Cambridge AS A Level Business Studies/ ZIMSEC Advanced Level Business Studies/ Business Enterprise Skills Notes: 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

To access more topics go to the Advanced Level Business Studies page

To access more topics go to the ZIMSEC Business Enterprise and Skills page

To access more topics go to the Cambridge AS A Level Business Studies page

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