharan Africa in 2009, with Uganda, Tanzania, and Nigeria exceeding 8% growth. Furthermore, the average annual return on capital of 954 companies studied in 2009 was 65% to 70% higher than that of comparable firms in China, India, Indonesia, and Vietnam. The median profit margin was 11%—better than the comparable figures for Asia and South America.

Stability. The periods of catastrophic government action that slowed growth in past decades have become much less frequent. Nigeria, for instance, has paid off its external debts, enacted prudent fiscal rules, and cleaned up its banking system. The entry of european and north-american companies forced governments to look after their laws to assure markets’ competition.

Opportunity. Construction companies, call centers, and IT services are among the region’s most successful businesses. The energy sector is also expected to be developed, in parallel to a regulation that allows new companies to invest, bringing new chances for existing solar and wind industries to expand.

The time is ripe for multinationals to rethink sub-Saharan opportunities and simultaneously to help the region achieving its promise by contributing much-needed capital, business skills, and global connections.

Categories: Africa, business, opportunity