An Introduction to Industry Classification Codes

As industrialization gained momentum during the early 1900s, various departments of the US government initiated research and studies on the various industries and their different functions. The aim was to consolidate information to come up with important decisions about necessary facilities, investments and regulations to further support the industrial growth. However, due to the lack of set standards, each department ended up using its own methodology. Consolidating information across multiple sources became a challenge. The Standard Industrial Classification (SIC) was hence proposed as a uniform classification system, aimed to represent major industries, sub-class and specific function/product, and was formally adopted in 1937.

How Do SIC Codes Work?

Depending upon the industry group, product, or function, SIC codes were designed such that one single SIC code can apply to multiple firms and companies. E.g. SIC code “0115” indicates multiple details and categorizations as follows:

• The first two digits “01” indicate the major group ( “Agriculture Production - Crops”)
• The first three digits “011” indicate industry sub-group (“Cash Grains”) which includes wheat, rice, corn, etc.
• The entire 4 digit code “0115” indicates a specific product group (“Corn”)

If any research-related data is tagged with the above four-digit code, it becomes easy to classify data at various levels. For e.g.:

• What was the total production of all agricultural crops in 2019 in Arizona? Simply pull records matching the first two digits of SIC codes as “01” (or 4 digit SIC code =”0100”) and state=”Arizona” and year =”2019”
• How many businesses operate in the “Cash Grains” segment (which includes Wheat, Rice, Corn, Soya, etc.) in the U.K.? Simply pull records matching first three SIC code digits as “011” (or 4 digit SIC code = “0110”) and country=”UK”
• To know how many companies are registered in Utah producing corn, one simply needs to generate a report which has the 4 digit SIC code “0115”

Uses and Benefits of SIC Codes

The structural hierarchy of SIC codes starts with the broad industry type (two digits), further narrowing to sub-industry (three-digit) and finally pointing to specific specialization (four digits). Using the same SIC code (0115 – Corn), two data gatherers—one surveying farms in the countryside about how much corn has been sown by farmers for the coming season, and another at the local market tracking the sale price, supply and demand of current corn produce—were able to consolidate their data uniformly.

The use of these standard SIC codes facilitated easy reporting, data analysis, and decision making for future investments and other necessary support.

Challenges of SIC Codes

SIC Codes, although extremely useful at the start, ran into issues of mismatches, overlapping and ambiguous descriptions, and their limited scope of classification code availability (due to only two digits, followed by one digit for each additional category). That constrained the scope of adding new emerging industries and functions.

Introduction of NAICS Code

In 1997, SIC codes were further expanded to NAICS (North American Industrial Classification System), which were six digits long and offered more scope for adding various new industries and functions, as well as clearing ambiguous codes. Here is the same example of the corn farming industry, progressively indicating what a 6 digit NAICS code represents:

11 – (Agriculture, Forestry, Fishing, and Hunting)

111 – (Crop Production)

1111 – (Oilseed and Grain Farming)

11115 – (Corn Farming)

111150 - (Corn Farming)

In essence, the SIC codes and NAICS codes are similar. NAICS codes offer more room and flexibility for accommodating more classification and functions.

Use of SIC and NAICS Codes

SIC codes and NAICS codes can be used in tandem. While SIC continues to remain popular for traditional businesses and industries (like manufacturing, crop produce, etc.), NAICS codes are finding more usage in newly developed segments and industries like that of technology, due to extended availability with extra digits. Both find usage in marketing, business listing, and analysis functions.