Booklet 2 : Central Purpose of Business Activity

Question 1

Define adding value (2)

Answer 1

1. The value of the final product is greater than the inputs
2. The product establishes a USP, by being more desirable to customers allowing the firm to charge a premium price

Question 2

State 3 advantages of adding value (3)

Answer 2

1. Being able to charge a higher price compared to inputs
2. It may offer the business the opportunity to make the product more distinctive by establishing a USP
3. The higher price may enhance the image of a product or service

Question 3

State 3 disadvantages of adding value (3)

Answer 3

1. The increase in price may restrict the total number of sales
2. The more competition may make it hard for a business to increase the price
3. It is not guaranteed that the cost of adding value can be recouped by increasing the price

Question 4

Define competitive advantage (2)

Answer 4

The advantage that a business offers over their competitors which allows them to attract and retain more customers than its rivals to generate a higher sales revenue e.g low cost, good customer service and unique features (2)

Question 5

Name the 2 types of competitive advantage (2)

Answer 5

1. Cost advantage
2. Differentiation advantage

Question 6

What is cost advantage, and name three points how a business achieve this (4)

Answer 6

Cost advantage refers to a business’ ability to produce goods and services at a lower cost than its competitors without reducing quality (1)

1. Utilising economies of scale
2. Investing in up-to-date machinery
3. Sourcing cheaper suppliers

Question 7

Outline three advantages and three disadvantages of cost advantage strategy (6)

Answer 7

Advantages
1. The business may gain significantly from economies of scale which competitors may not have access to
2. There is increased sales revenue and market share since the sale price is lower
3. Popular during times of recession or inflation where consumers are unwilling to pay higher prices

Disadvantages
1. Customers may doubt the product if it’s at such a low price
2. It can be hard to maintain profit when prices are low
3. Price wars can occur, from increased competition

Question 8

Define differentiation advantage (2)

Answer 8

This is when the business creates the perception in consumers’ minds that it’s product or service is better than rivals usually from a USP or Branding (2)

Question 9

Name three advantages and three disadvantages of differentiation advantage strategy (6)

Answer 9

Advantages
1. Firms can charge higher prices as customers are willing to pay more
2. If a business has a strong brand image it can help with customer loyalty
3. Makes it easier for a firm to launch a new product with a USP

Disadvantages
1. This strategy can be costly and time-consuming to implement
2. Customers may be concerned with product pricing
3. There is usually a threat of rival product ranges with cheaper products