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Understanding the Creation of Value – Part 1

Here at The Motley Fool Singapore, we’re being highly encouraged to read – it’s one of the greatest perks of my job.

One of the books I am currently reading now is “The Personal MBA” by Josh Kaufman, a blogger turned best-selling author.

At the beginning of his book, Kaufman wrote about the different types of value a business can provide which can define it as a sustainable business. According to Josh, there are twelve types of value that a business can bring to the table for its customers.

Kaufman’s book triggered my mind and led me to the opinion that thinking about the value that a company can provide is a very good starting point for investors who are analysing a new firm.

Providing value through a product

This is the most straight forward way a company can provide value, by creating a physical or intangible product (like intellectual property or something digital) which the customer can buy.

Products are a great source of value as it can at times be easily duplicated and distributed to more customers at minimal incremental cost. But, it’s for these reasons that many products are easily copied and thus competition in this field can be intense.

A company like even CapitaLand Limited (SGX: C31) is actually providing value in the form of product sales – the company develops real estate from raw land and sells the real estate to buyers for a profit. Thai Beverage Public Company Limited (SGX: Y92) is also another firm which provides the product form of value; it brews beer, distills spirits, and concocts non-alcoholic beverages using raw materials like wheat, barley, sugar, and water, and then sells the end products to consumers.

Providing value through a service

Another way for company to provide value is through providing services to its customers. A service is a sort of benefit that you provide your customer in exchange for a fee.

Service businesses can be highly profitable if they are providing a service that is unique and has high demand. But, the issue with a service-based business is that it might be harder to scale up the business as services require man-hours as an input and that is limited.

A local example of a service-based business is SIA Engineering Company Limited (SGX: S59). The company provides unique specialised services such as aircraft maintenance and training academies for the aerospace industry.

Foolish Summary

What you’ve just seen are only two of the 12 types of value that a company can provide. Understanding how a company can create value for its customers would give us a better idea of the advantages and disadvantages that’s inherent in a company’s business model.

There'd be more to come from me on the 12 types of value, so stay tuned! In the meantime, if you'd like more investing tips and tricks and to keep up to date on the latest financial and stock market news, sign up now for a FREE subscription to The Motley Fool's weekly investing newsletter, Take Stock SingaporeIt will teach you how you can grow your wealth in the years ahead.

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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.