Describe the Methods Used to Calculate Value Added. How Does Value Added Contribute Towards Understanding the Connections Between the Business and Its Product Markets? Use Relevant Examples to Illustrate Points.

Topics: Vertical integration, Value added, Marketing Pages: 5 (1396 words) Published: November 10, 2012
Essay n°=1: Describe the methods used to calculate value added. How does value added contribute towards understanding the connections between the business and its product markets? Use relevant examples to illustrate points.

Within the framework of value added in general, Pigou and Bernard Cox suggested the calculation of Value Added that is used for classical nationals accounts. In 1920, Pigou gave his interpretation of value added, consisting of being able to precisely determine the earnings of a company; whereas the sales turnover isn’t precise since the expenses aren’t take into account. In this fact, he presents value added as the subtraction of the output related to the inputs. Thus, outputs that aren’t generated by our self aren’t taken in account. In 1979, B. Cox in his book “value added” agrees with Pigou’s definition and goes even further in his explanations. He interprets value added in two different points of view: the subtractive and the addictive. On one hand, the subtractive value added, is calculated by subtracting purchases of materials and services from sales revenue. This value added represents its creation. On the other hand, addictive value added is calculated by adding labour cost (including social charges), depreciation, and operating profit. This enables us to estimate the way in which the created profit should be distributed. A business is a system in which goods and services are exchanged; market product is a market where products are sold (usually to organisations). Therefore, business and product market are connected since the business allows products to be sold in markets. Finally, there is a correlation between vertical integration and value added. In fact, the more a company has resorts to vertical integration, more its Value added ratio would be high. But most of companies do not create, on their own, their products completely.

We come to wonder, if value added is a key element for business and its product market, and therefore in which way they are connected? First, we will study the problem of the cost of products in companies, in order to understand the strategy of differentiation of products in a business to finally analyse the role of value added as benchmarking, versus performance.

To start off, a company will carry its interest on cost of its products. Some companies manufacture the major parts of them products; so as to raise the rate of vertically integration is in this way raised. The main gains due to vertical integration are that, transactions costs become lower, supply and demands are synchronized along the chain of products, and there is less uncertainty and higher investment and an ability to monopolize market throughout the chain by market foreclosure. Moreover the principal benefits for the company’s is that it will have better opportunities for investment growth and a higher ratio of value added. The calculation of value added can therefore determinate how vertically integrated is a company and thus enable a cost strategy for a business and its product market to be established. To be clear, based on economics in a business context, “It is necessary to understand the balance between internal and external costs and so identify strategic initiatives to reduce costs”. This theory is quite understandable in an industry framework, but why value added is so important for a country? Offshoring is for example, a source of conflict in some countries like in France. It can be explain in the same companies strategy ideas. The more a country offshore his industry, more its ratio of value added will be low. And we know that the sums of all value added gives the GDP, which determinates the wealth of a country. The calculation of value added allows us therefore, to compare at all levels, even for countries, businesses and product markets. However, other organisations support outsourcing. Outsourcing consists to compare an organisation with another in order to find out which one...
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