concept of adding value and how added value can be increased

1 Understanding Business Activity

1.1 Key Concepts

• Needs vs. Wants – A need is essential for survival; a want is a desire that is not essential.
• Scarcity – Resources are limited, so choices must be made.
• Specialisation & Division of Labour – Increases efficiency by allowing workers to focus on a limited range of tasks.
• Purpose of Business – To satisfy needs and wants by producing goods or services for profit.
• Classification of Business Activity
  • Primary (extraction of raw materials)
  • Secondary (manufacturing and construction)
  • Tertiary (services)
• Enterprise & Entrepreneurship – Identifying opportunities, taking risks and organising resources.
• Business Size – Measured by turnover, staff numbers or assets. Note: profit is *not* a size measure because a small‑profit business can be large in turnover, and a high‑profit business can be very small.
• Growth & Failure – Growth can be organic or through acquisition; failure may result from poor planning, cash‑flow problems, or external shocks.
• Forms of Organisation
  • Sole trader
  • Partnership
  • Limited company (private & public)
  • Co‑operative
• Business Objectives – Profit maximisation, growth, market share, survival, social responsibility, etc.
• Stakeholders – Owners, employees, customers, suppliers, government, community, shareholders.

Public‑sector vs. Private‑sector Objectives

Sector	Primary Objective(s)	Typical Measures
Private	Profit maximisation, shareholder value, market growth	Profit, ROI, market share, revenue growth
Public	Service delivery, equity, social welfare, value for money	Service quality, coverage, cost‑effectiveness, citizen satisfaction

Stakeholder Conflicts – Typical Examples

Stakeholder Group	Primary Concern	Potential Conflict
Owners / Shareholders	High returns / dividends	May clash with employees’ demand for higher wages
Employees	Job security, good pay, safe conditions	Can conflict with owners’ drive to cut costs
Customers	Low price, high quality, good service	May oppose shareholders’ wish for higher profit margins
Government	Tax revenue, compliance, environmental standards	Can limit expansion plans or increase operating costs

Exam tip: When objectives clash, justify a decision by weighing the relative importance of each stakeholder, the long‑term impact on the business and any legal or ethical constraints.

1.2 Adding Value

Definition: Adding value is the process by which a business transforms inputs (raw materials, labour, capital) into outputs (goods or services) that are worth more to the customer than the cost of the inputs.

Formula:

Ways to Increase Added Value

1. Improve Product Quality – Use superior materials, tighter quality control, better durability.
2. Enhance Brand Image – Consistent branding, sponsorship, celebrity endorsement, ethical positioning.
3. Offer Superior Customer Service – After‑sales support, warranties, easy returns, 24‑hour helpline.
4. Introduce Innovation – New features, technology, design, or a novel use of the product.
5. Increase Convenience – Faster delivery, multiple purchase channels (online, click‑and‑collect), extended opening hours.
6. Provide Customisation – Personalised colours, sizes, specifications, or made‑to‑measure services.
7. Achieve Economies of Scale – Lower per‑unit cost by producing larger volumes, negotiating bulk discounts.
8. Bundle Products/Services – Create attractive packages (e.g., “phone + data plan”).
9. Use the 5 Ps – Product, Price, Promotion, Place, People – each can be tweaked to add perceived value.

Worked Example

Item	Cost (£)
Raw material	30
Labour	20
Overheads (allocated)	10
Total Cost of Inputs	60
Selling price	120
Added Value	60

By improving the design and adding a two‑year warranty, the company could raise the selling price to £150, increasing added value to £90.

Key Points

• Added value = price paid by the customer – total cost of inputs.
• It can be increased through the 5 Ps, innovation, economies of scale and superior service.
• Businesses must weigh the cost of adding value against the price customers are willing to pay.

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2 People in Business

2.1 Motivation

• Maslow’s Hierarchy of Needs – Physiological → Safety → Social → Esteem → Self‑actualisation.
• Herzberg’s Two‑Factor Theory – Hygiene factors (salary, conditions) prevent dissatisfaction; motivators (recognition, achievement) create satisfaction.
• Taylor’s Scientific Management – Incentive wage (piece‑rate) to boost productivity.

2.2 Management & Leadership

• Management functions – Planning, organising, leading, controlling.
• Leadership styles
  • Autocratic – decisions made by manager alone.
  • Democratic – staff involvement in decision‑making.
  • Laissez‑faire – minimal managerial direction.

2.3 Trade Unions & Employee Relations

• Purpose: protect workers’ rights, negotiate pay and conditions.
• Collective bargaining – formal negotiations between union and employer.
• Industrial action – strikes, work‑to‑rule, overtime bans.

2.4 Recruitment, Training & Redundancy

• Recruitment process – Job analysis, advert, shortlisting, interview, selection.
• Training – Induction, on‑the‑job, off‑the‑job, continuous professional development (CPD).
• Redundancy – When a position is no longer needed; legal requirements for consultation and redundancy pay.

2.5 Legal Controls & Communication

• Employment legislation – Equality Act, Health & Safety at Work Act, National Minimum Wage.
• Effective internal communication – Meetings, newsletters, intranet, suggestion schemes.
• External communication – Press releases, social media, corporate website, public relations.

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3 Marketing

3.1 The Role of Marketing

Identifies customer needs, creates value, builds relationships and generates revenue for the business.

3.2 Market Changes & Segmentation

• Market trends – demographic, technological, cultural, economic.
• Segmentation variables – geographic, demographic, psychographic, behavioural.
• Targeting strategies – niche, mass, multi‑segment, micromarketing.

3.3 Market Research

Type	Method(s)	When Used
Primary	Surveys, interviews, focus groups, observation	When specific, up‑to‑date data are required
Secondary	Published reports, statistics, internet sources	When background information or trends are needed

3.4 The Marketing‑Mix (4 Ps)

1. Product – Features, quality, branding, packaging, warranty.
2. Price – Cost‑plus, competition‑based, price‑skimming, penetration.
3. Place – Distribution channels, logistics, retail format, e‑commerce.
4. Promotion – Advertising, sales promotion, public relations, personal selling, digital marketing.

3.5 E‑Commerce & Digital Marketing

• Online storefronts, mobile apps, social‑media advertising, search‑engine optimisation (SEO).
• Benefits – wider reach, lower overheads, real‑time data collection.
• Risks – security breaches, intense competition, complex return logistics.

3.6 Marketing Strategy & Legal Controls

• Strategic approaches – market penetration, market development, product development, diversification (Ansoff matrix).
• Legal controls – Consumer Protection Act, Advertising Standards Authority (ASA) rules, data‑protection (GDPR), price‑fixing legislation.

3.7 Foreign Markets

• Entry modes – exporting, licensing, franchising, joint ventures, wholly‑owned subsidiaries.
• Key considerations – cultural differences, currency risk, trade barriers, legal environment.

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4 Operations Management

4.1 Methods of Production

• Job (or bespoke) production – One‑off items, high skill, high cost.
• Batch production – Groups of identical items, moderate flexibility.
• Mass (flow) production – Continuous, high volume, low cost per unit.
• Lean production – Minimises waste, improves flow; techniques include Kaizen, Just‑In‑Time (JIT), 5S.

4.2 Productivity & Efficiency

Productivity = Output ÷ Input (e.g., units produced per labour hour).
Ways to improve productivity:

• Training and skill development
• Better equipment or technology
• Process redesign (e.g., assembly‑line layout)
• Motivation and incentive schemes

4.3 Costs & Economies of Scale

Cost Type	Definition
Fixed Costs	Do not vary with output (rent, salaries, depreciation).
Variable Costs	Change directly with output (raw materials, hourly wages).
Total Cost	Fixed + Variable.
Average Cost	Total Cost ÷ Quantity.

Economies of Scale – Average cost falls as output rises because fixed costs are spread over more units. Example: A factory producing 10 000 shirts spreads its £100 000 rent over more units than a workshop producing 1 000 shirts.

4.4 Break‑Even Analysis

Break‑Even Point (BEP) = Fixed Costs ÷ (Selling Price per unit – Variable Cost per unit).

Item	£
Fixed Costs	30,000
Variable Cost per unit	20
Selling Price per unit	35
Contribution per unit	15
Break‑Even Volume	2,000 units

A break‑even chart would plot total cost and total revenue against output, intersecting at 2,000 units.

4.5 Quality Management

• Quality control – Inspection, testing, defect removal.
• Quality assurance – Systematic processes (e.g., ISO 9001) to prevent defects.
• Total Quality Management (TQM) – Continuous improvement involving all staff, customer focus and process measurement.

4.6 Location Decisions

• Key factors – proximity to markets, raw materials, labour costs, transport links, government incentives, environmental impact.
• Analytical tools – cost‑benefit analysis, break‑even location analysis, GIS mapping.

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5 Financial Information and Decisions

5.1 Finance Needs & Sources

• Short‑term finance – Overdrafts, trade credit, commercial paper, factoring.
• Long‑term finance – Bank loans, debentures, equity (shares), retained earnings, venture capital.

5.2 Cash Flow & Working Capital

Cash flow = Cash inflows – Cash outflows over a period. Positive cash flow is essential for day‑to‑day operations and for repaying short‑term finance.

Month	Cash In (£)	Cash Out (£)	Net Cash (£)
Jan	50,000	45,000	5,000
Feb	55,000	48,000	7,000
Mar	60,000	52,000	8,000

5.3 Income Statement (Profit & Loss Account)

Item	£
Sales Revenue	200,000
Cost of Goods Sold	120,000
Gross Profit	80,000
Operating Expenses	30,000
Operating Profit	50,000
Interest	5,000
Tax (20 %)	9,000
Net Profit	36,000

5.4 Balance Sheet

Assets	£	Liabilities & Equity	£
Non‑current assets	150,000	Long‑term loans	80,000
Current assets	70,000	Current liabilities	40,000
Cash & equivalents	20,000	Shareholder’s equity	100,000
Total Assets		Total Liabilities & Equity
220,000		220,000

5.5 Key Financial Ratios (for exam practice)

Ratio	Formula	Interpretation
Gross Profit Margin	Gross Profit ÷ Sales Revenue × 100	Higher % = more efficient production.
Net Profit Margin	Net Profit ÷ Sales Revenue × 100	Shows overall profitability after all costs.
Current Ratio	Current Assets ÷ Current Liabilities	≥ 1 indicates ability to meet short‑term debts.
Return on Capital Employed (ROCE)	Operating Profit ÷ (Fixed Capital + Working Capital) × 100	Measures efficiency of capital use.

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