Industry Classification

Publication Date :

18 Jan, 2025

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Table Of Contents

What Is Industry Classification?

Industry classification refers to the categorization of businesses into groups based on their characteristics or common modes of operation. The main purpose of this classification is to segregate and label companies according to their business activities within a particular industry. It provides insights and information on the overall state of the industry.

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There are different classification systems used by industries and countries worldwide. Some of the popular industry classification systems include the North American Industry Classification System (NAICS), the Global Industry Classification Standard (GICS), the Refinitiv Business Classification, and the Industry Classification Benchmark (ICB).

Key Takeaways

Industry classification refers to categorizing companies and enterprises into specific groups based on their nature, mode of operation, size, raw materials, ownership, and type.
Some of the renowned classification systems include NAICS, GICS, ICB, and the Refinitiv Business Classification.
These classification standards are further divided into categories such as sectors, industry groups, industries, and sub-industries, with each group assigned a unique code.
Industry classification plays an important role for governments and policymakers in making informed decisions and formulating policies.

Industry Classification Explained

Industry classification systems create a framework for categorizing establishments (businesses and companies) under certain industry heads. They group businesses based on factors such as size, raw materials, ownership, and type. For example, if a firm is engaged in the marine (fishing) business, it would fall under the marine industry. Similarly, revenues also play a vital role in the classification of industries. However, the deciding factor in most industries is the product, good, or service they deal in.

The GICS and North American Industry Classification System (NAICS) are the most commonly used among popular classifications. The GICS categorizes public companies into well-suited industry groups and economic sectors. It is a four-tiered system that includes 11 economic sectors. These sectors are further subdivided into 24 industry groups, 69 industries, and 158 sub-industries.

In the same manner, NAICS is a six-digit system applicable in nations like Canada, Mexico, and the United States. It replaced the Standard Industrial Classification (SIC), which did not account for the inclusion of the information sector. NAICS divides the economy into 20 major sectors and 1,170 industries. Of these 20 sectors, 5 belong to the goods-producing industries, while the remaining 15 are service-producing industries.

Additionally, industry classification codes (two-, three-, four-, five-, and six-digit codes) are used to refer to specific industries. For example, code 31 refers to the manufacturing sector. Under it, the subsector starts with “33x,” followed by the industry group “33xx,” industry “33xxx,” and finally, the U.S. industry code “33xxxx.”

Types Of Industries

Based on different parameters, industry classification systems have created categories suitable for various industries. Let us look at each type of classification in detail:

Classification by Size: Industry size often refers to market capitalization, capital invested, number of employees, or volume of production. Under this category, industries are further classified into small-scale, medium-scale, and large-scale. Small-scale industries with limited resources and production volume operate at a basic level. These are often self-owned and employ minimal capital and staff. In contrast, medium-scale industries have more capital and resources but are not as powerful as large-scale businesses. They also tend to have a wider presence than small-scale industries but still fall short compared to large-scale operations.
Classification by Raw Materials: As the name suggests, this category relates to the type of raw materials involved in production. Examples include agro-based industries, marine industries, mineral-based industries, livestock-based industries, and forest-based industries. Businesses involved in stainless steel, iron, paper, pulp, crops, and livestock fall into this classification.
Classification by Ownership: Ownership can fall under either the public or private sectors. Industries can be owned by the government or private entities. In some cases, ownership may be shared, forming joint ventures. Additionally, businesses that do not belong to either the public or private sectors are typically classified as part of the cooperative sector.
Classification by Type: Another way of classifying industries is based on the type of goods or services involved. This classification differs from raw materials as it focuses on understanding the nature and scope of the business. The primary industries rely on natural resources, secondary industries produce finished goods from raw materials, tertiary industries provide services (e.g., banking, healthcare, teaching), and quaternary industries focus on information-based services such as education, scientific research, and development.

Examples

Let us look at some examples of such classification that relate to the concept and the real world:

Example #1

Suppose James and Kevin are businessmen and childhood friends. While James owns a paper mill that produces paper from wood pulp, Kevin operates a mining site that extracts minerals from the earth’s crust. Both have different business models. James’s business falls under the industry classification by raw materials and is part of the secondary sector. In contrast, Kevin also belongs to the raw materials classification but operates in the primary sector.

Similarly, if James had not decided to make paper from pulp and instead just sold wood, his business would fall under the primary sector. The act of converting raw material (pulp) into finished products classifies the business in the secondary sector.

Example #2

According to a news article published in March 2024, Relativity6, a leading company in industry classification, announced a collaboration with Linq360, an entity resolution provider. Their goal is to tackle the issue of small and commercial data collectively. Additionally, they aim to address one of the biggest challenges in this space—finding and identifying small and micro businesses. With cutting-edge AI technology, this partnership could redefine industry classification.

Importance

Industry classification systems have been of great interest to investors, financial institutions, and government agencies, helping to reduce disorganization and bring structure to industries. However, there's more to consider to fully understand the significance of these classifications. Let's explore briefly:

Insights on the Economy and Numbers: The primary purpose of industry classification is to support the growth of the economy. Through categorization, it becomes possible to analyze the structure of the economy and each industry's role within it. Additionally, classification offers insights into a sector’s contribution to the economy, often reflected in key statistics and data.
Policy-Making: Industry classification helps policymakers analyze and understand the specific needs of various sectors. This enables them to create policies that support growth, improve sector-specific development, and foster job creation.
Benchmark for Strategic Decisions: Industry classification also facilitates comparative analysis across different industries, providing a benchmark for tracking performance and identifying trends over time. This statistical insight allows businesses and investors to make more informed strategic and investment-related decisions.