What is an Industry?
Industry only exists if more than one firm is competing. The concept of industry is an attempt to
classify groups of companies that are related by their primary business activities. Why they are
grouped is important.
In modern economies, there are hundreds if not thousands of different industry classification codes
which are government created in order to report on “the economy”, which are then typically
grouped into even larger categories called industry sectors. We do not care about these.
The goal of this class is different. Industry is used to be able to compare, understand, or measure
businesses in an apples-to-apples fashion for some competition reason. Thus, every company in
an industry must be a direct competitor. Therefore, what is an industry should make sense for
what YOU are trying to do. For this class, always take the position of an employee in one firm.
Therefore, your industry is only those companies competing for YOUR firms’ customers.
We do not care about SIC or NAICS in this class. They are misleading for strategy creation.
Standard Industrial Classification, North American Industry Classification System.
Individual companies are generally classified into industries based on their largest sources of
revenue. For example, an automobile manufacturer might have a small financing division that
contributes 10% to overall revenues, but the company will still be classified as an auto maker.
There are few 100% “clean” examples of firms who fit perfectly into only one industry. The point
is not perfection. The point is “classification that is “good enough” so that some useful
comparison or decision can be reasonably made by you, an employee in one of the firms.
Companies that have focused interests in many industries are conglomerates. Examples are firms
such as GE (aircraft engines, locomotives, medical imaging, large appliances) or United
Technologies (helicopters, elevators, large air conditioners). So, if you are in medical imaging, GE
better be in your analysis.
Thus, an industry is simply a general term for a group of businesses doing similar things for
similar customers. It is what their customers buy that determines that their industry. Firms are
included or excluded from an industry based on the degree of similarity in products, and the types
of customers they service / marketplace in which they compete COMPARED TO YOUR FIRM.
Strategy is about gaining competitive advantage. So, by definition you care only about your
competitors. Thus, industry is defined by your competitors. Your industry is those firms you
worry can steal your customers.
An industry is that group of companies that make and or sell products and services which are
closely related in some important way – from YOUR customer’s perspective.
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The mortgage industry relates to all the people creating, originating, and working with
loans. But, if you are a mortgage broker in Naples, don’t include Mellon Bank in NY.
The textile industry works with cloth – which may end up in clothing, drapes, etc. But if
you make silk, don’t include someone who makes burlap for feed sacks.
The petroleum industry works mainly with oil, although one could say the fossil fuels
industry includes the companies working with petroleum, natural gas, and coal. If you
own a gas station, only other gas stations in your area make sense to include in your
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analysis. If you are Exxon Mobil, you look at other firms who do crude oil drilling,
refining, and gas stations. Three separate industries.
The finance industry may include banks, insurance firms, the mortgage industry, and more
depending on how one defines it and why it is being defined. But, if you are Edison Bank,
including Allstate Insurance does you NO good. Different industries.
There are no singularly and cleanly defined "industries" that will work for all purposes. The
important thing to remember: WHY you need to define an industry drives HOW you do the
definition. The definition determines the boundary – who is in and who is out.
Ultimately, YOU define the boundaries so that your analysis is VALUABE.
To define any industry:
Step 1: Think of the industry.
Step 2: Pick one company in this industry by name.
Step 3: Assume you have a job with this company.
Step 4. List those firm that you are worried will steal your possible customers.
This list is your industry.
Your strategy is your plan to compete and take their customers.
Sustainable Competitive Advantage.