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What’s it: Business activities refer to any activity involved in producing goods or providing services. These activities can be broadly categorized into different business sectors.
For example, some business activities involve extracting metallic minerals from nature or harvesting agricultural commodities. These resources are then often sold to businesses in the manufacturing sector for further processing. Manufacturers take these raw materials and convert them into final goods.
Another major business sector is the service sector. This encompasses businesses that provide services to consumers and other businesses. Distributing goods from producers to consumers is a key service activity. Transportation, finance, and tourism companies are all prime examples of businesses operating in the service sector.
Such activities are essential in our lives. Businesses sell goods or provide services to satisfy our needs and desires to make a profit. And in their daily operations, they carry out those activities.
Then, to operate, the business needs resources. It buys inputs such as raw materials, labor, and machinery. It then combines these inputs to produce goods and provide services.
Next, in satisfying our needs and wants, businesses must compete with each other. Therefore, they have to do it better than competitors. I mean, they have to be able to satisfy consumers more than their competitors do to keep the money flowing from consumers to them. If they manage to do so, they can generate a profit above the average competitor – resulting in a competitive advantage.
Why are business activities important?
Business is essential for our life. Their presence allows us to enjoy a better standard of living than would be possible if we were independent. They produce the goods and services we need.
Without them, we may have to return to the traditional economy. We have to produce all our own needs.
Because businesses exist, we only have to give up money to get various items, such as clothes, cars, and laptops. Moreover, through business services, we can also prepare for a better retirement.
The business not only meets our needs and wants but also provides jobs and income. We work in companies to earn money, which we can use to buy various goods and enjoy various services, including daily necessities, finance, transportation, and vacations.
Then, in carrying out operations, the business performs several activities. It can vary greatly between businesses. And, broadly speaking, we can group them into three main categories: extracting/harvesting natural resources, converting raw materials into the final output (manufacturing), and providing services.
How businesses work
Businesses thrive by understanding who needs their offerings. They start by identifying their ideal customer, which involves creating a customer profile that considers demographics, interests, and buying behaviors. Imagine a clothing company picturing its target customer as a young professional who values both style and sustainability.
Once they have a general idea, businesses can segment the market by dividing it into smaller groups with similar characteristics. This allows them to focus their efforts on the most promising customer segments, known as the target market.
Understanding needs and competition
In-depth market analysis is crucial. Businesses need to understand the needs and wants of their target consumers. What problems do their products or services solve? What are consumers’ desires and pain points? They can conduct market research through surveys, focus groups, and competitor analysis.
For example, an athletic apparel company might discover its target market prioritizes comfort and moisture-wicking technology in activewear. They also need to analyze the competition to understand their strengths, weaknesses, and offerings. This helps businesses position themselves effectively in the market.
Perhaps the athletic apparel company finds a competitor excels in stylish designs, while another offers a wider range of sizes. This knowledge allows them to emphasize their unique selling proposition, like using recycled materials or offering a custom fit service.
It’s not just about consumers
It’s important to remember that businesses don’t just sell to individuals. They can also sell to other businesses. This can include raw materials, equipment (capital goods), partially finished products (semi-finished goods), and various services.
Imagine a company that manufactures computer parts. They might sell those parts directly to consumers who build their own PCs, but they could also sell them in bulk to other electronics manufacturers.
Developing the marketing mix
After understanding the target market and competition, businesses create a marketing mix. This is a combination of four key elements that work together to influence customer decisions:
- Product: What goods or services will be offered? What features and benefits will they provide? A company selling camping gear might prioritize durability, portability, and weather resistance in their products.
- Price: How much will the product or service cost? This needs to consider production costs, competitor pricing, and customer-perceived value. The camping gear company will need to find a price point that balances offering quality products with remaining competitive in the market.
- Promotion: How will the business reach its target market and generate interest? This includes advertising, public relations, social media marketing, and more. The camping gear company could use social media influencers to showcase their products in action or partner with outdoor retailers to reach potential customers.
- Place: How will the product or service reach the customer? This involves considering distribution channels, online sales platforms, and physical store locations. The camping gear company might sell directly through its website, partner with sporting goods stores, or both.
By carefully crafting the marketing mix, businesses can effectively reach their target audience and achieve their sales goals.
Manage operations and activities
To turn ideas into reality, businesses rely on four key resources:
- Raw materials: The basic materials used to create a product (e.g., cotton for clothing, wood for furniture).
- Labor: The human effort required to produce goods or services. Skilled workers are essential for tasks like designing, manufacturing, and marketing products.
- Capital: The financial resources needed to operate the business, including equipment, buildings, and inventory. Businesses use capital to acquire the necessary resources to function.
- Entrepreneurship: The vision, leadership, and risk-taking ability to start and manage a business. Entrepreneurs are the driving force behind businesses, identifying opportunities and bringing the other three resources together.
Entrepreneurs are the spark that ignites a business idea. They combine the other three resources (raw materials, labor, capital) to create a functioning enterprise. They use their skills and vision to buy inputs, transform them into products or services, and ultimately sell them to customers. Imagine an entrepreneur with a passion for sustainable fashion. They might source organic cotton (raw material), hire skilled seamstresses (labor), and secure funding to purchase equipment (capital) to launch their clothing line.
Scaling up: Business functions
The way businesses manage their business activities depends on their size. Small businesses are often run by the entrepreneur themself, handling everything from marketing to finance (sole proprietorship). This means all the business activities, like marketing, sales, production, and customer service, fall under the entrepreneur’s responsibility.
However, as businesses grow, they typically divide these business activities into specialized functions. These functions, like marketing, human resources, and finance, each handle specific tasks and require employees with appropriate skill sets.
Imagine a small bakery where the owner handles everything, encompassing all aspects of the bakery’s business activities. As the business expands, it might hire a dedicated marketing manager to handle social media and promotions, while a human resources specialist focuses on recruiting and training new employees. This allows the business to achieve greater efficiency and specialization in each facet of its business activities.
Classifying business activities
Classifying business activities depends on what variables we use to group them. For example, it might be based on which industry/sector they operate in or what they do (business operations).
Another example is classification in accounting. Accountants distinguish them into three groups: operating activities, investing activities, and financing activities.
Business activities by sector
In this approach, we group activities into three economic sectors according to their stages in the production chain. They are:
- Primary sector
- Secondary sector
- Tertiary sector
The primary sector encompasses business activities involved in extracting, harvesting, and simply converting natural resources. These activities are then divided into several sub-sectors, such as mining, agriculture, plantations, and fisheries.
Output from this sector usually goes to the secondary sector for further processing into final goods. Or, some are also for direct consumption, for example, various agricultural products such as vegetables and fruits.
The secondary sector includes manufacturing and construction activities. Manufacturers transform raw materials into semi-finished or finished goods. The semi-finished goods are then sent to other manufacturers to process the final goods. Thus, the manufacturing sector produces the final goods overall.
Meanwhile, construction also falls into this category because it takes raw materials like wood and steel and turns them into something else.
The tertiary sector includes activities that provide services to businesses, households, or other organizations. These include trade, banking, insurance, hotels, and transportation services.
In several classifications, experts then separate intellectual-based services from this sector into the quaternary sector. Examples are services related to research and development, computing, information, and communication technology.
By value chain (creating value)
Activities within a company can vary widely between businesses. Some textbooks classify them into various business functions: production, human resources, marketing, accounting, and finance.
Then, another interesting classification is that proposed by Porter. He offers a “value chain” business model. It refers to various activities related to creating value through producing goods or providing services. It gives us deeper insight into where businesses can add value to create a competitive advantage.
Porter classifies activities along the value chain into two main groups: primary activities and support activities.
Primary activities include:
- Inbound logistics involves transporting inputs to production facilities and several other related activities, such as warehousing.
- Operations include activities to process input into output.
- Outbound logistics involves delivering output to customers, including handling warehousing and related information flows.
- Marketing and sales include selling and promoting products and developing long-term communication and relationships with customers.
- Customer service includes all activities to serve customers after they receive the product, for example, after-sales service.
Support activities include the following subcategories:
- Infrastructure includes activities involved in areas such as finance, law, and general management.
- Information technology provides technology, storing and transmitting information between departments within the company and external parties.
- Human resource management covers activities such as recruitment, development, training, and compensation.
- Procurement includes the activities involved in purchasing goods and services from external sources.
Competition and profitability
Operational activities consume costs. Since the business is profit-driven, it is essential to generate more revenue than expenses. To maximize profits, the company must earn the highest possible revenue and keep costs as low as possible.
However, to make a profit, businesses also have to compete with each other. Because they serve the same customers, they beat competitors for more money. Thus, to beat competitors and generate higher profits, they must have a competitive advantage.
How do businesses build a competitive advantage?
Porter proposes a cost leadership or differentiation strategy to achieve a competitive advantage. Cost leadership emphasizes lower-cost structures and selling products at or slightly below competitors’ averages. Companies aim to be the most efficient producers. They achieve this by streamlining operations, minimizing waste, and potentially negotiating lower prices with suppliers. This allows them to offer competitive pricing and potentially attract a wider customer base.
Meanwhile, the differentiation strategy emphasizes the uniqueness for which consumers are willing to pay more. This could involve superior quality, innovative features, exceptional customer service, or a strong brand reputation. Businesses that successfully differentiate themselves can command a premium price and build loyal customer followings.
Some choose to compete and execute the above strategies in main markets, where many players are involved. Others prefer niche markets and cater to more specific consumer needs.
Factors affecting profitability
Most businesses’ ultimate goal is to generate a profit. Profitability is the difference between a business’s total revenue (money earned from sales) and its total costs (expenses incurred in running the business).
Different industries have inherently different levels of profitability. Some industries, like technology or pharmaceuticals, may have high-profit margins due to factors like innovation or brand loyalty. On the other hand, industries with high competition and low barriers to entry, like restaurants or retail clothing stores, may have lower profit margins.
To answer how profitable the industry is, let’s take another piece of Porter’s work. He proposed five elements to explain it – five of which we call Porter’s Five Forces. They include:
- Threat of new entrants: How easy is it for new businesses to enter the industry and compete?
- Bargaining power of suppliers: How much power do suppliers have to influence prices and terms?
- Bargaining power of buyers: How much power do customers have to negotiate prices and demand high quality?
- Threat of substitutes: Are there readily available alternative products or services that could threaten the industry’s sales?
- Competitive rivalry: How intense is the competition among existing businesses in the industry?
