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An industry is an economic activity related to processing raw materials and manufacturing goods in factories. This definition is synonymous with manufacturing.
The term “industry” also means a group of different companies offering similar products. In other words, each product is closely substituting. Because they are close substitutes, firms use the same inputs and face more or less the same group of suppliers and buyers.
Companies in the industry offer products or services to meet similar customer needs. Take, for example, carbonated drinks, fruit punches, and bottled water. We can think of them as close substitutes. They serve the same basic customer needs: a cold, refreshing drink that doesn’t contain alcohol.
Industry classification
You can use different types of classifications to group companies. It can be based on:
- Sources of raw materials
- Types of products
- Number of employees
- The primary source of revenue
Industry classification is essential for fulfilling a variety of purposes.
- National and international statistical agencies use classification to summarize economic conditions, such as the value of output or job creation.
- Analysts in the stock market use it to understand the basic characteristics of an industry. It is useful for building an investment portfolio.
- Banks use classification to prioritize lending. Certain industries may be more prospective than others. After selecting the industry, the bank then selects the target debtor.
In Indonesia, two common types of classifications are:
- The Indonesian Standard Industrial Classification (Klasifikasi Baku Lapangan Usaha Indonesia or KBLI) was released by the Central Statistics Agency
- Jakarta Stock Industrial Classification (JASICA) for companies listed on the Indonesia Stock Exchange
On the international market, you can find a wide variety of classifications, including:
- International Standard Industrial Classification of All Economic Activities (ISIC) by the United Nations
- North American Industry Classification System (NAIC) by the United States, Canada, and Mexico
- Standard Industrial Classification (SIC) by the United States government.
- Industry Classification Benchmark (ICB) by FTSE Russell
- Global Industry Classification Standard (GICS) by Standard & Poor’s, Morgan Stanley Capital International
Industry classification based on the source of raw materials
Under this classification, the grouping of companies is based on the source of their raw materials.
- Extractive industry – the source of raw materials comes from nature. Examples are the agricultural industry, the mining industry, and the fishing industry.
- Non-extractive industry – raw materials come from other industries. Examples are the plywood industry, the food industry, the metal industry, and the spinning industry.
- Facilitative industry, which sells services to other parties. Examples are the tourism industry, the financial industry, and the trade industry.
Industry classification based on capital
The basis for classification is the portion of capital goods required to operate the business. In general, this classification categorizes industries into two groups:
- Heavy industry consists of businesses that use capital intensive production processes. This industry requires a large initial investment because it has to operate large equipment and machines. Examples are the steel industry, heavy equipment industry, and the automotive industry.
- Light industry includes businesses that have much lower capital requirements. They are usually labor-intensive and less in using heavy machinery or equipment. An example is the restaurant industry.
Based on the number of workers and business scale
- Home industry includes household businesses and has a labor of fewer than four people. Businesses are usually under the control of a family, so they have relatively limited capital. For example, the tofu industry and the chips industry.
- Small industry includes businesses with labor of between 5 – 9 people. This business has relatively small capital, and the labor generally comes from the surrounding environment. Examples are the brick industry and the tile industry.
- Medium industry includes businesses with labor of around 20-99 people. They have a large enough capital. Their labor is also relatively skilled. Company leaders usually have specific managerial abilities. For example, the convection industry and the ceramic industry.
- Large industry consists of businesses with well-defined business functions. The number of workers is usually more than 100 people. Another characteristic has large capital. They recruit workers with various educational backgrounds and skills. Company leaders are selected through a fit and proper test. Examples are the automotive industry, the base metal industry, and the electronics industry.
Based on the type of product produced
- Primary industry produces finished goods and does not need further processing. Output can be consumed or used directly. An example is the food and beverage industry.
- Secondary industry includes businesses that produce intermediate goods. So it requires further processing before being consumed or used. Examples are the steel industry and the yarn spinning industry.
- Tertiary industry includes businesses that provide services such as banking, insurance, trade, and so on.
Based on the stage in the production chain
- Upstream industry includes businesses that only process raw materials. This industry only provides input for other industrial activities. Examples are the plywood, aluminum, and steel industries.
- Downstream industry includes businesses that process semi-finished goods into finished goods. Hence, the resulting output can be consumed or used by end-users. Examples are the automotive industry and the electronic equipment industry.
Based on production location
This category describes whether the business operates and produces goods and services within certain national borders. The domestic industry includes industries located within the country. Conversely, foreign industries are industries that are located outside the boundaries of a country.