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...developing countries significantly lower productivity, as measured by added value per employee in comparison with developed countries. One reason for this imbalance is the traditional business practice in many developing countries of price competition as opposed to product innovation and superior customer value. The concept of added value is used to characterise three business strategies with decreasing, unchanged and increasing added value. In the third strategy the increased added value is the result of price increase, justified through improved functional product or service quality. Since product improvement mostly leads to higher costs, the crucial issue is to find a method to analyse when increased sales price, and hence also increase in added value, leads to lower profit due to higher production costs. The model suggested to cope with this issue is based on three parameters: added value grade, profit margin and refinement cost grade.
Introduction
The concept of added value is one of the more fundamental concepts in economics and business literature as judged by numerous textbook references and general management literature (Meredith and Shaffer, 2002; Jones and Tilley, 2003). In spite of this there are a few occasions where the significance of added value such as its role as indicator of a firm's business and innovation capability, is explicitly discussed. The purpose of this paper is to show how the concept of added value can be used to demonstrate the very essence of business, and to illustrate how added value and customer value are two sides of the same coin.
The significance of added value comes from the fact that value creation is what makes enterprises competitive. A conscious business strategy focusing on adding value to products and services is still lacking in many small and medium enterprises (SME), particularly in developing countries. Creating management awareness about the linkage between added value, customer value and profit is therefore an urgent issue in most developing countries. It is therefore imperative that small and medium enterprises in developing countries grasp the fundamentals of generating value to their clients.
Through interviews with about two hundred SME managers in African and Asian countries, the author has found that most managers accept, in principle, the business idea of an active customer dialogue. However, in reality, business is conducted in a most traditional way, with decisions made incrementally from previous commitments rather than from analysis of customer information. This paper is therefore a contribution to the discussion on how to improve business performance in SMEs in developing countries. The discussion below is partly based on a model that takes into account added value, profit margin and the refinement grade. The model is used to illustrate how an increase in added value may lead to a decline in profit margin. The model is intended to be used as a platform to discuss the nature of added value and its significance as a measure of enterprise performance.
Background
International trade is dominated by industrialised countries whose trade share is around the 80 per cent mark. This should be compared to developing regions such as Latin America and Africa. These countries' trade share is only 6 and 2 percent respectively (O'Brien and Williams, 2004). In contrast, the world's 48 poorest countries have seen their share of world trade decline by more than 40 percent since 1980 to a mere 0.4 percent in 2000 (Oxfam, 2000). In many developing countries trade means exporting primary commodities and importing high added value products. Apart from being exposed to vulnerability from a price mechanism that poorer countries have limited chance of influencing, the high costs for imports give little margin for investment in technology and skills. In a few developing countries (e.g. China, India and Brazil) there was early a shift away from this traditional dependence on the export of primary commodities to more labour-intensive and low technology manufactured products (O'Brien and Williams, 2004). More recently this process has partly developed into added value production. For example, Indian software industry is often cited in this context as an example of a highly competitive and export oriented industry sector based on human capital. However, the same industry is reported to represent the lower value-added end of the global software market (Forbes and Wield, 2002).
"Sri Lanka has an annual income from spice exports amounting to
85 million USD. Ninety percent of this export is sent in bulk form
and not in added value form, the highest value addition of spices
being in the perfume industry. The maximum amount of value addition
that could be obtained from the perfumery industry could
range from between 3 to 30 fold" (The Business Standard,
Colombo. January 30, 2004).
An industry strategy that leads to improved added value production must therefore be of high priority in developing countries, especially more the gap between...
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Economic liberalization, entrepreneurial development and manufacturing..., June 01, 2005
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