Which Industry Are You In?
The nature of new ventures and new products/services means that sometimes entrepreneurs can struggle to label themselves as part of a specific industry.
If this describes you, ask yourself the following questions:
- Who are my competitors?
- Who is providing similar products or services?
- Who has a similar process or business model?
Regardless of how you feel about being judged by the company you keep, the ways in which your competitors define themselves can ultimately help you better define the industry your venture belongs to.
Industry segments are classified by SIC or NAICS codes.
SIC stands for Standard Industrial Classification.
The SIC system is used for classifying industries according to a four-digit code.
It was established in the United States in 1937 and encompasses the majority of economic industrial sectors.
Due to concerns that the system was antiquated and inaccurate, it was overhauled in 1997 to become the NAICS classification system.
The North American Industry Classification System is a joint industrial classification system between the United States, Canada, and Mexico.
Developed in 1997, the NAICS system was designed to replace the aging SIC system.
Its updates have reflected the change in economic foci across the continent, and as a result, it is more inclusive of the changing service, tech, and information sectors than its predecessor.
The NAICS code structure is a hierarchical classification system that uses a two- through six-digit designation to classify various economic sectors, industries, and individual businesses.
As the number of digits in the NAICS code increases, the focus of the classification becomes narrower, meaning that a six-digit code is much more detailed than a three- or four-digit code.
- The first two digits designate an economic sector.
- The third digit designates the subsector.
- The fourth digit designates the industry group.
- The fifth digit designates the NAICS industry.
- The sixth digit designates the national industry.
There is no formal NAICS assignment process.
The entire directory of codes is made available online from the US Census Bureau, and firms can search the database to find and select the code that most closely describes their business.
For example, if you are the proprietor of a fast-casual restaurant with on-premises seating and the option to take food and beverages to go, your NAICS code would be 722513, Limited-Service Restaurants.
- 72 Accommodation and Food Service
- 7225 Restaurants and Other Eating Places
- 722513 Limited-Service Restaurants
What’s interesting here is that the NAICS designation 722513 doesn’t only include fast-casual restaurants.
Also included under this designation are carryout restaurants, delicatessens, limited-service family restaurants, sandwich shops, and pizza shops, among others.
This list is essentially a summary of your venture’s direct competitors.
What about some of the high-profile tech companies that have less-than-conventional business models?
Uber and Lyft call their services “ridesharing,” but there is no ridesharing industry group/NAICS industry. The generally accepted designation for those services is 485990, Other Transit and Ground Passenger Transportation.
The closest designation is 721310, Rooming and Boarding Houses.
Google has a variety of products and services that cast a wide net. The closest NAICS code is 519130, Internet Publishing and Broadcasting and Web Search Portals.
The NAICS system is reviewed on a five-year basis to ensure that classifications are regularly revised to keep pace with the changing economy, but at technology’s current rate of change the system can barely keep up.
Why should a new venture bother to determine what NAICS code is the best fit?
In addition to helping you ensure that your research is comparing apples to apples, NAICS codes are used by insurance companies to compute premiums and by the IRS as benchmarks.
A company with a tax profile that is wildly different from others with the same NAICS code will raise a red flag or two and will result in increased scrutiny, or even an audit.