SQA Higher Business Management

What business activity does

A business takes inputs such as raw materials, labour, premises and money, and turns them into goods or services that people want to buy. When the output is worth more to customers than the inputs cost, the business has added value. A baker who turns flour, yeast and an hour of work into bread that sells for far more than the ingredients cost has added value, and the difference pays the wages, the rent and the owner's return.

Businesses matter to society beyond the goods themselves. They create jobs, and those jobs give people an income to spend elsewhere in the economy. They pay taxes, which fund schools, hospitals and roads. They help satisfy the needs of customers, and because they compete for those customers they have a reason to improve products, cut prices and bring in new ideas. They also create wealth for owners and shareholders, and for the pension funds that hold shares on behalf of ordinary savers.

The same activity can cause harm. A factory may pollute a river, a retailer may pay low wages, and a company that closes a plant may leave a town without work. Society therefore expects businesses to operate within the law and increasingly within ethical standards, which is why social responsibility appears as an objective in its own right.

Customer needs change, and so does the environment businesses work in. New technology, a change in tastes or a new competitor can make a successful product out of date, so a business has to keep adapting if it is to keep adding value.

Sectors of industry

Industries are grouped by what stage of production they carry out.

Each sector depends on the others. A fish farm in the primary sector supplies a processing plant in the secondary sector, which supplies a supermarket in the tertiary sector, and each of them may buy advice or software from the quaternary sector.

In developed economies such as the UK, most people are employed in the tertiary sector, with the primary sector employing relatively few because of mechanisation. As an economy develops, the weight of activity tends to move from primary towards secondary and then tertiary and quaternary work. The movement matters to a business because the skills it needs and the customers it serves change along with it.

Sectors of the economy

The economy can also be divided by who owns and controls the organisation.

• The private sector is made up of organisations owned by individuals or groups of shareholders and run mainly to make a profit, such as sole traders, partnerships, private limited companies and public limited companies.
• The public sector is made up of organisations owned and controlled by central or local government and paid for mainly from taxation, such as the NHS, state schools and local councils.
• The third sector is made up of organisations that are neither owned by the government nor run to make a profit for owners: charities, voluntary groups and social enterprises. Any surplus they make goes back into their purpose.

Some activity sits across the boundary. A state-owned body that sells services at a charge, or a charity that runs shops, behaves partly like a private business, and a private company may deliver a service that the public sector pays for. Knowing which sector an organisation sits in tells a student its likely objectives, where its money comes from and who controls its decisions.