Understanding the Creation of Value – Part 5

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 tuned best-selling author.

At the beginning of his book, Kaufman talked about the different types of value a business can provide which can define it as a sustainable business. According to Kaufman, 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.

In the first part of this series, I looked into companies that provide value through their products and services. In the second part, I dug into companies that brought value to their customers by sharing resources and providing subscriptions.

Then, in the third leg of the stool, I glanced at business models involving resale and leasing. In the fourth portion, I peered at the agency business model and businesses that deal with audience aggregation.

For this article, let’s dig into business models involving the provision of loans and options.

Providing value with the loan model

Finance is one of the oldest business models around. Providing loans to those who require capital and charging a fee or interest for the use of that capital is the basics of the loan business model.

Singapore, being the financial hub of Southeast Asia, can be considered to be at the centre of such activities. Companies like DBS Group Holdings Ltd (SGX: D05)United Overseas Bank Ltd (SGX: U11) and Oversea-Chinese Banking Corp. Limited (SGX: O39) – which are all banks – utilise the loan model for their business.

What a bank does is to first take deposits from depositors like you and me. To attract depositors, the bank will have to offer to pay interest on the deposits, in effect giving depositors some return in exchange for allowing the bank to safeguard their money.

The bank will then turn around to lend this money to individuals or businesses which require funds. The bank will also charge these individuals or businesses an interest, which is typically higher than the interest that the bank pays on its deposits. The spread between the two interest rates – the interest charged to borrowers and the interest paid to depositors – is known as the Net Interest Margin (NIM).

Banks provide value as they provide a stable return and safe place for depositors to keep their money while giving borrowers access to funds they would need.

Providing value with the option model

Another method for a company to create value is through the option model. Selling an option means that a company’s selling its customers the right to take an action in the future with a specific cutoff date.

Among the companies listed in Singapore, Singapore Airlines Ltd (SGX: C6L) can be thought of as a company that has an option model. Basically, the airline is selling its customers the right to take up a seat in one of its planes for a trip from Point A to Point B. After the customer has purchased the ticket, the customer still has the choice to decide whether or not to take the trip, thus the ticket is giving him or her an option to take the trip.

Foolish Summary

So there you have it, a run through of businesses which create value through providing loans and options. Businesses that can create sustainable value for their customers are the ones that likely will have longevity. They are also the types of businesses that we as investors would ideally like to own as they can help compound value for the long-term.

Learning about how a business can create value for its customers would thus give us investors a better understanding of the advantages and disadvantages of the business and help us to make better-informed investing decisions.

I’ve so far covered only 10 of the 12 types of value that a company can provide. So, stay tuned for more!

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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.