The value added concept in marketing

Now suppose we use the same formula to measure value added in distribution. Take, for example, a typi¬cal supermarket. The cost of goods is $798,000. Labor and overhead cost $198,000. Total value of goods sold to the public, $996,000. Clearly, here, the value added was $198,000. If there are 10 employees in the supermarket, we can say the per capita productivity was $19,800, and average sales $99,600 per employee.
But now take a store only half as large, doing $500,- 000 a year. The cost of goods may have been only $300,- 000. But the cost of selling these goods, because of various services rendered by the store, was $200,000. This store employs only 7 people, so that the per capita productivity, measured by value added, would amount to some $28,500, considerably more than that of the supermarket.
The cost of doing business, on which we base our value added, was higher because they rendered more services. In this particular case, if the services rendered have value for the consumer, the higher cost might be said to be the result of more value which has been added to the merchandise. But it should be noted that we would then equate value with cost of doing business.
The importance of that becomes clear when we look at a third store. This store also has a total sale volume of $996,000, like the first one. But here examination shows that the cost of goods (what the store bought for resale) amounted to only $698,000. Because, however, this third store is not as efficient as the first, the cost of doing business is $298,000.
The retail price to the consumer is the same as in the first store but the cost of doing business is considerably higher. Under the value added formula, we would have a per capita value added of $29,800 or $10,000 more per employee than that attained by the efficient store. It is easy to see, therefore, that value added might give us a quantitative figure or standard, but it does not give us a qualitative one. And if we take the numerical standard alone, the more we spend, the more value we add. This, of course, is not true. Efficiency is a qualitative yardstick.
The reader may raise the same question in connection with the use of the value added theory in manufacturing; namely, that it measures how much is turned out per employee, but it does not measure how efficiently the employee works. To a degree this is true. But manufacturing productivity is the result of certain standards set by engineers on the basis of highly mechanized manufacturing equipment. Engineers set these standards on the basis of time and motion studies, industrial research, and industrial measurement. Machines are aligned in the most efficient line of flow, and production is measured in terms of number of units turned out.
In marketing, we cannot line people up and count the number of cans or packages they handle and sell. Much of marketing work has little, if anything, to do with handling cans or packages. We know total sales, and possibly total net margin from such sales effort. But we cannot measure, in terms of dollars, the value of the contribution of each performer.
A more realistic approach is found in measuring through job analysis. A good job description predetermines the job to be done. It gives a standard by which to measure performance.
If we have carefully established job specifications, have described the job we assign to an individual, and both he and management know what he is supposed to do, then we can watch and measure progress week by week or month by month. What we do, in effect, is to break down the job into component units. By assigning responsibility for getting each component done, we can hold the performer accountable.