Industry codes are a system of classification called the Standard Industrial Classification (SIC) set up in the U.S.A. in 1937 and is made up of a four-digit number in order to differentiate between industries. These industry codes are numerical representations of the main businesses and industries and are based on common characteristics of products and services from a specific industry.
Purpose
The SIC codes have been designed in order to facilitate communication and ease sharing data between different agencies who had the same objective of measuring business prospects through separate analysis, often not communicating between each other.
Structure
It has a hierarchical structure, each digit standing for a type or branch of industry:
The first two digits represent the main industry sector to which a business belongs (e.g. electronic);
The third digit stands for the sub-classification of the business (e.g. electronic, component and accessories);
The fourth digit represents the specialization inside the business (e.g. printed circuit boards).
Uses
In reporting, they are used by labor and statistics agencies to report on labor force, salaries and pricing in different industries;
In academic and business sectors, they are used to refer to a certain industry sector or specialization as a universal reference.
Having set up SIC codes, two distinct data gatherers in two different fields may make their data analysis available in order to consolidate it and provide uniformity.
Therefore, the use of industry codes facilitates cross-sector reporting, data analysis and decision-making concerning future investments and other support.
Drawbacks
Misclassification: if a company fails to correctly identify itself in the business sector, it has an impact on the whole industry. It goes against the purpose it was created for and corrections are hard to incorporate.
Outdated: industry codes should be updated regularly since they were created for traditional businesses in the 1930s. They are being outdated rapidly as businesses have developed from mostly manufacturing-based to service based.
The slow adapting process results in a slow recognition of new industries, such as businesses dealing in the technology sector.
However, the intention of updating these codes often leads to a gap between very specific codes (e.g. “Manufacture of Sewing Threads”) and all-encompassing ones designed for newer industries (e.g. “Other Computer-Related Activities)
Distinction from NAICS codes
The SIC codes were altered in the 1990s by the NAICS (North American Industrial Classification System) ones, rendering them very similar. However, the NAICS offers more flexibility as the codes are more accommodating for new businesses and functions.
At the present, they can be used in tandem, tending to have different scopes:
the SIC codes are more used in traditional industries such as manufacturing,
the NAICS codes are often used by businesses related to technology,
both are still used in marketing, business listing and function analysis.
