Lesson 2 of 7 · 15 min
Defining an industry and grouping companies
An industry is a group of companies selling similar products from the customer's point of view; third-party schemes such as GICS are a good start, but analysts must adjust for their limitations, and other groupings (geography, cycle sensitivity, statistics, ESG) serve other purposes.
In short
- An industry = companies selling similar products or services, from the customer's perspective. Hard parts: substitutes, multi-industry companies, geography, and business models that keep changing.
- Legacy schemes (SIC, NACE, ISIC) were government-run, country-specific, rarely updated and grouped firms by production (a supply approach). Commercial schemes (GICS, ICB, TRBC) are global, reviewed at least annually and group firms by what they sell (a demand approach).
- GICS, ICB and TRBC are strictly hierarchical: each company sits in one lowest-tier group, which fixes all its higher tiers.
- Multi-segment companies: a line with ≥ 60% of revenue decides; otherwise a line with > 50% of revenue, profits or assets; otherwise discretion or a multi-industry/conglomerate label.
- Four limitations: groupings that are too broad or too narrow (business-model variations, substitutes), multi-product companies, geography, and changes over time that hurt comparability.
- Other groupings: geography (by domicile, listing or headquarters, not revenue mix), cyclical vs defensive, statistical similarities, and ESG characteristics.
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