Every day, intergovernmental organizations such as the United Nations, economic unions such as the European Union, countries such as the United States of America, and financial analysts such as Standard & Poor’s use classification systems to analyze and report economic activities in a unified manner. These classification systems ensure that everyone in the value chain is used shared terminology and that information systems are working with a single version of the truth (SVOT).
If you are a corporate manager, why is that important?
Why Classification Standards Matter
When planning your company’s activities on a corporate, portfolio, program, or product/service level, it is a good practice to follow classifications and to use frameworks wherever possible. By doing so, you ensure that:
- Any names and definitions you are using are recognized and understood by as many stakeholders as possible, internally and externally.
- Any industry data or market data you use corresponds to your actual market segments and customer segments.
- Any reports you generate, publicly or privately, correspond to industry recognized names and definitions of markets.
In most cases, financial departments are obliged to use industry classifications (and other classification system) in their information systems and business processes. Ensuring that the same level of standardization applies to the rest of your company can only help to build better dialog and interoperability.
Here is a list of the most common international and regional classifications in North America and Europe:
International Standard Industrial Classification (ISIC, Rev. 4)
The International Standard Industrial Classification (ISIC, Rev. 4) was released in 2008. It is the United Nation’s classification framework for economic activities. Its first version dates back to 1948 and it is used as a foundation for other industry classifications in this list.
Global Industry Classification Standard (GICS)
The Global Industry Classification Standard (GICS) was established in 1999 by Standard & Poor’s and MSCI Barra. The GICS is a framework for industry analysis, used by most financial professionals worldwide. It consists of 11 sectors, 24 industry groups, 68 industries, and 157 sub-industries.
North American Industry Classification System (NAICS)
The North American Industry Classification System (NAICS) was adopted in 1997 and developed jointly by the U.S. Economic Classification Policy Committee (ECPC), Statistics Canada, and Mexico’s Instituto Nacional de Estadistica y Geografia. NAICS divides the economy in 20 sectors and 1,057 industries.
Note: One level lower, on the goods (products/services) level in North America, is the North American Product Classification System (NAPCS), which consists of 24 sections, 61 subsections, 172 divisions, 276 groups, 497 subgroups, and 1,167 trilateral products.
European Industry Classification (NACE Rev. 2)
The Statistical Classification of Economic Activities in the European Community, Rev. 2 (NACE, Rev. 2) was published in 2008 as a revision to its previous versions, the NACE, Rev 1.1 and NACE, Rev 1. It is the European Union’s classification framework for economic activity.
Note: Going one lever lower, on the goods (products/services) level in the European Union, is the Combined Nomenclature (CN), which classifies goods according to the requirements of the Common Customs Tariff and the EU’s external trade statistics.