6 Powerful Forces That Tell You How Strong a Business Is

It’s common to think that one should be reading more investing books in order to learn about investing. That’s true, but only to a certain extent.

The investing great Benjamin Graham once said that “investing is most intelligent when it is most businesslike.” So, to be a good investor, we have to think and learn about businesses. And to do so, we have to read business books.

One business book I’m currently reading is called “Only the Paranoid Survive,” written by Andrew Grove, the ex-Chairman of the giant chip maker Intel Corporation. In his book, Grove had written about how the Porter’s Five Forces framework can be a useful tool for understanding the competitive strengths and weakness of a business.

My colleagues and I have written about Porter’s Five Forces a number of times here and I myself have used it extensively to better understand the different companies listed in Singapore. Here are a few older articles where I’ve used Porter’s Five Forces for a quick view on the business of a few blue-chips in Singapore:

  1. Thai Beverage Company Limited (SGX: Y92)click here
  2. Golden Agri-Resources Ltd (SGX: E5H) – click here
  3. Genting Singapore PLC (SGX: G13)click here
  4. DBS Group Holdings Ltd (SGX: D05)click here

But besides talking about Porter’s Five Forces, Grove also wrote in his book that there is actually a sixth force that we should be looking at when we’re studying a company and that is the “force of complementary products.”

It refers to the level of reliance on complementary goods and services that the company in question has; the higher the level of reliance, the more the company’s business can be affected by the health of the complementors’ own businesses.

As an illustrative example, let’s take it that you’re trying to understand Genting Singapore better. Tourists that visit the company’s flagship attraction in Singapore, Resorts World Sentosa, would likely have flown in from somewhere. As such, airlines such as Singapore Airlines Ltd (SGX: C6L) – the companies helping to fly the tourists in – can be seen as a complement to Genting Singapore.

This is a very interesting concept because it gives us another way to understand how a business is doing. If we stick to Genting Singapore, we saw how complementors can affect its business back in 2014: When Malaysia Airline flight MH370 unfortunately went missing that year, it caused panic amongst travellers from China. That led to drop in Chinese tourists flying to Southeast Asia which subsequently resulted in impacts to the business of Genting Singapore.

Foolish Summary

It’s important to learn about investing itself from investing books.

But after we’ve grasped a basic understanding of how to read financial statements and how to value a business, what we need is the ability to understand the businesses we are looking at from the point of view of a businessman. Only then can we better assess if the business decisions that management teams implement make sense or otherwise. Reading business books can help in this aspect.

So, now that you’ve had a taste of the sixth powerful force that can affect a business, what other complementors can you find for the 30 blue chips within the Straits Times Index (SGX: ^STI)? I’d love to hear from you, so drop your comments below!

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim does not own any companies mentioned above.