Classification of businesses PDF

Classification of businesses in terms of different criteria
Business can be classified under the following criteria.
 According to the nature of the production.
 According to the ownership/ proprietorship.
 According to the goals.
 According to the scale.
 According to the production sector/source of production.
Bases of business classification and the way of classifying them can be shown by the following
flow chart.
1. According to The nature of Production
Businesses can be classified as primary, secondary and tertiary according to the nature of
production.
 Primary Pro: The businesses which extract the natural resources as its own form for
production are known as the primary sector. Primary production can be divided as
follows. Extraction industries: extraction of products from natural resources. Eg: hunting,
fishing, mining (coal mines) Genetic industries: These industries remain engaged in breeding plants and
animals for their use in future reproduction
Eg: breeding of plants, dairy farming
Bases of business classification
Nature of production Ownership Objectives Scale production
sectors
 Primary
 Secondary
 Tertiary
 Public
 Private
 Profit motive
 Not for profit
motive
 Small and
medium scale
 Large scale
 Agriculture
 Industries
 Services

 The businesses which convert the natural resources into other productions are known
as secondary sector. It converts extracted primary materials to build, manufacture or
develop finished goods. Secondary production can be subdivided as follows. Manufacturing industries: These industries are engaged in producing through
processing of raw materials and thus creating from utilities. Manufacturing
industries can be divided in to as follows.
 Analytical industry which analyses and separates different elements from
materials as in the case of oil refining.
For example; Extracting LPG from natural gas
 Synthetic industry which combines various ingredients to produce a new
product, as in the case of cement.
For example; the perfume industry
 Processing industry which involves successive stages for manufacturing
finished products, as in the case of sugar and paper.
For example; The salt processing unit
 Assembling industry which assembles different component parts to make a
new product as in the case of computer, car, etc.
For example; Mobile phones manufacturing Construction industries: These industries are involves in the construction of
buildings, bridges, dams as well as tunnels.
 The businesses which provide service are known as tertiary sector. These are concerned
with providing support services to primary and secondary industries as well as activities
relating to trade. These industries provide service facilities such as banking, insurance,
advertising, etc.

Following are the classifications of primary, secondary and tertiary according to the nature of
the production.
o Primary sector- Agriculture which involves a range of farming activities. This is probably
the most important primary sector activity for most countries. Most agriculture is
concerned with food production,
Forestry involves managing forests to provide timber for wood products. It also involves
protecting the natural environment, providing access and facilities to the public and
managing wildlife habitats
Fishing involves netting, trapping, angling and trawling fish. It also includes catching or
gathering other types of sea food such as mussels, prawns, lobsters, crabs, scallops and
oysters. China is the world’s largest fish producer.
Mining and quarrying where raw materials such as coal, iron ore, copper, tin, salt and
limestone are dug out of the ground. This sector also includes the extraction of oil and
gas. Saudi Aramco, the largest oil producer in the world, is an example of a business that
extracts oil.
o Secondary sector- Manufacturing industries, Construction industries
o Tertiary sector- Professional services such as accountancy, legal advice and medical
care.
• Transport such as train, taxi, bus and air services.
• Household services such as plumbing, decorating, gardening and house
maintenance.
• Leisure services such as television, tourism, swimming pools and libraries.
• Financial services such as banking, insurance, and pensions.
• Commercial services such as freight delivery, debt collection, printing and
employment agencies
2. According to The ownership
Businesses can be classified as private sector businesses and public (government) sector
businesses according to ownership.
Businesses owned by an individual or a group of individuals are known as private sector
businesses. Private sector businesses can be further classified as sole proprietorship,
partnerships, incorporated companies, cooperative societies and other associations.

Businesses funded and owned by the government are public sector business organizations.
State departments, state corporations, state companies, businesses registered and owned
under Provincial Councils and Local Government Institutions are the different types of business
organizations in the public sector.
3. According to the objectives
Businesses can be classified as profit motive businesses and non-profit motive businesses
according to the objectives.
When the main objective of the business is to earn profits, they are known as profit oriented
businesses. This type of businesses is operated under both private sector and public sector.
The main objective of these businesses is to ensure welfare of members and the society. Not
for profit businesses are also conducted both under private sector and public sector.
4. According to the scale
Businesses can be classified as small and medium scale businesses and large scale businesses
according to the scale.
Accordingly, businesses with a small amount of capital invested, with a small number of
employees and having a small market share relative to large scale businesses are known as
small and medium scale businesses.
Businesses that have invested a large amount of capital, have employed a large number of
employees, have a large market share and have the ability to influence the respective industry
are known as large scale businesses.
5. According to the production sectors
Businesses can be classified as agriculture, industries and services according to the production
sector or source of industries.
The sectorial composition of the GDP is published in the annual report of the Central Bank ff Sri
Lanka.

Mining and quarrying come under primary sector, when classifying according to the nature of
production, but mining and quarrying come under industries when classifying according to the
source of industries. According to the nature of production electricity, gas and water come
under the tertiary sector but according to the source of industries they come under industries.
The sectorial contribution to the GDP can be presented as a percentage. (Refer the latest
annual report of the Central Bank of Sri Lanka).
Auxiliaries to trade:
 Warehousing: To store the goods produced in bulk quantities, to keep the products safe
from damage and to maintain a regular supply of goods in the market is known as
warehousing.
For example; Cold storage warehouse to keep ice-creams fresh
 Transportation: The process of moving the finished products from the industry or
production unit to the marketplace for easy availability to customers is known as
transportation.
For example; Goods train transports a variety of goods on a large scale
 Insurance: Insurance of goods provides financial security against the risk of loss or
damage caused to the products at the time of transport or otherwise.
For example; Fire insurance of the crackers stored in a warehouse
 Banking and Finance: There are financial institutions that provide financial leverage to
the trading firms in the form of business loans and other banking services. Such as fund
transfer, cheque payments, current account transactions, etc.
For example; Commercial banks
 Advertising: To introduce and generate product demand in the market, advertising the
product through newspapers, radio, television, internet, hoardings, etc. is essential.
For example; Hoarding advertisement agencies
 Communication: Communication implies the service facilitating the exchange of opinion
and information between two or people.
For example; Internet service provider

Inputs of a business
Inputs (resources) such as land, labour, capital, entrepreneurship, information, time, ans
knowledge are used for business activities.
Consider an institute that produces finished garments as an example.
 Land - Land where building is situated, Ventilation, Sunlight (Natural light)
 Labour – Physical and mental labour of the tailor, Physical and mental labour of
the supervisor, Mental labour of the managers, Labour of the watchmen
 Capital –Building, Sewing machines, equipment, Distributing vehicles, Materials,
thread, buttons, zips, Money
 Entrepreneurship – Decision maker of the combination of resources (Person who
enjoys profits), Decision maker who undertakes risks, Individuals or institutes
 Information –Designs that suit with consumer taste, New information about raw
materials, Information about new technology, Information about the market
 Time –Working hours of employees, Working hours of machines, Time taken to
make decisions
 Knowledge – Obtaining patents for new products, Skills of garment employees,
knowledge processed by managers, Knowledge of designing technicians, Law
advice
Basic functions of a business
Administration, Production, Marketing, Financial activities, Human resource activities, Research
and development are known as basic functions of business.
Given below are functions of business and some examples.

 Maintain documents related to business activities and maintaining communication are
included in the Administration activities.
 Process that converts resources into goods or services is known as production
(Operation)
 Identifying customer needs and wants and satisfying them are known as marketing.
 Obtaining and investing funds and other activities related to it is known as finance.
 Attraction, selection, recruitment, training, welfare activities are known as human
resource activities.
 Improving the quality of products and innovating new products are included in research
and development.
The production process
Production process can be represented in a diagram as an input – output process as follows.

Business process of a bakery is shown in the following diagram as an input - output process.
Inputs / Resources
Land
Labour
Capital
Entrepreneurship
Information
Time
Knowledge
Business Functions
Administration
Operations (Production)
Marketing
Financial activities
Human resource activities
Research and development
Outputs
Goods or services

Additional notes
Problems in the barter system
Meaning of Barter:
‘Direct exchange of goods against goods without use of money is called barter
exchange.’ An economy based on barter exchange (i.e., exchange of goods for
goods) is called C.C. Economy, i.e., commodity for commodity exchange
economy. In such an economy, a person gives his surplus good and gets in return
the good he needs.
1. Lack of double coincidence of wants:
Double coincidence of wants means what one person wants to sell and buy must
coincide with what some other person wants to buy and sell. ‘Simultaneous
fulfillment of mutual wants by buyers and sellers’ is known as double coincidence
of wants.
There is lack of double coincidence in the wants of buyers and sellers in barter
exchange. The producer of jute dresses want shoes in exchange for his dresses. But
he may find it difficult to get a shoe-maker who is also willing to exchange his
shoes for dresses.
Thus, a seller has to find out a person who wants to buy seller’s goods and at the
same time that must have what the seller wants. This is called double coincidence
of wants which is the main drawback of the barter exchange.
2. Lack of common measure of value:
In barter, there is no common measure (unit) of value. Even if buyer and seller of
each other commodity happen to meet, the problem arises in what proportion the
two goods are to be exchanged. Each article must have as many different values as
there are other articles for which it is to be exchanged.
When thousands of articles are produced and exchanged, there will be unlimited
number of exchange ratios. Absence of a common denominator in order to express
exchange ratios creates many difficulties. Money obviates these difficulties and
acts as a convenient unit of value and account.

3. Lack of standard of deferred payment:
There is problem of borrowing and lending. It is difficult to engage in contracts
which involve future payments due to lack of any satisfactory unit. As a result,
future payments are to be stated in term of specific goods or services. But there
could be disagreement about the quality of the good, specific type of the good and
change in the value of the good.
4. Difficulty in storing wealth (or generalised purchasing power):
It is difficult for the people to store wealth or generalized purchasing power for
future use in the form of goods like cattle, wheat, potatoes, etc. Holding of stocks
of such goods involves costly storage and deterioration.
5. Indivisibility of goods:
How to exchange goods of unequal value? If a household wants to sell his cow and
get in exchange cloth equal to the value of half of his cow, he cannot do so without
killing his cow. Thus, lack of divisibility of goods makes barter exchange
impossible.
In order to overcome the above disadvantages of the barter system, money was
invented by the society.
Reasons for slow growth in E-commerce in provincial wise in Sri Lanka
 Language acts as a barrier
 Lack of IT knowledge
 Lack of infrastructure facilities in provincial wise
 High cost to be incurred in getting internet access
What is M-commerce?
M-commerce is the buying and selling of goods and services through wireless
handheld devices such as smartphones and tablets. As a form of e-commerce, m-
commerce enables users to access online shopping platforms without needing to
use a desktop computer.

It has served as a trigger for new industries and services, or helped existing ones
grow, including: Mobile banking, Mobile marketing, Electronic tickets and
boarding passes, Mobile money transfers.
Globalization
Globalization refers to companies operating internationally or on a global scale.
Globalization means the integration of national economies into the international
economy through trade, foreign direct investment, capital flows, migration, and the
spread of technology. The three main elements of globalization are imports,
exports and business location.
Globalization involves businesses buying and selling around the world, often due
to the cost or availability of products or cheap labour. Additionally, some products
have a reputation for being from a certain part of the world, so versions of the
product from that location may be highly desired.
The process of buying from and selling to overseas countries is also known as
international trade.
Importing refers to the process of purchasing goods or services from overseas
and bringing them into another country.
Exporting refers to a country selling products and services to other countries
around the world.
Elements and new trends of globalization
1. Emergence of new markets
Foreign exchange markets, capital markets, insurance and transportation related
markets emerge in a global scale and operates 24/7.
2. Emergence of new technology
Internet connections, mobile connections, e commerce
3. Emergence of global organizations
WTO, multinational companies and foreign companies takes the lead in global
production.

International fraud court concepts
4. Emergence of new laws and regulations
Laws relating to human rights, Global environment protection, patent rights,
communication, etc.
Promotion of free trade:
 Elimination of tariffs; creation of free trade zones with small or no tariffs
 Reduced transportation costs, especially resulting from development of
containerization for ocean shipping.
 Reduction or elimination of capital controls
 Reduction, elimination, or harmonization of subsidies for local businesses
 Creation of subsidies for global corporations
 Harmonization of intellectual property laws across the majority of states,
with more restrictions.
 Supranational recognition of intellectual property restrictions (e.g. patents
granted by China would be recognized in the United States)
Benefits of Globalization
 By buying products from other nations customers are offered a much wider
choice of goods and services.
 Creates competition for local firms and thus keeps costs down.
 Globalization promotes specialization. Countries can begin to specialize in
those products they are best at making.
 Economic Interdependence among different nations can build improved
political and social links.
 This can lead to more access to capital flows, technology, human capital,
cheaper imports and larger export markets
Drawbacks of Globalization

 Cheap imports from developing nations could lead to unemployment in
developed countries where the cost of production is high.
 Choosing to specialize in certain products may lead to unemployment in
other sectors which are not prioritized.
 Increased competition for infant industry.
 ‘Dumping’ of goods by certain countries at below cost price may harm
industries in order countries.
 Competition among developing countries to attract foreign investment leads
to a “race to the bottom” in which countries dangerously lower
environmental standards
 Cultural uniqueness is lost in favor of homogenization and a “universal culture”
that draws heavily from American culture
Indicators of Globalization
 International trade
o Exports of goods and services in % of GDP
o Imports of goods and services in % of GDP
 Foreign Direct Investment
o Inward FDI stocks in % of GDP
o Outward FDI stocks in % of GDP
The relationship between trade, commerce and businesses
o Trade is the exchange of goods, services, information or ideas between two
or more individuals.
o Commerce is the combination of trade and auxiliary services
o Business is combination of commerce and industries
BUSINESS = INDUSTRIES + COMMERCE
COMMERCE = TRADE + AUXILIARY SERVICES

‘Commerce is not trade. But there is no commerce when there is no trade’.
Comment.
o Commerce is the process that involves from production to delivery of goods
to the end customers. This includes trade and auxiliary services. Therefore,
trade is not commerce but is a part of commerce. In addition, a product,
service, information or an idea that is transferred from one person to another
person is trade while commerce is based on this process.
Commerce is based on excess production.
Trade emerged as a result of exchange of excess production and as auxiliary
services expanded for trade to happen efficiently, it led to the emergence of
commerce. If not trade led for the emergence of commerce and the need for
auxiliary services to conduct trade led to the emergence of trade.
Masflow’s hierarchy of needs
The needs in Maslow’s hierarchy include physiological needs (food and clothing),
safety needs (job security), social needs (friendship), self-esteem, and self-
actualization. This hierarchy addressing five needs can be used by managers to
better understand employees’ motivation and address them in ways that lead to
high productivity and job satisfaction.

Physiological needs: These needs are fundamental or basic need of human being
such as food, water, clothes, shelter etc. Without these needs human being cannot
survive. Therefore, these needs are necessary to operate the human life. In
organization, the manager can provide the adequate lighting, comfortable
temperatures and ventilation etc to motivate the employees at first. These are the
lowest order needs and assume top priority
Safety/ security needs: An individual wants to be free from the fear of losing job,
food, shelter etc which is known as safety or security needs. It is second important
need because after fulfilling physiological need people want the safety and security
needs. These needs may be job security, old age provision, pension plans,
insurance, security from risk etc

Social needs: It is the third hierarchy of needs which comes after fulfilling safety
or security needs. Man is social in nature. Therefore, human beings always want to
live in society or group which loves him/her the most. These needs include love,
affection, friendship, social acceptance etc. So a manager can initiate participation
of the employees as part of association to motivate the people.
Esteem/ego needs: After fulfilling the social needs of people, they now want
esteem needs by which they can have some special and unique place or status for
him/her. They want to be prestigious and respected which is known as esteem or
ego need. It is the second last need of Maslow’s need hierarchy theory. This need
includes self-confident, self-respect, prestige, power, status, job title etc. So s/he
wants to be strong and want to have immense power from which s/he can get self-
satisfaction. A manager can provide the attractive job position to employees to
fulfill esteem or ego needs.
Self-actualization needs: Maslow said that self actualization is the last and highest
need in his hierarchy. After all needs are fulfilled especially including esteem/ego
needs they now want or desire to help others. It is maximization of one’s potential.
In this need people want to be satisfied in their desire. It includes challenging jobs,
creativity, risk bearing capacity etc.
Business Environment
Given below are some of the stakeholders of a business.
 Owners/shareholders  Managers  Employees  Creditors  Customers 
Suppliers  Potential investors  Government  Community  Other parties
Reasons for the interest of each stakeholder are given below.
Owner -  To know if they receive an adequate profit for the money they have
invested
 To find about the growth of the business
 To know the market share
Managers –  To maximize the profit of the business
 To know the growth of the business

 To know the successfulness of the management decisions
Employees –  To obtain a higher salary
 To obtain a bonus
 To get promotions
Debtors –  To know the ability of recovering the loans
 To know the safety of the lendings To ensure the safety of collaterals
Customers –  To receive quality goods and services
 To see if the responsibilities are fulfilled properly.
 To ensure the existence of the business
Supplies –  To receive continuous orders
 To collect money back for the goods supplied
Potential Investors –  To invest their resources in that business in future
Government –  To collect taxes/ to give tax reliefs
 To improve the employment
 To measure the economic development
Community -  To know about the environment protection.
 To obtain job opportunities.
Given below are some reasons for the importance of stakeholders to a business.
Parties Reasons for the importance to a business.
Owners -:  To increase the investment To ensure the existence of the business

Employees -:  To improve the employees’ efficiency
 To retain the employees To get the employee attraction
Debtors -:  To obtain the funds continuously
 To obtain the funds at low cost
Government - :  To get tax reliefs To get infrastructure facilities
 To obtain technological knowledge
Customers -:  To protect the market of the relevant goods and
services
 To build up consumer confidence
 To create consumer loyalty
Business Environment
The environment, in which the factors which influence the business operate, is
known as business environment. Business operates in Unique Environment and
cannot function in isolation. • Business is like open systems which continuously
interacts with environment i.e. Business enterprises exist in and are surrounded by
an ‘environment’ called as the business or organisational environment. • Society
and business enterprises are mutually dependent i.e. Business enterprises satisfy
societal needs. Relationship between society and business enterprises takes place in
a changing environment
Importance Of Business Environment

 Firm to identify Opportunities and getting the first mover advantage.
E.g. Maruti for small cars. Firms to identify threats and early warning signals. E.g.. Multinational entering
Indian market. Continuous learning: Environmental analysis makes the tasks of managers easier
in dealing with business challenges. Image Building: By showing their sensitivity towards the environment. E.g.
Captive power plants in factories. Meeting competition: It helps the firms to analyze the competitors’ strategies
and formulate their own strategies accordingly. Identifying firms strengths and weaknesses.
Factors of business environment can be categorized into two
1. Internal Environment
2. External Environment