Industry Explained: Types, Classification, and How It Works 

Industry is the backbone of any economy. It encompasses the vast network of businesses and organizations that produce goods and services. Whether it’s the steel plant that manufactures beams for skyscrapers or the bakery that supplies your neighborhood with fresh bread, every industry plays a crucial role in fulfilling our everyday needs.  This comprehensive guide will delve into the various ways industries are categorized, helping you gain a deeper understanding of this fundamental economic concept.

Industry defined

An industry is an economic activity that goes beyond just factory walls. While manufacturing certainly plays a major role, the term encompasses a much broader landscape. Industry refers to the entire system of businesses and organizations that produce goods and services. These can range from the steel plant that manufactures beams for skyscrapers to the bakery that supplies your neighborhood with fresh bread or even the tech startup developing the next game-changing app.

Companies within an industry typically offer products or services that meet similar customer needs. For example, carbonated drinks, fruit punches, and bottled water can all be considered part of the beverage industry. 

While they may have distinct flavors, they all quench your thirst and serve as non-alcoholic refreshments. Industry classification comes into play when similar businesses are grouped together. 

Industry classification

Industry classification is more than just a fancy term. It’s a powerful tool used by a wide range of players in the economy, from government agencies to investors, to understand how different industries function and interact.

Why classify industries?

Imagine trying to analyze the health of the economy without any organization. Industry classification brings order to the chaos. Here’s how different groups benefit:

• National agencies: They use classifications to track job creation, measure the value of goods produced (GDP), and develop economic policies.
• Stock market analysts: Classifications help them understand the underlying characteristics of an industry, which is crucial for building a well-diversified investment portfolio.
• Banks: Banks use industry classification to assess risk and prioritize lending decisions. Certain industries may be considered more promising than others.

Navigating the classification landscape

There isn’t a single, universal way to classify industries. Different countries and organizations have developed their own systems, but they all share the same core principle: grouping companies based on shared characteristics. 

While national classifications are important, understanding international systems can provide a broader perspective on how industries function across borders. Here’s a closer look at some key international classifications:

• ISIC (International Standard Industrial Classification of All Economic Activities): Developed by the United Nations, ISIC is the foundation for most industry classification systems around the world. It categorizes industries based on the type of activity (e.g., agriculture, manufacturing, services) and the products or services produced. Think of ISIC as the global blueprint for classifying industries.
• NAICS (North American Industry Classification System): The United States, Canada, and Mexico collaborated to create NAICS, which is heavily based on ISIC. However, NAICS incorporates regional considerations specific to North America. This might involve further segmentation of industries or the creation of new categories relevant to the region’s economic landscape.
• SIC (Standard Industrial Classification): Once the dominant system in the US, SIC has been superseded by NAICS. However, it’s still valuable for historical data analysis as some financial information might be categorized according to the older SIC system. Understanding SIC can be helpful when interpreting historical economic trends.
• ICB (Industry Classification Benchmark): Developed by FTSE Russell, a leading financial data provider, ICB focuses specifically on investment analysis. It categorizes industries based on their investment characteristics, such as growth potential, risk profile, and sensitivity to economic cycles. Investors can leverage ICB to compare companies within similar investment categories across different countries.
• GICS (Global Industry Classification Standard): A joint effort by Standard and Poor’s and Morgan Stanley Capital International, GICS is another investment analysis-oriented classification system. Similar to ICB, GICS groups industries based on shared investment characteristics but with a slightly different methodology. Both ICB and GICS offer valuable tools for investors seeking to build globally diversified portfolios.

Industry classification by source of raw materials

One way to classify industries is by the source of their raw materials. This approach sheds light on the fundamental building blocks of different industries. Here’s a breakdown of the main categories:

Extractive industries: These industries are the primary source of raw materials, directly harvesting them from nature. Examples include:

• Agriculture: Growing crops and raising livestock for food, fiber, and other agricultural products.
• Mining: Extracting minerals and metals from the earth’s crust, used in construction, manufacturing, and various other applications.
• Fishing: Catching fish and other seafood, a vital source of protein for human consumption.

Non-extractive industries: These industries take raw materials from other industries and transform them into finished goods. Examples include:

• Plywood industry: Uses logs from the forestry industry to create sheets of plywood for construction purposes.
• Food industry: Takes raw agricultural products like wheat, milk, and vegetables, and processes them into consumable food items.
• Metal industry: Uses raw metals extracted by the mining industry to produce various metal products like sheets, bars, and wires used in manufacturing.
• Spinning industry: Converts raw fibers like cotton or wool into yarn, which is then used in the textile industry to create fabrics.

Facilitative industries: These industries provide services that support other industries but don’t directly produce physical goods. Examples include:

• Tourism industry: Provides services like accommodation, transportation, and entertainment to tourists, facilitating travel and leisure activities.
• Finance industry: Offers financial services like banking, insurance, and investment to businesses and individuals, enabling economic transactions and growth.
• Trade industry: Facilitates the exchange of goods and services between businesses and consumers, acting as a bridge between producers and markets.

Industry classification by capital requirements

Another key factor used to classify industries is the amount of capital they require to operate. This capital can come in the form of expensive machinery, factories, and infrastructure. Here’s how industries stack up based on their capital intensity:

Heavy industries: These are the big spenders of the manufacturing world. They require massive upfront investments in large-scale equipment, factories, and transportation infrastructure. Examples of heavy industries include:

• Steel industry: Producing steel involves massive blast furnaces, rolling mills, and transportation networks to move heavy raw materials and finished products.
• Heavy equipment industry: Manufacturing excavators, bulldozers, and other construction machinery require significant investment in specialized equipment and facilities.
• Automotive industry: Setting up assembly lines for complex vehicles like cars and trucks demands substantial capital for machinery, robotics, and production facilities.

Light industries: In contrast to their heavy counterparts, light industries operate with a much lower capital burden. They often rely more on human labor and less on expensive machinery. Examples of light industries include:

• Restaurants: While some restaurants may have significant investments in kitchen equipment, the overall capital requirements are typically lower compared to heavy industries.
• Clothing manufacturing: While some automation exists, garment production often relies on a skilled workforce using sewing machines and other relatively affordable equipment.

Industry classification by business scale

The number of employees and overall business scale are another lens through which industries can be classified. This approach provides insights into the size and structure of different industry players. Here’s a breakdown of common classifications based on business scale:

Home industry: These are typically family-run businesses with a very small workforce, often fewer than four people. They usually operate from a home environment and have limited capital. Examples include businesses producing:

• Tofu: A traditional fermented soy product often made in small batches.
• Chips: Small-scale production of potato chips or other snack foods.

Small industry: These businesses employ a small group of workers, typically between 5 and 9 people. They often operate locally and have relatively limited capital compared to larger industries. Examples include:

• Brick industry: Production of bricks for construction purposes, often on a smaller scale.
• Tile industry: Manufacturing ceramic or concrete tiles for flooring or wall applications.

Medium industry: These businesses have a more established structure with a workforce ranging from around 20 to 99 people. They typically possess more capital than smaller industries and may have some level of automation or advanced equipment. Examples include:

• Convection industry: Businesses specializing in made-to-order clothing production.
• Ceramic industry: Manufacturing ceramic products like tableware, sanitary ware, or decorative items.

Large industry: These are the industrial powerhouses, employing a large workforce exceeding 100 people and possessing significant capital resources. They often have complex organizational structures and advanced technology and operate on a national or even international scale. Examples include:

• Automotive industry: Large-scale production of cars, trucks, and other motor vehicles.
• Base metal industry: Manufacturing of basic metals like aluminum, copper, and steel, used in various industrial applications.
• Electronics industry: Production of electronic devices like computers, smartphones, and consumer electronics.

Industry classification by type of product

Industries can also be classified based on the type of product or service they provide. This categorization sheds light on the role different industries play in the overall economy. Here’s a breakdown of the three main categories:

Primary industries: These industries are directly involved in extracting or harvesting raw materials from nature. They are the foundation of the economic pyramid, providing essential resources for other industries. Examples of primary industries include:

• Food and beverage industry: This industry encompasses the production of agricultural products like fruits, vegetables, grains, and livestock and the processing of these raw materials into consumable food and beverages.
• Forestry industry: This industry involves harvesting trees and other forest products, which are used in construction, paper production, and various other applications.
• Mining industry: Extracting minerals and metals from the earth’s crust, which are then used as raw materials for a wide range of industries.

Secondary industries: These industries take raw materials produced by primary industries and transform them into finished goods. They are the manufacturing engine of the economy, converting raw materials into usable products. Examples of secondary industries include:

• Steel industry: This industry transforms iron ore into steel, a crucial material for construction, machinery, and various other applications.
• Yarn spinning industry: This industry converts raw fibers like cotton or wool into yarn, which is then used in the textile industry to create fabrics for clothing and other products.
• Chemical industry: This industry uses raw materials like oil, natural gas, and minerals to produce a wide range of chemicals used in various manufacturing processes and consumer products.

Tertiary industries: These industries provide services to businesses and consumers, playing a vital role in facilitating economic activity. They are often referred to as the service sector and encompass a wide range of sub-industries. Examples of tertiary industries include:

• Banking industry: Provides financial services like loans, deposits, and investment products to businesses and individuals.
• Insurance industry: Offers protection against financial losses caused by events like accidents, illnesses, or property damage.
• Trade industry: This industry facilitates the exchange of goods and services between businesses and consumers. It includes activities like wholesale trade, retail trade, and transportation.

Industry classification by production chain stage

Understanding where a business fits within the production chain is another way to classify industries. This perspective highlights the interconnectedness of different industries and how they rely on each other. Here’s a breakdown of the two main stages:

Upstream industries: These industries act as the initial link in the production chain, supplying raw materials or semi-finished goods to other industries further down the line. They are often resource-intensive and play a crucial role in providing the building blocks for finished products. Examples of upstream industries include:

• Plywood industry: This industry manufactures plywood sheets from raw logs, which are then used by the construction and furniture industries.
• Aluminum industry: This industry processes bauxite ore into aluminum, a versatile metal used in various applications like construction, transportation, and packaging.
• Steel industry: As mentioned earlier, steel is a vital raw material for many industries, and steel producers act as a key upstream supplier.

Downstream industries: These industries take semi-finished goods or raw materials from upstream industries and transform them into final products for consumers or businesses. They represent the final stage of the production chain, where raw materials are converted into usable goods. Examples of downstream industries include:

• Automotive industry: Car manufacturers rely on a vast network of upstream suppliers for steel, rubber, glass, electronics, and other components needed to assemble vehicles.
• Electronic equipment industry: This industry utilizes various components like semiconductors, circuit boards, and displays (often supplied by upstream industries) to manufacture finished electronic devices like smartphones, computers, and televisions.

Industry classification by production location

Industry classification can also consider the geographic location of production. This distinction is particularly relevant for investors and businesses operating in a globalized economy. Here’s a quick breakdown:

• Domestic industries: These industries are located within a specific country’s borders. They produce goods and services that are primarily consumed or used domestically. Understanding the landscape of domestic industries is crucial for analyzing a nation’s economic health and production capabilities.
• Foreign industries: These industries are located outside a specific country’s borders. They produce goods and services that may be exported to other countries or consumed locally within the foreign nation. Analyzing foreign industries can be valuable for investors seeking opportunities in international markets or businesses considering sourcing materials or products from overseas.

Link between business sectors and industries

Understanding the relationship between business sectors and industries is key to grasping the overall structure of an economy. Here’s a breakdown to shed light on this connection:

Business sectors

Imagine the economy as a vast landscape. Business sectors act as broad categories that group industries based on their core economic activity. These sectors represent fundamental pillars that support the entire economic system. Here are the three main sectors:

• Primary sector: This sector encompasses industries involved in extracting raw materials directly from nature. It forms the foundation of the economic pyramid and provides essential resources for other sectors. Examples include agriculture, mining, forestry, and fishing.
• Secondary sector: Often referred to as the manufacturing sector, this category groups industries that take raw materials from the primary sector and transform them into finished goods. Examples include steel production, car manufacturing, textiles, and chemicals.
• Tertiary sector: Also known as the service sector, this category encompasses industries that provide services to businesses and consumers. It plays a crucial role in facilitating economic activity and includes a wide range of sub-industries. Examples include banking, insurance, healthcare, education, retail trade, and transportation.

Industries

Within each business sector, we find a multitude of industries. These industries are more specific groupings that categorize businesses based on the particular goods or services they provide. They are the building blocks that make up the larger sectors.

For example, the primary sector includes the agriculture industry, which can be further divided into sub-industries like dairy farming, grain production, or fruit cultivation. Similarly, the vast service sector encompasses the education industry, which can be broken down into sub-industries like primary education, higher education, or vocational training.

Understanding the link

By understanding the relationship between business sectors and industries, you gain a deeper perspective on how different parts of the economy work together. Here’s how they connect:

• Interdependence: Industries within a sector often rely on each other. For instance, the automotive industry (a secondary sector) relies on the steel industry (a secondary sector) to provide essential materials for car manufacturing.
• Value chain: Business sectors work together to create a value chain. Raw materials extracted by the primary sector become inputs for the secondary sector, which transforms them into finished goods. The tertiary sector then distributes and services these finished goods.
• Specialization: Industries allow for specialization within sectors. Businesses within an industry can focus on a specific product or service, leading to greater efficiency and innovation.

In conclusion, business sectors provide a broad framework for understanding the economy, while industries offer a more granular view of the specific activities that take place within each sector.