What Is an Industry Code and How Should It Be Used for Benchmarking?
May 23, 2011
Industry categories do exist to classify the various types of enterprises that make goods or provide services. There is a problem, however: the kinds of categories used by bureaucrats, economists, data collectors and information classifiers are not the kind of industry categories used by the typical person on the street.
If the organization is a fast-food place, for example, it is really a subset of the Standard Industrial Classification (SIC) code for Eating Places. SIC codes are used by the Securities and Exchange Commission that regulates corporate stock markets, so that code remains in use even though it is an old-fashioned four-digit code. The new North American Industry Classification System (NAICS) required on American business tax returns has more digits and provides for both Take-Out Eating Places and Buffet Eating Places. But there is no officially recognized industry named “fast food” in the United States, Canada or Mexico, which all use the NAICS code system.
With more prevalent terms like “technology,” people often make casual reference to high-tech or IT as industries when those are just terms that describe a process. There is no formal industry for high-tech. Even in the new NAICS code that was last updated in 2007, there is only one place in which the word “technology” appears in connection with an industry, and that is code 712110 Science and Technology Museums.
Let’s take a look at rose-growers classified under agriculture in the SIC system. To be precise, they are in nursery production under rose bush growing and rose bush cutting under the NAICS code. Dealing with individual roses (not full bushes) probably falls under floriculture production or retail flower shops.
Farming isn’t recognized as a separate “industry,” although some formal industry titles do identify General Farms, Strawberry or Orange Farms and Dairy Farms in the old four-digit SIC system. There are 339 NAICS industry codes with the word farm in them, yet there is no specific industry code for general farming in the newer six-digit industry coding system.
Everyone talks about “eCommerce” yet that “industry” doesn’t even exist in any officially recognized classification system. Google is SIC 7371, Services – Computer Programming, Data Processing, etc., which is pretty vague. One analytical reporting service (ERI Economic Research Institute) has renamed that category Information Technology in its modernized industry classification scheme (attempting to be more representative of the modern business world) and would label it SIC = 7370 Information Technology. The biggest eCommerce firm, eBay, calls itself SIC 7389 Services – Business Services n.e.c. (Not Elsewhere Classified). It should come as no surprise in this fast-changing world that a lot of industry strings include a final section labeled N.E.C.
Frequently additional research is required to find out exactly which industry should apply. Some organizations have multiple industry classification identities because they are conglomerates that combine different kinds of business or have units that cut across different industry sectors. In one of the initial paragraphs of the electronic proxy record in the United States, there will be a SIC or NAICS code or two identifying the primary industry. It frequently displays the secondary and tertiary codes covered by the enterprise also. Other nations have different protocols for their industry classifications, with the EU and the UN leading those initiatives: http://www.lib.strath.ac.uk/busweb/guides/indclassguide.htm
Although the topic may appear simple, it is critical for making valid comparisons and benchmarks.