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/ Business Enterprise Skills page

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