Classification of Business Activity

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    Welcome back guys, before we start lets do a quick recap.

    In the last lecture I told you about the concept of Needs, wants and Resources; also we learned a little bit about business activity. Now those of you who haven’t visited seen the last video, make sure to check it out as it will help you in understanding later on.

    OK, so now I’m going to tell you about the three types of business activities:

     

    1. Primary Industry e.g Fishing
    2. Secondary Industry e.g leather manufacturing
    3. Tertiary Industry e.g shops, banks etc.

     

     

     

     

    The primary sector of industry deals with the harnessing and/or extraction of natural resources. Natural resources include vegetation, water, animals, wind i.e renewable-resources and Oil, gas and Coal i.e. Non-renewable. Anything from coal mining to farming can be labelled as Primary Industry.

    Now let’s come to Secondary sector of industry. Also known as the intermediate sector, it deals with the manufacturing and processing of those goods which are obtained from primary industry in order to convert them into products that are fit for our use. For example, the wood (primary resource) that is obtained from woodcutters (primary industry) cannot be used by people straightaway in their daily live, because the wood is in its crude form: crassly shaped planks.     Only after this wood has been processed and manufactured into tables and chairs can it be used by us.

    Tertiary industry provides services and products to consumers and other sectors of industry. You yourself are most probably sitting in front of a table watching this video. This table was bought from a shop and that, my friends, is a perfect example of tertiary industry. Other examples are banks, transport, hotels etc.

     

     

    The proliferation of either industry in a country tells us very much about its economy. In countries where Primary industry has a greater share, by either employing more people or producing more output, the process of development has just started; these countries are called developing countries e.g Kenya and Bangladesh.

     

    Other countries where tertiary sector occupies a greater percentage of the industry, development is at a much advanced pace and those countries are known as developed countries e.g UK, USA, and Australia.

     

    Business Growth               

     

    Businesses grow, which means they increase in size. For example, if there was one shop of a particular person and he decides to open another shop, this will be known as growth.

     

    There are various reasons why businesses grow:

    • To increase revenue. Obviously if a shop owner has two shops instead of one, he will earn more profit than he did before.
    • To spread business risks. E.g if one of the shop is destroyed by fire or Earthquake, the owner still has a source of income.
    • To achieve “Economies of scale”. This term will be discussed later however, let me elucidate it by giving you an example. If the owner buys goods for one shop, they will be comparatively lesser than those for two shops. As a result he will receive little or no concession from the wholesaler for the transaction of goods. Whereas buying bulk for two shops will give him concession over his transactions.
    • More status and prestige for the owner. Of course when the owner has a bigger business, his status within the business community will increase.

     

    How can businesses grow?

    Ok, so now we will see what some of the methods businesses adopt for growth are.

    Internal Growth – When a business itself expands its own businesses

    External growth – When a business merges with or takes over another business.

    The important difference between these two types of growths is the number of businesses directly involved in the expansion.

    Now mergers themselves are of three types:

    • Horizontal merger- between businesses belonging to same industry
    • Vertical merger- between businesses belonging to different industries
    • Conglomerate merger- between two businesses in different fields.

    The benefits of Hor. Integration are as follows:

    1. The merger reduces the number of competitors in the industry.
    2. There are opportunities for economies of scale
    3. Greater market share.

    Benefits of Vertical integration:

    1. The merger gives an assured outlet for the businesses’ products e.g if a car manufacturer merges with a car dealer he will have an assured showroom reserved solely for his vehicles.
    2. The profit margin made by the retailer will be absorbed by the expanded business

    Benefits of conglomerate integration:

    1. Risks of the businesses’ will be spread.
    2. The profit margin of one business will be absorbed by the whole.

     

    That was a quick study of growth methods. Ok I think we should end this lecture, but, before doing so I will mention the types of economies.

     

    Types Of Economies 

    There are three types of economies:

    1. Free market economy: This economy has the following features:
    2. No government control or restriction on business activity.
    3. Prices of goods are influenced by the demand or supply of those goods.
    4. No government provided health or services.
    5. Command/planned economy:
    6. Government has total control over businesses and makes all the important decisions.
    7. Employment for everyone.
    8. Government has fixed wages for everyone from worker to manager so less incentive to work.

     

    1. Mixed economy
    2. It has both a private sector( Business activity liberal)
    3. As well as public sector(Govt. controlled businesses.)

     

     

    Q/A session

    Q: Define the term “Primary industry”.

    Ans. Primary industry is that industry which deals with the producyion, harnessing and/or extraction of natural resources like oil, water etc.. An example of primary industry is ‘oil extracting, fishing etc.

    Q: Why does a business want to grow?

    Ans. A business grows for several reasons:

    1. To increase the revenue of the business
    2. To spread the risks of the business
    3. To achieve economies of scale.

     

    Well, this is it for now. See you later Bye.