The purpose of business activity
The specification gives three purposes, and they build on one another.
To produce goods or services. Goods are physical products you can touch — food, clothes, phones. Services are things done for you — a haircut, insurance, a train journey. Many businesses provide both: a restaurant sells food, which is a good, and the cooking and serving, which are services.
To meet customer needs. Producing something is not enough; it has to be something people want. A business that produces goods nobody needs makes no sales, which is why understanding customers comes immediately after this in topic 1.2.
To add value. This is the one that carries most marks, because it explains how a business makes money at all.
Adding value means the difference between the cost of the inputs and the price the customer is willing to pay.
value added = selling price − cost of raw materials and bought-in components
If a sandwich shop buys bread, cheese and salad for 80p and sells the sandwich for £3.20, it has added £2.40 of value. That is not the same as profit, because the shop still has to pay wages, rent and energy out of it — but a business that adds no value has no way of covering those costs.
The specification names five ways of adding value:
- Goods
- Physical products a customer can touch.
- Services
- Actions performed for a customer rather than a physical product.
- Adding value
- The difference between the cost of inputs and the price the customer pays.
- Unique selling point (USP)
- A feature that makes a product different from every competitor's.
Common mistake
Value added is not profit. It is selling price minus the cost of materials only — wages, rent and other overheads still have to be paid out of it. A business can add plenty of value and still make a loss.
The role of entrepreneurship
An entrepreneur is the person who sets up and runs a business. The specification gives them three roles.
Organises resources. Bringing together everything the business needs to operate — money, premises, equipment, materials and people — and arranging them so they work together.
Makes business decisions. Choosing what to sell, at what price, where to locate, who to employ and when to expand. Nobody else makes these choices in a small business, so they all fall to the entrepreneur.
Takes risks. Putting their own money and often their livelihood into a venture that may fail, and accepting the possibility of financial loss in exchange for the chance of profit — which links straight back to 1.1.2.
Worked example
A carpenter buys wood for £40 and makes a table which she sells for £260. State the value added, and explain two ways she could add more.
- Value added is selling price minus the cost of materials.
- 260 − 40 = £220 of value added.
- For the first improvement, think about what would let her charge more for the same materials.
- Better design — a distinctive style customers prefer to a mass-produced table.
- Or branding — building a reputation so buyers seek out her work specifically and will pay a premium for it.
Answer: £220 of value added. She could add more through design, making the table distinctive enough that customers prefer it to a factory-made one, or through branding, building a name that lets her charge a premium for the same materials.
- Entrepreneur
- the person who sets up and runs a business, organising resources, making business decisions and taking the risk
Before you practise
- The purpose of business activity: to produce goods or services, to meet customer needs, and to add value.
- Goods are physical; services are performed. Many businesses provide both.
- value added = selling price − cost of materials. It is not profit, because overheads still have to be paid.
- The five ways to add value: convenience, branding, quality, design, unique selling points.
- The entrepreneur organises resources, makes business decisions and takes risks.