Industry group

What Is an Industry Group?

An industry group is a classification used to categorize companies that engage in similar lines of business and generate revenue from comparable products or services within an overarching economic sector. This concept is fundamental to financial classification systems, providing a structured framework for organizing companies based on their primary economic activity. Industry groups are often a mid-tier level in hierarchical classification schemes, sitting between broader sectors and more granular industries or sub-industries. They help investors, analysts, and policymakers gain a clearer understanding of market dynamics and facilitate more precise market analysis.

History and Origin

The need for standardized ways to classify businesses became apparent with the growth and complexity of global financial markets. Early attempts at company classification were often proprietary or government-specific, leading to inconsistencies. A significant development in private sector classification was the Global Industry Classification Standard (GICS), established in 1999 by MSCI and S&P Dow Jones Indices. GICS was designed to provide a universal framework for investment research and portfolio management by categorizing companies into a four-tiered structure: sectors, industry groups, industries, and sub-industries.⁶ Before GICS, various national systems existed, such as the Standard Industrial Classification (SIC) system in the U.S.

In North America, a notable government-led initiative is the North American Industry Classification System (NAICS), developed jointly by the U.S., Canada, and Mexico. Adopted in 1997, NAICS replaced the SIC system and aimed to allow for a high level of comparability in business statistics across the three countries.⁵ Both GICS and NAICS, along with other systems like the Industry Classification Benchmark (ICB), continuously evolve to reflect changes in the global economy and the emergence of new business models.

Key Takeaways

• An industry group is a mid-level classification that clusters companies with similar business activities.
• It serves as an intermediate category between broad sectors and more specific industries or sub-industries.
• Standardized industry group classifications, like those found in GICS and NAICS, are crucial for investment analysis, economic data reporting, and regulatory purposes.
• Proper classification into industry groups aids in assessing market trends and identifying competitive landscapes.
• Industry groups help investors achieve diversification by enabling exposure across different economic segments.

Interpreting the Industry Group

Understanding a company's assigned industry group provides crucial context for investors and analysts. It helps in assessing a company's competitive environment, regulatory landscape, and exposure to specific business cycles. When evaluating a company, its industry group helps identify direct competitors and benchmarks for performance comparison. For instance, a company classified within the "Software & Services" industry group would be analyzed against other software and service providers, rather than, for example, companies in the "Automobiles & Components" sector. This level of classification allows for more granular insights than a broad sector classification but still aggregates enough companies to provide meaningful statistical analysis.

Hypothetical Example

Consider an investor, Sarah, who is building a well-diversified portfolio. She wants to invest in technology but also manage risk within that broad area. She decides to allocate funds to different industry groups within the Information Technology sector. Instead of just buying a broad technology exchange-traded fund, she researches companies categorized under the "Semiconductors & Semiconductor Equipment" industry group, the "Software & Services" industry group, and the "Technology Hardware & Equipment" industry group.

For the "Software & Services" industry group, she identifies several companies, including a cloud computing provider and a cybersecurity firm. While both are in software, they belong to different sub-industries within this group, offering Sarah further granularity for her investment choices. This approach allows her to gain exposure to different facets of the technology sector while making informed decisions based on the specific dynamics of each industry group.

Practical Applications

Industry groups are widely applied across various facets of finance and economics. They are integral to investment strategy, guiding decisions related to asset allocation and risk management. Portfolio managers utilize industry groups to ensure their portfolios are adequately diversified across different economic segments, rather than being overly concentrated in a single area.

Beyond investing, industry groups are critical for:

• Economic Analysis: Government agencies, such as the U.S. Bureau of Economic Analysis (BEA), collect and publish economic data categorized by industry. This allows policymakers and researchers to track the performance, growth, and trends of specific segments of the economy. For example, the BEA provides data on gross domestic product (GDP) by industry, offering insights into which parts of the economy are expanding or contracting.⁴
• Market Research: Businesses use industry group classifications to identify competitors, analyze market size, and pinpoint potential growth areas.
• Regulatory Oversight: Regulators may use industry groups to monitor specific market segments for compliance, antitrust issues, or systemic risks. The U.S. Census Bureau, for instance, uses NAICS codes to classify business establishments for statistical data collection related to the U.S. business economy.³
• Lending and Credit Analysis: Financial institutions often assess the creditworthiness of borrowers based on the industry group they belong to, as different industry groups carry varying levels of risk and cyclicality.

Limitations and Criticisms

While industry groups provide a valuable framework for categorization, they are not without limitations. One significant challenge is the rapid evolution of business models, especially with the rise of technology and diversified conglomerates. A single company may operate across multiple traditional industry groups, making it difficult to assign a singular, representative classification. For instance, a technology giant might have significant revenue streams from e-commerce (Retail), cloud services (Information Technology), and content creation (Communication Services). This can lead to companies being classified in a way that doesn't fully capture their diverse operations.

Furthermore, the rigid nature of some classification systems means they can lag behind real-world economic shifts. As new financial instruments and information technologies emerge, the distinctions between traditional financial intermediaries and non-bank entities can blur, posing challenges for clear classification.² Critics suggest that a purely "vertical" industry emphasis might need to shift towards classifications centered on business models to better reflect the complexity of modern enterprises.¹ This ongoing dynamic necessitates periodic revisions of classification standards to maintain their relevance and accuracy for effective market analysis and policymaking.

Industry Group vs. Industry

The terms "industry group" and "industry" are often used interchangeably, but in formal classification systems, they represent distinct levels of granularity. An industry group is a broader aggregation of companies that share general business characteristics, serving as a mid-level organizational category within a larger sector. For example, within the broader "Information Technology" sector, "Software & Services" is an industry group.

An industry, on the other hand, is a more specific and narrower classification within an industry group. It comprises companies that provide very similar products or services and often compete directly with one another. Following the previous example, within the "Software & Services" industry group, you might find "Application Software" or "IT Consulting & Other Services" as specific industries. The key difference lies in the level of detail; an industry offers a more granular view of competitive landscapes and specific business activities than its parent industry group.

FAQs

What is the purpose of classifying companies into industry groups?

The purpose is to provide a standardized, hierarchical framework for organizing companies based on their primary business activities. This facilitates investment analysis, economic research, competitive benchmarking, and regulatory oversight by allowing for systematic comparison and aggregation of data.

How do industry groups differ from sectors?

Sectors are the broadest categories in most classification systems, representing major divisions of the economy (e.g., Financials, Healthcare). Industry groups are the next level down, segmenting these broad sectors into more specific clusters of related businesses (e.g., within Financials, there might be "Banks" or "Capital Markets").

Are all companies assigned to an industry group?

Yes, in common classification systems like GICS and NAICS, every publicly traded company or business establishment is assigned to a specific industry group (and a corresponding sector, industry, and sub-industry/activity code) based on its primary revenue-generating activity.

Can an industry group change over time?

Yes, industry groups and the broader classification systems they belong to are periodically reviewed and updated. This is necessary to reflect the evolution of markets, the emergence of new technologies, and changes in how companies generate revenue, ensuring the classifications remain relevant and accurate.

Where can I find information on industry groups for specific companies?

Information on industry group classifications for publicly traded companies is often available through financial data providers, brokerage platforms, and the websites of the classification standard creators like MSCI and S&P Dow Jones Indices. For government statistical classifications, resources like the U.S. Census Bureau website are primary sources.