Businesses operate in various industries or markets. In every industry, one or more companies operate. They compete with each other directly. For example, PepsiCo, Inc. and Coca-Cola Co. compete in the beverage industry.
- What is a business activity? Business activity is about anything a business or company does to satisfy consumers profitably. It may involve manufacturing, distributing, or providing solutions to others (services).
Then, if we group industries based on similarities in their activities, that is what we call a sector. Thus, a sector includes several industries.
For example, we grouped the beverage industry above with the food and automotive industries into the manufacturing sectors. This is because they are involved in processing raw materials into finished goods.
Another example is the transportation sector, which includes land, water, and air transportation industries.
Several standards exist for classifying sectors or industries, including:
- Global Industry Classification Standard (GICS)
- Industry Classification Benchmark (ICB)
- International Standard Industrial Classification of All Economic Activities (ISIC)
- North American Industry Classification System (NAIC)
- Standard Industrial Classification (SIC)
In another classification, the business sector is divided into four groups, namely:
- Primary sector
- Secondary sector
- Tertiary sector
- Quaternary sector
The above classification is related to which production chain businesses operate. For example, the primary sector operates in the upstream production chain. They provide raw materials for processing by businesses in the secondary sector.
The next classification is:
- Private sector
- Public sector
The two differ based on who owns the organization. The private sector is owned by individuals (ultimate owners). Meanwhile, the public sector is owned by the government.
Primary, secondary, tertiary, and quaternary sectors
Each business in the primary, secondary, tertiary, and quaternary sectors has similar activities in the production chain. For example, companies in the primary sector deal with extracting, harvesting, and converting natural resources.
Unlike the secondary sector, they do not process it into finished goods. Instead, they take it from nature – some may simply process it – and sell it as a raw material.
Businesses in the primary sector are involved in extracting, harvesting, and mining natural resources. An example is an agricultural, plantation, mining, or fishing business.
They are at the first stage in the production chain and produce raw materials to become inputs for the next sector, the secondary sector. And their activities have a small added value.
Operating activities may rely on hands. Some may use more automated methods, such as relying on more sophisticated equipment such as heavy machinery and equipment.
The secondary sector is related to manufacturing. Businesses in this sector produce goods such as cars, food, and beverages. In addition, the construction and utility businesses are also included in this sector.
Businesses in the secondary sector convert raw materials from the primary sector into goods. They may be intermediate goods, which will be sold to other companies in the sector. Or, they produce finished goods for end use, whether sold to businesses or households.
Businesses in the tertiary sector are involved in providing services. Examples are banks, insurance companies, hairdressers, retail, hotels, transportation, restaurants and logistics. They may sell their services to other businesses in the same sector, in different sectors, or to households.
For example, banks provide loans to transportation or retail companies. They also supply it to mineral miners or manufacturers. They also offer loans to households, such as personal loans and mortgages.
The quaternary sector also provides services, just like the tertiary sector. For this reason, some classifications combine the two.
But, unlike in the tertiary sector, businesses in the quaternary sector focus on knowledge-based and intellectual activities. They generate and share information. Examples are research and development, computing, and information and communication technology.
Compared to the previous three sectors, the quaternary sector requires a highly educated workforce. Due to this reason, this sector is growing more rapidly in developed countries than in developing countries. In addition, this sector also generates high-added value.
The above sectors contribute to an economy’s output, income, and employment. How vital is each sector’s contribution? It varies between countries. The secondary sector may contribute more dominantly in some countries. While in others, the tertiary sector dominates.
Countries in the world usually shift from relying on the primary sector to the secondary sector. And as their economy progressed, they moved towards the tertiary and quaternary sectors.
The shift made it possible to create more added value. For example, developing countries rely on the primary sector and only produce raw materials, which generates low added value.
When these countries can develop economically, they build factories to process raw materials into semi-finished or finished goods, which have a higher added value.
There are two terms related to sectoral changes, namely:
Industrialization is the transition from agriculture-based to manufacturing-based. In other words, the economy is moving from relying on the primary sector to the secondary sector. This transition creates higher added value in the economy.
Meanwhile, deindustrialization occurs when the manufacturing sector contributes to a decline in the economy. It usually happens in the long run. The shift may arise from the secondary sector to the tertiary sector, as experienced by developed countries.
But, what is bad is if the opposite happens, where the secondary sector declines but the tertiary sector does not develop. This condition may occur due to the following:
- Decreased competitiveness
- Capital flight
- Worsening quality of labor
Reasons for sectoral changes
Several reasons explain why sectoral changes occur. Now, let’s break down the details of why the service sector dominates the economy and contributes more and more, overtaking the secondary sector.
Increased demand for support services. Many companies use more sophisticated services, such as subcontractors and specialists, to help grow businesses. So they can focus on their core business and rely on other companies to provide services for support activities. This strategy allows them to grow faster and be flexible in dealing with changes in the business environment.
Increase in household income. When households have more money, their demand for services such as recreation and health increases. They spend more money on services than goods. As a result, the service business accelerated.
More free time. Improved living standards allow people to have more time to do activities other than work. In addition, they generate enough income from investments to finance their daily needs. Thus, higher salaries do not entice them to work. This is what underlies the backward-bending labor supply curve.
Shift focus on customer service. Companies are increasingly focusing on customer service. These services, in addition to providing higher added value, also enable them to increase customer loyalty. You can see some big companies like Apple focus on customer service in the United States and outsource their production overseas.
Private sector, public and third sector
In addition to the four previous categories, the business sector can be categorized into three, namely:
- Private sector
- Public sector
- Tertiary sector
Each has a different business organization. Their ownership, aims, and objectives are also different.
Business organizations in the private sector are oriented to make a profit. They seek to maximize profits by producing goods and services to satisfy customer needs and wants. Their ultimate owner is an individual.
Business organizations in the private sector include:
- Sole proprietorship or sole trader
- Corporations – private limited companies and public limited companies
Privatization involves selling state-owned assets to the private sector. That includes contracting out services previously provided by the government to the private sector. Divesting ownership interests in state-owned companies is another form, usually by selling them to the public via the stock exchange.
- Generate revenue for the government
- Promoting efficiency, competition, and innovation
- Reducing the fiscal burden
- Increasing private participation in the economy
- Encouraging better quality goods or services
- Price problem because it is motivated by profit
- Maximizing the owner’s wealth over the public interest
- Opposition from company employees
- Economic power concentrated in the private sector
The public sector is under the government. Organizations in this sector are owned and controlled by the government. They provide services to the public and operate in strategic areas such as health, infrastructure, defense, education, housing, and social work.
Organizations in the public sector include:
- National government
- Local government
Another organization is a state-owned enterprise (SOE). But, unlike other organizations, which are financed through taxes, SOEs usually operate on a commercial basis and have greater management autonomy.
Nationalization is the opposite of privatization. So it is when the government takes over an asset, company, or industry from the private sector. After being nationalized, they became under government control.
- Preventing resource exploitation because the private sector is profit-motivated
- Eliminating private monopolies, avoiding high prices
- Preserving strategic industries, for example, because they are labor intensive
- Maintaining consistent public services because they are driven by public interest motives
- Providing essential goods and services at a fair price
- The revenue potential for the government
- Inefficiency and low productivity because they are not driven by the profit motive
- Political intervention in management, for example, is a government tool to perpetuate power
- Corruption and mismanagement, for example, because it brings more bureaucracy
- Deteriorating service quality due to the absence of tough competition
Organizations in the third sector aim to provide services to members. They raise money to support their activities and raise awareness for good causes. Organizations in this sector include:
- Voluntary organization
- Social enterprise
- How Does The Government Play A Role In The Economy?
- External Sector: Its Effect on the Economy
- Household Sector: Definition and Role in the Economy
- Macroeconomic Sector: Types, Roles
- Government Sector: Meaning, Budget, and Impact on the Economy
- Economic Sector and Its Classification
- Tertiary Sector: Examples and Its Contribution to the Economy and Employment
- Secondary Sector: Know More Its Activities and Contribution to the Economy
- Quaternary Sector: Examples, Contributions, and How It Grows
- Primary Sector: Output and Economic Activities Involved