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Business Activities: Definition, Importance, Classification

Updated on · By Ahmad Nasrudin Tag: ,

Business Activities Definition Importance Classification
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What’s it: Business activities refer to any activity involved in producing goods or providing services. For example, they may involve extracting metallic minerals from nature or harvesting agricultural commodities for sale to the manufacturing sector for further processing. Or they involve converting raw materials into final goods as manufacturers do.

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Another business activity is providing services. Distributing goods from producers to consumers is an example. Another example is what transportation, finance, and tourism companies provide.

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, in operating, the business needs resources. They buy inputs such as raw materials, labor, and machinery. They then combine 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.

Not only meeting our needs and wants, but the business also provides jobs and income to us. We work in companies to earn money, with which we can 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 do business activities work?

Businesses identify who their customers are. Next, they segment the market and determine the target market. Then, they analyze to understand the needs and wants of consumers in the market, including studying its competition.

As a note, the need does not only come from individuals but also businesses. So, businesses sell not only goods and services to consumers. However, they also sell raw materials, capital goods, semi-finished goods, and services to other businesses.

After identifying what consumers need in the target market, the business then develops the appropriate marketing mix. Next, they have to make important decisions about what goods or services they sell, at what price, how to promote them, and how to make sure they are available when consumers need them.

Manage operations and activities

Producing products and running a business requires input. It includes raw materials, labor, capital, and entrepreneurship. We call these four factors of production or resources. Specifically, I use the term raw material to replace land, which is usually used in textbooks.

Of the four resources above, entrepreneurship plays a role in uniting and organizing the other three resources, which are played by entrepreneurs. They start a business buying inputs and using them to produce goods or provide services.

Managing businesses can vary widely, depending on the scale of their operations. Small-scale businesses are usually managed and handled by an entrepreneur. Usually, they operate under a sole proprietorship. The owner is responsible for everything from operations, marketing, human resources to finance.

Meanwhile, large businesses usually divide their operations and activities into various business functions such as operations, marketing, human resources, and finance. Others may break it down again by adding customer service, logistics, and information technology functions.

Those business functions involve different tasks and activities. Thus, they need specific functional skills to work. Therefore, each function also requires appropriate human resources.

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Compete with other businesses

Operational activities consume costs. Since the business is profit-driven, making sure to get more revenue than expenses is a must. To maximize profits, they must earn the highest possible revenue and keep costs as low as possible.

But, on the other hand, in making 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. Cost leadership emphasizes lower-cost structures and selling products at or slightly below competitors’ averages. Meanwhile, the differentiation strategy emphasizes the uniqueness for which consumers are willing to pay more.

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.

How much profit does the company get? It depends not only on the competitive strategy being executed but also on the industry in which the business operates. This is because each industry has a varied competitive environment, which affects its profitability.

The competitive intensity in each industry is also different. And, in general, intense competition pushes profitability down.

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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 Powers. They include:

  1. Bargaining power of buyers
  2. Bargaining power of suppliers
  3. Barriers to entry
  4. Threat of substitution
  5. Rivalry between companies

How to classify 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.

Alright, here, I’m just going to cover the first two:

Activities by sector

In this approach, we group activities into three sectors according to their stages in the production chain. They are:

  1. Primary sector
  2. Secondary sector
  3. Tertiary sector

The primary sector involves extracting, harvesting, and simply converting natural resources. These activities are then divided into several sub-sectors, such as mining, agriculture, plantations, and fisheries.

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  • 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 goods or finished goods. The semi-finished goods then go to other manufacturers to process the final goods. So, overall, the manufacturing sector produces the final goods.

  • 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 involved in providing services to businesses, households, or other organizations. They include trade, banking, insurance, hotel, 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.

Activities by value chain

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:

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  • 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.
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