A good way to think of a business is to imagine inputs entering an imaginary black box. What come out of the box are outputs. The black box is the business – what is does how it does it and so on.
A business needs resources in order to trade. The activities of a new business should be designed to turn those resources into products and services that customers are willing to pay for. This process is known as the "transformation process".
If the value of what customers pay for the outputs is more than the cost of the inputs, then the business can be said to have "added value".
So, in summary, the transformation process is about adding value.
That sounds pretty theoretical. So, let's take a look at some practical examples of what is involved in the transformation process.
In order to make products and deliver services, a business needs resources – i.e. inputs. The textbooks often refer to these as "factors of production", which is a slightly boring way of describing real resources such as:
Labour – the time and effort of people involved in the business: employees, suppliers etc
Land – think of this as the natural resources that are used by the business – e.g. actual land, energy, and other natural resources
Capital – capital includes physical assets such as machinery, computers, transport which are used during production. Capital can also include finance – the investment that is required in order for the business activities to take place.
Enterprise – enterprise is the entrepreneurial "fairy-dust" that brings together or organises the other inputs. The entrepreneur takes the decisions about how much capital, what kind of labour etc and how & when they are needed in the business. You will probably agree that enterprise is the most important input for a successful business.
Inputs by themselves are rarely enough for a start-up to succeed. They need to be the right kind of inputs, in the right mix. So, for example, a successful entrepreneur will be keen to ensure:
High quality people are employed (the best the business can afford at each stage of development) and that these people are retained and invested in (training)
Capital investment is focused on efficiency and quality – use of modern machinery or IT systems of the right kind can have a significant effect whether a small business is able to compete
The outputs of business activities are reflected in the products and services sold to customers. It is quite useful to think of ways in which similar business activities can be grouped based on those outputs.
Economists and business examiners alike have traditionally categorised the outputs from the transformation process into these three groups:
Extraction of natural resources (e.g. oil, gas) and farming activities
Production of finished goods and components (e.g. flat-screen TVs, computer memory chips, games consoles, industrial equipment, motor vehicles. The secondary sector is also often referred to as the "manufacturing sector".
Providing a service of some kind. E.g. health, travel, legal, finance, building, security. The list of potential services is endless. Think of this as any business activity that involves people doing things for you! Retail businesses are in the tertiary sector.
In recent years, some textbooks have also suggested that there is a fourth sector – the Quaternary sector. The quaternary sector consists of those industries providing information services, such as computing and ICT (information and communication technologies), consultancy (offering advice to businesses) and R&D (research, particular in scientific fields).
In most textbooks you will see the outputs of the Quaternary sector included in the tertiary sector. Don't worry; the distinction isn't important. What is important is that you remember that the Tertiary sector in the UK has grown strongly over recent decades and now accounts for about 75% (three quarters) of all business activity.
A final word about the categorisation of business activities (outputs) into sectors. Remember that is perfectly possible for a single business to be operating in more than one sector.
For example, many farms in Britain (farming = primary sector) also offer holiday accommodation (tertiary sector) and produce processed foods such as cheese and ice-cream from farm supplies (secondary sector).
Here is another example. Morrison's supermarkets (i.e. tertiary sector - one of the four largest supermarkets in the UK) also own and operate its own factories that make many of the food products sold in store (secondary sector).