Understanding the Creation of Value – Finale

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 part, I peered at the agency business model and businesses that deal with audience aggregation.

The pen-ultimate part of this series had me digging into business models involving the provision of loans and options. In this final chapter, let’s take a walk with businesses that provide insurance as well as capital.

Providing value with insurance

Insurance basically involves a company extending a promise to take on the risks that its customers want to shed in return for a fee.

One home-grown insurance company in Singapore is Great Eastern Holdings Limited (SGX: G07). Great Eastern has more than 100 years of history in the business and is considered one of the largest life insurance companies in Singapore. The insurer happens to be a listed subsidiary of banking group Oversea-Chinese Banking Corp Limited (SGX: O39).

Let’s say you’re purchasing a life insurance policy with Great Eastern. The transaction will see you paying a fee to Great Eastern (this fee is called a premium in insurance-speak) in return for a promise from Great Eastern that it will pay-out a larger sum of money to your beneficiary in the event of your death.

Great Eastern adds value for a customer in this way as he or she can ensure that the beneficiary will be taken care of upon the customer’s death. It is also valuable for the company to be providing the service as long as it can price its insurance products right and ensure that the premiums that are collected in aggregate is more than the claims that have to be paid out.

Providing value with capital

Lastly, a business can also provide value by using its capital. This is achieved when a company uses the capital it has to invest into other businesses that will give it a good return on the investment. Most conglomerates operate in this manner, where the holding company focuses on reinvesting the cash generated from its diverse business operations into other unrelated businesses.

The history of Keppel Corporation Ltd (SGX: BN4) is a good example of how capital can be used to provide value. The company started as a shipyard, but has allocated its capital over the years and invested into businesses dealing with property, banking, and telecommunications. Today, Keppel Corporation is a collection of many different businesses and there is no limitation beyond its management’s imagination on where it can invest its capital next.

Foolish Summary

This is the end of a  six-part series on how companies can create value through 12 different ways. The 12 value creation methods are not mutually exclusive, meaning to say that one company can utilise multiple ways of creating value in their own unique business models.

Businesses that can create sustainable value 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.

I hope this series has given you a new way to think about things when you’re looking for your next investment.

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 Limowns Keppel Corporation Ltd.