Classification of Businesses

Classification of Businesses

Learning Objectives

• Understand that business activity falls into three different sectors.
• Understand the changes in sectors that have occurred over time.

Primary Sector

• Involves extracting raw materials from the earth.
• Examples:
  • Agriculture: Farming activities (food production, flowers, tropical fish). One of the most important activities for some countries.
  • Fishing: Netting, trapping & trawling for fish; China is the world's largest fish producer.
  • Forestry: Provides timber & protects the natural environment, providing access & facilities for the public & managing areas for wildlife.
  • Mining & Quarrying: Extraction of raw materials such as coal, iron, salt.

Secondary Sector

• Production involves the conversion of raw materials into finished and semi-finished goods.
• Includes all manufacturing, processing, and construction.
• Semi-finished goods are produced for other businesses & used for the production of finished goods, which are then sold to consumers.
• In developed countries, the secondary sector has declined.

Tertiary Sector

• The provision of a wide variety of services.
• Examples:
  • Commercial: Freight delivery, debt collection, printing & employment agencies.
  • Financial: Banking, insurance, investment advice, and pensions.
  • Household: Plumbing, decorating, gardening, and house maintenance.
  • Leisure: Television, tourism, hotels, and libraries.
  • Professional: Accountancy, legal advice, and medical care.
  • Transport: Train, taxi, bus, and air services.

Case Study: Agricultural Employment (Andalucía, Southern Spain)

• The largest olive-growing region in the world.
• Many growers are small family businesses.
• The Casillas family grows olives and sells their harvest to a local business that processes the olives into oil, much of which is exported.
• Harvest time is between November and March.
• They usually employ about 15 villagers to help out.
• Marco Casillas is considering investing in harvesting machinery to reduce labor costs and remain competitive.
• Primary vs. Secondary Sectors (in this case study):
  • Primary sector: Olive growing by the Casillas family (farming).
  • Secondary sector: Olives being processed into olive oil using machinery; cleaning process to ensure purity.
• Agricultural Employment in Spain (1980-2010):
  • Significant decline in the number of people employed in agriculture.
  • Fallen from around 19% in 1980 to just under 5% in 2010.
• Reason for the Decline:
  • Advances in technology: Farmers may rely more heavily on machines due to the growing availability of affordable technology.
  • Example: Marco Casillas considering purchasing harvesting machinery to reduce labor costs and remain competitive.

Interdependence

• Businesses in all three sectors rely on each other.
• Example:
  • Cereal farmers (primary) rely on bakers (secondary) for their sales of wheat.
  • Bakers depend on advertising agencies (tertiary) to produce newspaper adverts for their products.
• In modern developed economies, interdependence is significant.

Changes in Sectors

• Different sectors grow and decline; the number employed in each changes over time.
• Historical Context (UK):
  • Before the Industrial Revolution: Most production in the primary sector.
  • Mid-19th Century: Secondary sector expanded rapidly.
  • Last 60 years: Tertiary sector expanded at the expense of agriculture and manufacturing (de-industrialization).

Reasons for Manufacturing Decline

• People prefer to spend income on services rather than manufactured goods.
• Fierce competition in the production of goods from countries like China, India, & Brazil.
• As countries develop, the public sector (mostly services) grows.
• Advances in technology: Employment in manufacturing falls as machines replace people.

Case Study: Hisense (China)

• China is well-known for its manufacturing capabilities due to its cheap and large supply of labor.
• Hisense is a large state-owned Chinese manufacturer of white goods, electrical goods, and related products.
• Hisense also provides services such as product design, information technology services, and property management.
• Hisense has opened two new research and development centers.
• Changes in China's Economy:
  • Significant changes in the proportion of people employed across the primary, secondary, and tertiary sectors between 1990 and 2015.
  • 1990: 60% in agriculture, 22% in the secondary sector, and 18% in the tertiary sector.
  • 2015: 28.3% in agriculture, 29.3% in the secondary sector, and 42.4% in the tertiary sector.
• China's Economy Becoming More Balanced:
  • Less dependence on agriculture in 2015 compared to 1990.
  • Potential for future imbalance as it becomes more dependent on services.

De-industrialization

• Occurs in well-developed countries (e.g., USA, Germany, Japan, France).
• Involves the decline of the manufacturing sector at the expense of the tertiary sector.
• Many western-style economies have seen a sharp fall in manufacturing employment and a steady increase in services.

Causes of De-industrialization

• Change in consumer demand: Shift towards spending on services rather than manufactured goods (e.g., holidays, restaurants).
• Competition in manufacturing: Fierce competition from developing countries (e.g., India, China, Thailand, Brazil) with cheaper production costs.
• Growth of the public sector: Public sector mainly provides services (e.g., education, transport, healthcare).
• Advances in technology: Machines replace people in manufacturing, leading to a fall in employment.

Interdependence Between Sectors (Hisense Example)

• Hisense may rely on retailers and other distributors to sell its manufactured goods to consumers.

Review Questions & Answers

• Difference between secondary and tertiary production:
  • Secondary sector: Manufacturing and processing (conversion of raw materials into goods). Example: Hisense manufacturing white goods and electronic products.
  • Tertiary sector: Provision of services. Example: Hisense providing IT and design services.
• Evidence of a more balanced Chinese economy since 1990:
  • Decrease in agricultural employment from 60% to 28.3%.
  • Increase in tertiary sector employment from 18% to 42.4%.
  • Increase in secondary sector employment from 22% to 29.3%.
• Interdependence:
  • Cereal farmers (primary) rely on bakers (secondary) for wheat sales.
  • Bakers may depend on advertising agencies (tertiary).
  • The transport industry (tertiary) relies on the oil industry (primary) for fuel.
• What is de-industrialisation?
  • The decline of the manufacturing sector and expansion of the tertiary sector
• Causes of de-industrialisation:
  • A change in consumer demand
  • Competition in manufacturing
  • Growth of the public sector
  • Advances in technology