Every business belongs to one or more industries. An industry classification describes a company’s primary business activity. It usually refers to the company’s largest source of revenues.
The classifying authority for industries in the United States is the census bureau. Standard industry classifications began in 1934 because data collected by the government for similar businesses was not suitable for comparison across a broader range of businesses. The classification system consisted of a four-digit Standard Industrial Classification (SIC) code with the first digit representing the broadest classification.
Standardization sought to classify ‘industry’ in the broad sense of all economic activity; that is, agriculture, forestry and fisheries; mining; construction; manufacturing; wholesale and retail trade; finance, insurance and real estate; transportation, communication, electric, gas and sanitary services; and services. They began by classifying manufacturing and reached the first agreement in 1938.
The United States, Canada and Mexico developed a joint North American Industry Classification System (NAICS) in 1997. This is a six-digit code with major sub-divisions using one to four digits. NAICS/SIC comparison charts are available on the web. The NAICS identified new industries such as credit card processors; fiber optic cable manufacturing; pet supply stores; paging; casinos; cellular and other wireless communications; and so forth.
Finding your industry is a good exercise. Your fellow industry participants are most likely your competitors. The similarities are strong.
* You sell similar products and services,
* You most likely use the same or similar suppliers
* You have similar buying, selling and distribution patterns
* Local and regional economies affect you in the same way
* Your operating cycles are similar and
* Your capital needs and profit margins are similar.
A complete business plan discusses general industry economics, participants, distribution patterns, factors in the competition, and whatever else describes the nature of this business to outsiders.
Who else is in your industry and what is happening to them?
You should know who about similar businesses in your marketplace. Industries usually have similar types of participants. There is a huge difference, for example, between an industry like television services, with a few huge companies, and one like dry cleaning, with tens of thousands of smaller businesses.
This can make a big difference to a business and plans for growth and other changes. Look at the food industry: for eating in, we have grocery stores, health food stores, farm markets and so forth. For eating out, there are two major types of businesses: The restaurant industry has many small participants while fast food competitors consist of a few national brands seen in thousands of branded outlets, many of them franchised.
An industry consolidates when many small participants begin disappearing and a few large players emerge. In accounting, for example, there are a few large, well-known international firms and tens of thousands of smaller firms. The automobile business is composed of a few national brands seen as thousands of branded dealerships. In computer manufacturing, for example, there are a few large international firms whose names are well known, and thousands of smaller firms.
What is a distribution pattern?
Products and services can follow many paths between suppliers and users. Is yours an industry with retailers supported by regional distributors (like computers, magazines, or auto parts)? Does your industry depend on direct sales to large industrial customers? Do manufacturers support their own direct sales forces, or do they work with product representatives?
* Are you a retail stores selling to consumers?
* Are you a distribution company buying from manufacturers and selling to other businesses?
* Do your items come directly from the manufacturer?
* Do you sell through mail campaigns? national advertising?
Your competitors most likely have the same distribution pattern.
* Do you sell by the item? or by outcome?
* Do you sell by a long-term contract?
* Do you sell through agents or a sales staff?
Why would customers buy from you?
What are the buying patterns in your industry?
* How do customers choose among the competitors?
* Why do they make these choices? price, product, support, delivery?
* What strategies do your competitors use to distinguish themselves?
Competition among restaurants in one area may depend on reputation in one area and location in another area. How do professionals (doctors, lawyers and accountants) compete? Do local customers prefer national or local brands or businesses?
Broaden your list of competitors. Hobby stores compete with recreational businesses for leisure activity dollars in family budgets. Eating out competes with eating in. Looking at your industry helps give you a realistic perspective of your business in your local and regional economy.
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