Classification of Businesses

Businesses offer many different things: some companies provide services, while others manufacture and sell products. This broadness of purpose brings about the necessity of the classification of businesses. Let's take a look at how businesses can be classified.

What is business classification?

Based on their functions and activities, businesses are broadly classified into two categories. But before explaining business classification and its types, it is imperative to understand the term business.

Business is an economic activity that involves the exchange of products and/or services for profits or other motives. Simply put, business is any transactional activity people engage in to make a profit.

All businesses look towards the satisfaction of the customer. Therefore all the activities of a business are directed toward customer satisfaction with an aim of generating profit. This goal is usually achieved through the production of quality goods and services demanded by consumers, at affordable prices. Classification is based on the type of activities carried out by the business.

Classification of business

Business classification is broadly of two types (see Figure 1 below):

1. Industry business classification

2. Commerce business classification

Fig. 1 - Business classification

The basis for business classification is the activities carried out by businesses. For example, industry classification looks to classify businesses based on their activities of conversion and processing of resources, whereas commerce looks to classify businesses based on goods distribution activities.

1. Industry business classification

This business classification involves business activities such as the conversion of raw materials into finished products, production of goods and services, mining of resources, and animal husbandry. Examples of goods made in an industry business include customer-ready products such as clothes, butter, cheese, etc., and capital products such as machinery, building materials, etc.

Goods can come in the form of raw materials from another sector, called producer goods, or final products ready for consumer consumption, usually called consumer goods.

Businesses are broadly divided into three sectors:

• primary sector
• secondary sector
• tertiary sector.

2. Commerce business classification

Therefore, all business activities that involve the distribution of goods fall under this business classification. Commerce is broadly divided into two categories: trade and aids to trade.

A. Trade

Trade looks to provide a direct bridge between producers and consumers. It involves the buying and selling of goods and/or services between two or more parties. Trade is classified into two categories: internal trade and external trade.

• Internal trade: Also referred to as domestic trade or home trade, this involves business transactions within a country's borders. Here, the currency of the country in question is used for business activities. Internal trade can be done in one of two ways: retail or wholesale.

• External trade: This involves business transactions between nations or business transactions not bound by geographic boundaries. There are three types of external trade: import, export, and entrepot.

B. Aids to Trade

This involves business activities that make business trading easier by eliminating problems that may arise during the production or distribution of goods and/or services. Aids to trade include: banking services, transportation services, marketing and advertising, insurance firms, etc.

As a result, business classifications provide an understanding of different business activities by grouping them into different sectors based on the activities they conduct. Each sector is dependent on the other.

Primary sector of Industry business classification

Businesses classified into the primary sector are involved in the extraction and exchange of natural resources to make profits. Primary sector business classification is divided into two further sectors, the extraction sector and the genetic sector.

• Extraction sector: This involves the extraction and processing of resources by industries. It is made up of two categories, the first of which deals with the collection of goods and raw materials already produced or existing. Examples may include mining or hunting. The second category deals with the processing of the collected materials. Examples of the second category include farming and lumbering.

• Genetic sector: This involves the rearing and/or breeding of animals or living organisms. The genetic sector is sometimes subject to scientific or technological improvement. Examples include rearing livestock, breeding cattle, fish ponds, rearing of plants in a nursery, etc.

Secondary sector of Industry business classification

Businesses classified into the secondary sector are involved in the processing and conversion of raw materials into consumer-ready products. This is done in three ways: (1) converting raw materials supplied from the primary sector into consumer-ready products; (2) further processing goods from other secondary sector industries; and (3) producing capital goods. The secondary sector looks to convert resources extracted in the primary stage into finished products. The secondary sector business classification is further divided into two sectors, the manufacturing sector and the construction sector.

• Manufacturing sector: semi-finished goods or raw materials are processed and converted into finished goods by the manufacturing sector. Examples include car manufacturers or food production.

• Construction sector: this sector is involved in the construction of dams, roads, houses, etc. Examples include building companies and construction companies.

Tertiary sector of Industry business classification

The tertiary sector promotes the activities of the primary and secondary sectors by providing facilities for the easy flow of goods from each sector. Examples include supermarkets, hairdressers, and cinemas.

The difference between the primary sector, secondary sector, and tertiary sector is in the activity carried out by each sector. The primary sector is involved in resource extraction, the secondary sector in resources processing into finished products, and the tertiary sector in the flow of goods and services.

It is important to note that all business activities supplement each other. The primary sector extracts and provides raw materials for the secondary sector to process into consumer-ready goods, with the final goods promoted by the tertiary sector.

The commerce sector then looks to trade and distribute these goods to the consumers locally or globally utilizing different methods. Let's take a look at this in more detail.

Resources used by the primary, secondary and tertiary sectors

The following main resources are used by all primary, secondary and tertiary businesses during their operations and processes

1. Land

Businesses need land on which they can operate, e.g., offices, roads, etc. However, this needs goes beyond just the physical space for its activities. It also includes the resources and natural resources used during manufacturing processes. Land includes buildings, roads, oil, gas, coal, plants, minerals, animals, aquatic animals, etc.

2. Labour

This covers the required skills, talent, and knowledge needed to operate a business. This type of resource is usually referred to as human resources, as it involves human input physically or through technology in the running of a business. It can include both manual and mental labour.

4. Capital

This refers to the investment needed for business activities and the purchase of non-current assets. It is usually contributed by investors or the owners. It is used in sorting all the financial needs of the business.

5. Enterprise

This refers to the understanding of business processes, and how to run a business. This involves getting in-depth knowledge on the competition, the target market, and the customers in order to make favourable business decisions.

In conclusion, business classifications provide an understanding of different business activities by grouping them into different sectors based on the type of industry they operate in. Each group is dependent on the others to carry out their activities. An example of this would be the secondary sector, which is dependent on the resources extracted by the primary sector.