Global / How to Use Industry Research
Understanding NAICS Codes
by Rebecca Simon
Jun 25 2019

What is NAICS?

The North American Industry Classification System (NAICS) is an arrangement between Canada, Mexico and the United States by which businesses are designated based on their type of economic activity. The system uses a six-digit coding system where each additional digit narrows the scope of the business grouping.

According to NAICS, the first two digits designate the largest business sector, the third digit specifies the subsector, the fourth digit designates the industry group and the fifth digit specifies the NAICS industries. The international NAICS agreement fixes the first five digits of the code, so they are standardized across countries. The sixth designates the national industries or the more granular industry product or service, thus, 6-digit U.S. codes may differ from counterparts in Canada or Mexico.

NAICS_breakdown

Breakdown of NAICS codes

At the two-digit NAICS level, businesses are grouped into sectors, which are the largest segments of the economy. There are 20 sectors and they include names like Utilities, Retail Trade, Educational Services, and Manufacturing. A sector can then be designated as either primary, secondary, tertiary or quaternary. Companies classified in the primary sector primarily extract and harvest resources from the earth, like agriculture, mining or forestry. The secondary sector comprises businesses that are involved in processing, manufacturing and construction. Businesses in the tertiary sector provide services, such as retailers or financial companies. Lastly, the quaternary sector is composed of knowledge-oriented businesses, such as educational institutions.

With each additional digit added to a NAICS code, the scope of the group of businesses narrows, leaving the most similar companies classified into industries with the longest codes. At the four-digit NAICS code level, companies receive the designation of industry group, which is subsequently further broken down into specific industries as additional fifth and sixth digits are added. An industry is the narrowest classification in NAICS and comprises companies operating in the same business sphere of the economy, with the most similar attributes.

IBISWorld industry research and NAICS

IBISWorld industry reports analyze industries at both the five- and six-digit NAICS level, while also offering corresponding sector reports at the two-digit NAICS level. For example, the Cigarette and Tobacco Manufacturing industry (IBISWorld report 31222) comprises businesses that manufacture cigarettes, cigars, loose pipe tobacco, smokeless tobacco and e-cigarettes. This industry is a part of the larger Manufacturing sector (IBISWorld report 31-33), which is made up of all establishments that transform raw materials into new products via mechanical, physical or chemical processes.

Understanding the distinction between an industry and its broader overarching sector is vital to discern the value of the level of granularity industry research offers. Analysis of an industry at the five- or six-digit NAICS level can be leveraged by businesses in any industry to both comprehend and strengthen their position within their marketplace.

Using IBISWorld industry research reports, a business can conduct a SWOT analysis to determine the opportunities and threats its market faces while also identifying its individual strengths and weaknesses. Additionally, a company can benchmark financial data averages of its industry against those of the larger corresponding sector using the Cost Structure Benchmarks industry report section to measure how its own spending compares to other similar businesses. Comprehension of this information can permit a company to successfully navigate its respective market and maximize its profitability leading to overall success.

SWOT_graphic