The concept of adding value

The difference between the cost of purchasing raw materials and other bought-in services and the price the finished goods are sold for.

How could the following businesses add value to the goods they buy in:

• hotel • car dealer • clothing manufacturer • fast-food restaurant?

[12 marks]

Definition of added value:

Hotel – clean and well-presented guest rooms, attentive staff , 24-hour room service, airport collection.

Car dealer – cars fully cleaned and polished, warranty providing cover in case of faults after purchase, showroom to display cars, free drinks for customers

Answers

Clothing manufacturer – fashionable designs, fashion shows, celebrity endorsements of product.

Fast-food restaurant – light and airy premises, smart fixtures and fittings, comfortable seating, efficient service with no queuing, waitress service.

Answers

It may be inferred from the case study material that Rivelino has a number of qualities that make him a successful entrepreneur. These include: • Commitment and self-motivation – ‘Rivelino’s vision and that of his other directors is fuelled by a drive to succeed.’ This suggests that Rivelino has the essential qualities of being ambitious, energetic and focused. • Self-confidence – Rivelino has set up other businesses in diverse industries, including a business selling herbal teas and another arranging boat tours for tourists. This willingness to repeatedly take risks suggests that Rivelino believes in himself and his abilities. • Marketing skills – Rivelino is able to identify business opportunities. The case study implies that his previous businesses have had a degree of success. • Recognition of his own limitations – this led to his decision to bring in two partners for the ITS venture. • Networking skills – Rivelino ‘quickly developed a very large number of important business contacts’

Explain the qualities Rivelino has that make him a successful entrepreneur. [8]

The key advantage is that Rivelino may have lacked the relevant knowledge and skills to make a success of the business opportunity by himself. By forming a partnership, he was able to complement his own marketing skills and business contacts with the skills of the other two partners. • The second partner was trained in soft ware design and development. • The third partner had financial skills and soft ware design experience. The three partners thus had the potential to identify market opportunities, manage the development of soft ware applications and develop appropriate marketing strategies whilst ensuring that the business remained on a sound financial footing. ITS would also benefit from the start-up capital available from the three partners, thus reducing the need for debt finance. It might also be stated that the formation of a partnership is relatively quick and easy as no formal paperwork is necessary (although it is advisable to draw up a deed of partnership).

Why do you think it was an advantage to initially set up ITS with two other partners? Explain your answer. [6]

Challenges are likely to include: • It is a highly competitive industry. ITS will be competing with well-established global brands. Although ITS has been successful in the Caribbean market, it will be relatively unknown outside that market. Th us marketing the business to the wider business community will be costly. • Th e industry is characterised by rapid technological change; ITS will need to remain at the forefront of change to be competitive on a global scale. Th is may require substantial capital expenditure. Ultimately, this may mean changing the legal status of the business to a plc. • As it expands, ITS will need to recruit suitably qualifi ed staff to provide the ‘advanced customised soft ware’. Human resource management will become increasingly important. • Financing expansion will be necessary. If profi ts are insuffi cient to fund the expansion, decisions about sources of fi nance will have to be made, e.g. debt fi nance or equity fi nance. • Organisational structure will need to develop alongside the expansion of the business. Th e challenge may be how to retain control whilst still allowing the fl exibility that is a feature of modern knowledge-based fi rms. If ITS becomes a plc to facilitate its growth, then there will be a divorce between ownership and control – that is, as a plc, owners may no longer control the day-to-day operations of the business.

Discuss the challenges that face ITS in its aim to become a global soft ware business. [9]