Classification of Industries

Classification of companies into industries must ideally be such that it helps analysts compare companies across the world. This helps in comparing industry trends and relative valuations. Industry classifications can be commercial or government classifications. Commercial industry classifications can be further sub-divided into the following:

  • Global Industry Classification Standard (GICS): This system classifies companies globally according to their principal business activity. The companies form part of a sub-industry, which belongs to an industry, which comes under an industry group. Each industry group comes under a sector. The composition of the industries under this classification has changed periodically to reflect the changes in the global economy. S&P and MSCI Barra developed this classification.
  • Russell Global Sectors (RGS): This system classifies companies on the basis of the products or services they sell. The RGS classification system is slightly broader and does not have as many subsections as the GICS.

  • Industry Classification Benchmark (ICB): FTSE and Dow Jones developed this classification. This classification groups companies on the basis of where companies derive their primary revenues. The classification structure is four-tiered. Unlike the RGS and GICS classifications the ICB divides consumer goods and consumer services companies.

Despite the minor differences between these three classifications, they are most commonly used to classify companies into different groups. Following is a list of the industry classifications.

  • Basic Materials and Processing: Companies in the business of processing chemicals, forest products, and minerals.

  • Consumer Staples: Companies that sell food and beverages, tobacco, personal care lines where aggregate demand stays stable, despite economic cycles.

  • Consumer Discretionary: Automobiles, electronics, travel, and hotels. This category is susceptible to economic downturns and upswings.

  • Energy: The exploration, production and processing of natural resources. This category also includes manufacturers of energy exploration and processing equipment.

  • Financial Services: Companies in the business of banking, financial services, and insurance.

  • Healthcare: Hospitals, health care equipment manufacturers, pharmaceuticals and bio-product producers.

  • Industrial Producers and Manufacturers: Capital goods manufacturers and service providers. Defence, transportation, logistics companies and heavy equipment for instance.

  • Technology: Computer sales, software companies and consultancy in the information technology arena.

  • Telecommunication: Companies that sell both wireless and fixed line connections.

  • Utilities: Gas, electricity, water supply, and telephone companies

Classification Caselets

Reliance Petrochemicals is based in India and is in the business of exploring for natural gas, processing it. What would be a suitable classification?

Answer: The Global Industry Classification Standard can be used. The company can be classified under Energy, and the company will be assessed on the basis of revenue.

Chevrolet is an American car manufacturing company. They have a variety of models that caters from the budget to the high end luxury car user.

Answer: The Russell Global Sectors classification that classifies on the basis of products can be used. This company will have a cyclical nature of business and will be classified under the auto sector.

Apple Computers is an American company that produces computers, tablets, iPods, television and mobiles. They also sell mobile applications, song tunes, etc. Their primary source of revenue is from computers and mobiles.

Answer: The Industry Classification Benchmark can be used that classifies on the basis of primary revenue. The company would be classified in the technology sector.

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