AS A Level: The Concept Of Adding Value

• One of the functions of businesses is that they add value to products
• Added value can be defined as an increase in the value of a resource, product, or service as the result of a particular process
• Added value is thus the difference between the cost of acquiring the raw materials and finished goods
• Value addition must not be confused with beneficiation or profit
• Beneficiation refers to various ways of adding value to minerals in the mining sector
• Value addition refers to both beneficiation and other forms of value addition in other sectors
• Added value describes the enhancement a company gives its product (which can be a mineral or any product really) or service before offering it to customers
• In economic terms, added value is the difference between the selling price and the cost of inputs used in the production process
• \text{Value Added = Sales Revenue – Cost of Raw materials}
• For example, a product (chair) sells for $10 when the inputs (raw materials wood, glue and nails in this case) used to make this product cost $7,
• The added value is $3
• In another example, we can consider a mining company extracts iron ore from within the earth and passes it on to a processing factory which increases the value of the ore which is turned into pig iron.
• The iron is then processed into steel which further enhances the value of the product.
•  Value is added as a product moves along the production process from the primary level up to the secondary level of production
• Businesses ( and the countries in which these businesses are located) that add more value have a higher profit margin that businesses that add little value
• As already said value addition should not be confused with profit
• When calculating value-added we only subtract the cost of raw materials
• On the other hand, when calculating profit we subtract other costs as well for example overheads such as electricity

Ways of adding value

• Value can be added by:
  • Refining for example distillation
  • Purification processes for example flotation of copper or reduction of iron in the blast furnace
  • Cutting and polishing for example diamonds
  • Manufacturing goods into finished or semi-finished goods
  • Branding, for example, adding a sign or trademark or insignia associated with a certain brand
  • Packaging which often comes with branding but in and by itself packaging can enhance value for example packaged vegetables are worth more than unpacked ones
  • Advertising– promotional strategies like these can create brand loyalty allowing businesses to charge more for a product
  • Providing additional features, for example, more storage on a computer
  • Offering convenience, for example, convenience stores (tuckshops) are often nearer to customers and therefore charge more than local supermarkets
  • Providing customised services, for example, tailor-made suits or gowns are worth more than generic off the shelf ones even if they are made by the same fashion brand

Benefits of adding value/beneficiation

• Creates employment opportunities
• It increases a business’s profit prospects
• Increases the business’ profit margins
• Mitigates the imbalance of trade/ Reduces trade deficits
• Increases the host country’s Gross Domestic Product (GDP) value
• Increases the host nation’s Gross National Product (GNP) value if beneficiation is carried out by local companies
• Increases the host country’s export proceeds
• Increases the local economic contribution of raw materials (minerals)
• Reduces socio-economic inequality
• Increases the host government’s tax base and thus tax revenue
• Reduces the import bill as some local demand can now be satisfied using local production
• Brings in more foreign currency
• Leads to development of related industry around the main industry for example real estate businesses near a mine and processing plant
• Distinguishes the business’s products from those of competitors

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