Topic 2

Question 1

List five reasons for the importance of adding value

Answer 1

It helps a business to survive
It allows a business to charge a premium price
It enables a business to gain sales and be successful
It allows a business to differentiate the product compared to competitors
It allows the firm to establish a USP

Question 2

List two ways to achieve added value

Answer 2

Introduce new or improved products/services that provide a greater value to customers

Reduce the cost of bought in items through more efficient use of all inputs

Question 3

Give three advantages of adding value

Answer 3

Allows a business to charge a higher price and therefore a higher profit
Higher price can enhance the image of the product
Can make the product more appealing and gives a USP

Question 4

Give three disadvantages of adding value

Answer 4

Higher prices can restrict sales and therefore profits
Competition can make it difficult to increase prices in order to cover the cost of adding value
The cost of adding value may not always justify charging a higher price

Question 5

Explain cost advantage

Answer 5

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

Question 6

List four advantages of cost advantage

Answer 6

Sale prices will be lower which helps to increase sales and market share
Similar prices can also be charged to competitors allowing them to gain higher profit margins
The business can benefit from economies of scales, which increases profitability
Useful in times of recession when consumers are not willing to pay high prices

Question 7

List four disadvantages of cost advantage

Answer 7

Cheaper prices may make consumers think that the product is of low quality
It can be hard to make profit while keeping prices low
Increased competition can result in price wars
Production may move overseas for cheaper labour, which affects the local economy

Question 8

Explain differentiation advantage

Answer 8

Differentiation advantage is when the business creates the perception in consumers’ minds that it’s product or service is better than its rivals’. Businesses can differentiate itself from its competitors by creating a unique selling point or a strong brand name.

Question 9

List four advantages of differentiation advantage

Answer 9

Makes products more attractive to customers
Allows firms to charge high prices
New products are easily introduced if the business already has a strong brand name
Customer loyalty will be enhanced if they have a strong brand name

Question 10

List four disadvantages of differentiation advantage

Answer 10

Costly and time consuming to achieve
Threat of competition will be intense if high sales can be achieved
Consumers may not be interested in the product if it’s at a high price
Production costs will be high due to hiring specialist workers for research and development