North American Industry Classification System (NAICS)
North American Industry Classification System (NAICS)
The North American Industry Classification System (NAICS) is an industry coding system designed to facilitate the collection, analysis, and presentation of economic data in the United States, Canada, and Mexico, all member nations of the North American Free Trade Agreement (NAFTA). First implemented in 1997, the NAICS is the successor to the Standard Industrial Classification (SIC) system, which had been used by U.S. agencies to compile and track national business data, and economic activity data generally, for more than six decades.
Collecting information about and reporting on something as large as the U.S. economy is an enormous task. Organizing this task by creating a hierarchical classification for the incoming data is an essential part of tackling the job. NAICS is the newest industry classification system being used to do this job in the U.S. Experienced business analysts, journalists, and economists are all familiar with both the SIC and NAICS systems. They are also frequent users of the wealth of data that U.S. federal government agencies collect and publish regularly. When those data are economic in nature—for example, average labor unit cost for bicycle manufacturing, annual output by the financial services industry, or number of gas stations in a metropolitan area—they are organized by NAICS codes. The easiest way to access these data sources is to use the classification system used to organize them, the NAICS.
The U.S. Census Bureau touts the NAICS as "a unique, all-new system for classifying business establishments. It is the first economic classification system to be constructed based on a single economic concept. Economic units that use like processes to produce goods or services are grouped together. This 'production-oriented' system means that statistical agencies in the United States will produce data that can be used for measuring productivity, unit labor costs, and the capital intensity of production; constructing input-output relationships; and estimating employment-output relationships and other such statistics that require that inputs and outputs be used together…. NAICS is forward looking and flexible, anticipating increasing globalization and providing enhanced industry comparability among the NAFTA trading partners while recognizing important national industries and providing for periodic updates through three-country review [the United States, Canada, and Mexico]. NAICS recognizes the structural and technological changes occurring in the economies of the three North American countries and provides the means to measure these changes well into the next millennium."
THE SIC SYSTEM
The predecessor to the NAICS—the Standard Industrial Classification system—was the first comprehensive classification system used by American government agencies to organize economic statistics.
The SIC system was an establishment-based industry classification system that classified each establishment (defined as a single physical location at which economic activity occurs) according to its primary activity. For each of these recognized industries, the government kept detailed statistics in such areas as employment, payroll, receipts, profits, and capital investment.
After its unveiling in 1937, the SIC system's universe of economic data became a heavily utilized tool for conducting business research and tracking economic trends. Government agencies, nongovernmental organizations, and private businesses alike made extensive use of the data. But despite periodic updates and revisions to the SIC classification system, its inadequacies became more glaring with the passage of time.
The fundamental problem was that the SIC system was based on concepts developed in an era of American history—the 1930s and 1940s—when manufacturing was the dominant economic engine. Many service activities were not separately identified, and as service-oriented businesses became more important, SIC revisions did not keep pace. The economic statistics contained in the SIC system thus became progressively more incomplete as newly technologies and areas of endeavor were not covered. This under representation of important economic sectors was further exacerbated by the SIC's framework, which gathered unrelated industries together into similar categories.
Despite its imperfections, however, the Standard Industrial Classification system continued to be widely used by business marketers through the 1990s. The SIC data did provide them with a method for classifying organizational customers and gauging industry trends (especially in manufacturing sectors), and it remained the only source of these important economic statistics. In addition, the 1987 revision added approximately 20 new service industries and tweaked several manufacturing industry classifications to reflect changing technological realities. Ultimately, however, the SIC system remained an outmoded one. For example, of the 1004 industries recognized in the 1987 Standard Industrial Classification program, nearly half (459) represented manufacturing, even though manufacturing's share of the U.S. Gross Domestic Product (GDP) has shrunk to less than 20 percent of the nation's total. "The SIC did a superb job of describing and detailing the structure of the footwear industry in the United States, but failed to recognize and account for the information age in which we live and work," summarized Carole Ambler in Business America. "The SIC scattered the production of high-tech products such as computers, semiconductors, and communications equipment in groupings of industrial machinery and electrical equipment, and included the reproduction of shrink-wrapped software in the same industry with software publishing."
The various inadequacies of the SIC system finally prompted America's public and private sectors to unite and call for a new industry classification system that would be based on the reality of today's service-based, Internet-driven, technology-powered global economy. The ultimate shape and character of this new system was dramatically influenced by the implementation of the North American Free Trade Agreement between the United States, Canada, and Mexico in 1994. This major trade treaty highlighted the need to develop a new industry classification system that would take into consideration the increased flow of goods, services, and capital between the three North American nations. Moreover, it emphasized the need for a system that could provide users with country-to-country comparability of statistical information.
CREATION OF THE NAICS
The North American Industrial Classification System was a cooperative effort that required the active involvement of U.S., Canadian, and Mexican government agencies. The primary U.S. body involved in NAICS creation and implementation was the Economic Classification Policy Committee (ECPC) of the Office of Management and Budget, but the Bureau of Economic Analysis, the Bureau of Labor Statistics, and the Census Bureau all contributed to the initiative. Statistics Canada and Mexico's Instituto Nacional de Estadistica, Geografia e Informatica (INEGI), meanwhile, worked with the ECPC to ensure that the new system would be able to provide comparable statistics for industries in place in all three countries, while simultaneously providing flexibility so that each country could accommodate industries unique to its own economy.
In 1997 the Office of Management and Budget (OMB) announced its decision to adopt the new NAICS as the industry classification system used by statistical agencies of the United States. During this same period, the nuts and bolts of the NAICS were unveiled to largely positive reviews. "NAICS recognizes new, emerging, and advanced technology industries; NAICS acknowledges the information age in which Americans live and work; NAICS considers over 150 new service industries; NAICS provides for comparability of data with other NAFTA trading partners; and NAICS is based on a production-oriented conceptual framework," observed Energy Conservation News. Marketing professionals were particularly pleased with the new proposed system. "NAICS is based on an entirely different concept than SIC," stated Suzanne Sabrosk in Searcher. "Its goals were not only to identify new industries but to acknowledge a more consistent economic principle—namely types of production activities performed, rather than the mix of production and market-based categories in the SIC. This process orientation, as opposed to an approach stressing supply and demand, accounts for the presentation of more detail in the service sector. NAICS classifies industries based on what the industries do, rather than whom the industries serve. For example, NAICS classifies bakeries that bake and sell on the premises under manufacturing, instead of as retailers, because of the way in which the bakeries produce their baked goods."
FRAMEWORK OF THE NAICS
The North American Industry Classification System defines a total of 1,170 industries in the United States. Nearly 360 of these industries are delineated for the first time (many in high-tech fields such as fiber optic cable manufacturing and satellite communications), while 565 are service-based. These industries are grouped in 20 industrial sectors that are progressively subdivided into three-digit subsectors, four-digit industry groups, and five-digit industries. The definition of most five-digit industries is the same in all three countries (the United States, Mexico, and Canada) so that they can produce comparable data, but some U.S. industries feature a sixth digit. The old SIC system was based on a four-digit code that did not have any linkages between the NAFTA-member economies. "NAICS allows each country to recognize activities that are important in the respective countries, but may not be large enough or important enough to recognize in all three countries. The sixth digit is reserved for this purpose," explained the Census Bureau.
The base two-digit NAICS Industry Sectors are as follows:
|11||Agriculture, Forestry, Fishing and Hunting|
|48-49||Transportation and Warehousing|
|52||Finance and Insurance|
|53||Real Estate and Rental and Leasing|
|54||Professional, Scientific, and Technical Services|
|55||Management of Companies and Enterprises|
|56||Administrative and Support and Waste Management and Remediation Services|
|62||Health Care and Social Assistance|
|71||Arts, Entertainment, and Recreation|
|72||Accommodation and Food Services|
|81||Other Services (Except Publish Administration|
Of these base sectors, five of them are primarily goods-producing (manufacturing) in nature, while the remaining 15 are services-oriented. This is a dramatic departure from the manufacturing-oriented perspective of the old Standard Industrial Classification system. Complete NAICS listings are available on the Census Bureau Web site at www.census.gov/naics.
Many of the NAICS sectors feature combinations of old SIC divisions, while others are long-neglected economic sectors. For instance, the NAICS has an information sector that includes all establishments that create, disseminate, or provide the means to distribute information. "So everything from data-processing services to motion pictures, broadcasting, and sound recording industries ended up here, as did newspaper, book, and periodical publishers, previously classified as manufacturing, and software publishers, previously included in SIC services," explained Sabrosk. "There are 34 industries in this sector, of which, 20 are new, such as paging, cellular, wireless, and satellite communications. In NAICS, publishing—including reporting, writing, and editing—appears as a major economic activity in its own right, whereas printing remains in NAICS manufacturing. Software publishing goes here because creating a copyrighted product and brining it to market equates to the creative process for other types of intellectual products." This sector's creation will enable the U.S. government and business (and other governments and business enterprises for that matter) to track the tremendous impact of information-based industries on the U.S., Canadian, and Mexican economies for the very first time.
Other important new or overhauled sectors in the North American Industry Classification System include:
Professional/scientific/technical services—This grouping consists of businesses whose major input is "human capital," such as physicians and attorneys.
Health care/social assistance—The number of industries classified in this sector nearly doubled from those listed under the old SIC system. Among the 27 new industries included in this sector, particularly notable ones include health maintenance organizations (HMOs), organ banks, and continuing care retirement facilities.
Computer and electronics manufacturing (including software reproduction, compact disc reproduction, and printed circuit assembly).
Arts, entertainment and recreation—This new sector includes a variety of ascendant industries that reflect our changing lifestyles, such as fitness and recreational sports centers, casinos, skiing facilities, and outfitting companies.
Insurance and real estate—the parameters of these important economic sectors have been expanded and extensively reshaped to reflect current realities.
Wholesale and retail trade—"The distinction between retail and wholesale trade is now based on how the establishment conducts its business rather than on the class of customer that it serves," wrote Ambler in Business America. "Those businesses that operate from a storefront, advertise to the general public, and provide retail-type services are considered retailers in NAICS regardless of whether they sell primarily to businesses or consumers. This new definition reflects the changing structure of retail trade."
DIFFERENCES BETWEEN NAICS AND SIC SYSTEMS
Analysts have pointed out a number of significant differences between the new NAICS system and the Standard Industrial Classification arrangement that it replaces. Key areas in which the two systems differ include:
Focus—The NAICS focused on services industries and new industries driven by advanced technology, whereas the SIC system was heavily weighted toward manufacturing. In addition, the NAICS benefits from a unified, production-oriented conceptual framework. "Businesses that use similar production processes to produce a good or service are grouped together," explained Ambler. "This single conceptual framework ensures that the classification system will produce data for improved analysis of input/output patterns, productivity, unit labor costs, and industrial performance. There was no consistent conceptual framework for the SIC." However, analysts note that the differing definitions that exist between the NAICS and the SIC will make historical trend analysis a difficult undertaking in many instances. "Comparative statistics and bridge tables may help at the 2-digit SIC and 3-digit NAICS level of activity," noted Robert Haas and Thomas Wotruba in Agency Sales Magazine. "[But] more detailed comparisons and links with past data may require what the Census Bureau calls 'synthetic estimates.' These involve applying proportions or trends from details making up one data set to the totals in a related data set or category."
Nomenclature—Groupings within NAICS are known by different names than those in the SIC system. For example, the SIC called the highest level of aggregation in its system a "division," whereas the NAICS calls it a "sector." The SIC's next highest level of aggregation, meanwhile, was designated "major group," but in the NAICS it is known as a "subsector."
Update-friendly—NAICS codes will be reviewed and updated on a regular five-year cycle by NAFTA member countries to make the system as useful and relevant as possible. The old SIC system, on the other hand, was only revised every 10 or 15 years.
Comparability—The Four-digit SIC system was not linked to the economic data tracking systems of Canada or Mexico in any way. The NAICS system, on the other hand, enables analysts to directly compare industrial production statistics collected and published by all three NAFTA members. In addition, NAICS provides for increased compatibility with the International Standard Industrial Classification System, developed and maintained by the United Nations and widely used in Europe.
The ECPC published a revision to the original NAICS structure in 2002 as part of a planned five year update cycle. The next update is scheduled for release in 2007.
The North American Industry Classification System is regarded as a welcome development by most heavy users of economic statistics, despite the choppy conditions that may prevail during the transition away from the old SIC framework. "The SIC system was dated and badly in need of revision," stated Haas and Watruba. "The new system should provide much more detailed information on a wider spectrum of industries, which in the long run should prove more beneficial to all concerned. In addition, its application to Canadian and Mexican markets and its compatibility with the ISIC system should greatly facilitate more effective global marketing by U.S. marketers. Once NAICS has been adopted and implemented over an extended time period, the short-run problems may well be forgotten because of the long-run benefits of the new system."
Ambler, Carole A. "NAICS: The 'S' Doesn't Stand for Services (But It Could)." Business America. April 1998.
"Good Bye to SIC, Hello to NAICS!" Energy Conservation News. March 2000.
Haas, Robert W., and Thomas R. Wotruba. "From SIC to NAICS—What Does It Mean for Business Marketers?" Agency Sales Magazine. January 1998.
"The History of NAICS." NAICS Association. Available from http://www.naics.com/info.htm. Retrieved on 18 April 2006.
Ojala, Marydee. "SIC Those NAICS on Me: Industry Classification Codes for Business Research." Online. January-February 2005.
Sabrosk, Suzanne. "NAICS Codes: A New Classification System for a New Economy." Searcher. November 2000.
Saunders, Norman C. "The North American Industry Classification System: Change on the Horizon." Occupational Outlook Quarterly. Fall 1999.
"SIC Codes Get Revamped." Quality. December 1998.
U.S. Department of Commerce. Bureau of the Census. "North American Industrial Classification System (NAICS)" Available from http://www.census.gov/epcd/www/naics.html. Retrieved on 18 April 2006.
Hillstrom, Northern Lights
updated by Magee, ECDI
"North American Industry Classification System (NAICS)." Encyclopedia of Small Business. . Encyclopedia.com. 25 May. 2017 <http://www.encyclopedia.com>.
"North American Industry Classification System (NAICS)." Encyclopedia of Small Business. . Encyclopedia.com. (May 25, 2017). http://www.encyclopedia.com/entrepreneurs/encyclopedias-almanacs-transcripts-and-maps/north-american-industry-classification-system-naics
"North American Industry Classification System (NAICS)." Encyclopedia of Small Business. . Retrieved May 25, 2017 from Encyclopedia.com: http://www.encyclopedia.com/entrepreneurs/encyclopedias-almanacs-transcripts-and-maps/north-american-industry-classification-system-naics
North American Industry Classification System
NORTH AMERICAN INDUSTRY CLASSIFICATION SYSTEM
The North American Industry Classification System (NAICS) groups establishments into industries according to their primary economic activities. NAICS facilitates the collection, calculation, presentation, and analysis of statistical data by industry. The North American Free Trade Agreement countries—United States, Canada, and Mexico—developed the system to provide comparable statistics among themselves. Federal statistical agencies in these countries use NAICS to produce information by industry on inputs and outputs, productivity, industrial performance, unit labor cost, and employment. Both government and business use this information to understand industries and the economy.
NAICS has a production-oriented conceptual framework. It groups establishments according to similarity in the processes used to produce services or goods. This supply-based framework delineates differences in production technologies. In this system, an industry is not solely a grouping of products or services.
NAICS replaced the Standard Industrial Classification (SIC) system in the United States. The SIC system, established in the 1930s and revised through 1987, drew increasing criticism as rapid changes affected both the U.S. and world economies in the late 1980s.
In 1992 the Office of Management and Budget (OMB), an executive office of the president, established the Economic Classification Policy Committee (ECPC). The ECPC was chartered to provide a "fresh-slate" examination of economic classifications for statistical purposes. The ECPC ultimately joined with Mexico's Instituto Nacional de Estadistica, Geografia e Informatica and with Statistics Canada to develop the NAICS. The NAICS codes are revised on a regular five-year cycle.
The U.S. Bureau of the Census, the U.S. Bureau of Economic Analysis, and the U.S. Bureau of Labor Statistics (BLS) continue to develop NAICS. NAICS implementation began for reference year 1997 in the United States and Canada, and for 1998 in Mexico. The U.S. Census Bureau used NAICS to prepare the 1997 Economic Census, which became available in 1999.
Other agencies implementing NAICS include the Federal Reserve Board and federal departments (e.g., Labor, Commerce, Defense, and the Treasury).
STRUCTURE OF NAICS
NAICS uses a six-digit code to identify particular industries, in contrast to the four-digit SIC code. The structure of NAICS is hierarchical. The first two digits of each code indicate the sector. The other digits and what they indicate are:
Fourth digit—Industry group
Fifth digit—NAICS industry
Sixth digit—National industry
In the manual North American Industry Classification System: United States, 2002 (NAICS: United States, 2002 ), there are codes for 1,179 U.S. industries.
NAICS classifies by sectors first. The NAICS: United States, 2002 manual presents twenty sectors, their two-digit codes, and the distinguishing activities of each, as follows:
11 Agricultural, Forestry, Fishing and Hunting
This sector includes growing crops, raising animals, harvesting timber, and harvesting fish and other animals from farms, ranches, or the animals' natural habitat.
Extracting naturally occurring mineral solids, such as coal and ore; liquid minerals, such as crude petroleum; and gases, such as natural gas; and beneficiating (e.g., crushing, screening, washing, and flotation) and other preparation at the mine site, or as part of mining activity.
Providing electric power, natural gas, steam supply, water supply and sewage removal (through sewage systems and treatment facilities).
Erecting buildings and engineering projects (e.g., highways), including new work, additions, alterations, or maintenance. Site preparation for new construction and land subdivision are also part of this sector.
The mechanical, physical, or chemical transformation of material, substances, or components into new products.
42 Wholesale Trade
Wholesale establishments sell merchandise as an intermediate step in the distribution process and provide services incidental to such sales. Wholesalers can be either merchants or establishments arranging for the purchase or sale of goods owned by others.
44–45 Retail Trade
Retail establishments sell to the general public in the final step of distribution of merchandise and provide services related to such sales.
48–49 Transportation and Warehousing
Providing transportation of passengers and cargo, warehousing and storing goods, scenic and sightseeing transportation, and supporting these activities.
Producing and distributing information and cultural products, providing the means to transmit or distribute these products, data or communications, and processing data.
52 Finance and Insurance
Involves the creation, liquidation, or change in ownership of financial assets and/or the facilitation of financial transactions.
53 Real Estate and Rental and Leasing
Renting, leasing, or otherwise allowing the use of tangible or intangible assets (except copyrighted works), and providing related services.
54 Professional, Scientific, and Technical Services
Establishments in this sector provide professional, scientific, and technical services for the operations of other organizations.
55 Management of Companies and Enterprises
Includes: (1) holding securities of companies and enterprises, for the purpose of owning controlling interest or influencing their management decisions, or (2) administering, overseeing, and managing establishments of the company or enterprise, including strategic planning and decision making.
56 Administrative and Support and Waste Management and Remediation Services
Establishments in this sector perform routine support activities for the day-to-day operations of other organizations.
61 Educational Services
Providing instruction and training in a wide variety of subjects.
62 Health Care and Social Assistance
Providing health care and social assistance for individuals.
71 Arts, Entertainment, and Recreation
Operating facilities or providing services to meet varied cultural, entertainment, and recreational interests of their patrons.
72 Accommodation and Food Services
Providing customers with lodging and/or preparing meals, snacks, and beverages for immediate consumption.
81 Other Services (except Public Administration)
Providing services not elsewhere specified, including repairs of equipment or machinery, religious activities, grant making, advocacy, laundry, personal care, death care, and other personal services.
91–93 Public Administration
Administration, management, and oversight of public programs by federal, state, and local governments with executive, legislative, and judicial authority.
NAICS code 711211 identifies the Sports Teams and Clubs industry in the United States and Canada. It belongs to:
Sector 71—Arts, Entertainment, and Recreation
Subsector 711—Performing Arts, Spectator Sports, and Related Industries
Industry Group 7112—Spectator Sports
NAICS Industry 71121—Spectator Sports
National Industry 711211—Sports Teams and Clubs
The NAICS: United States, 2002 manual gives a detailed description of the Sports Teams and Clubs industry in the three countries.
ASSIGNMENT OF NAICS CODES
NAICS is a classification system for establishments. NAICS: United States, 2002 defines an establishment as "the smallest operating entity for which records provide information on the cost of resources—materials, labor, and capital—employed to produce the units of output." In the United States the establishment is generally a single physical location using a distinct process to produce goods or services. An enterprise (company) may consist of more than one establishment. Each establishment within the enterprise is assigned a NAICS code. Statistical agencies such as the Census Bureau and the BLS assign NAICS codes based on information reported to them on administrative, survey, and census reports. The Census Bureau assigns a NAICS code to each establishment based on its primary activity.
Comparable data for the United States, Canada, and Mexico are generally available at the five-digit NAICS industry level. The sixth digit of the NAICS code is used to define national industries, which differ among the three countries because of differences in economic and organizational structures.
Many other countries collect data using the International Standard Industrial Classification (ISIC) system established by the United Nations (UN) in 1948. The UN's Statistical Commission revised the ISIC structure and codes in 1958, 1968, and 1989.
Similar to NAICS, ISIC primarily classifies establishments (rather than enterprises and firms). The criteria used to classify ISIC division and groups are:
- The type of goods and services produced
- The uses of goods and services produced
- The inputs, process, and technology of production
The third classification criterion of the ISIC is the conceptual foundation of NAICS. Hence, NAICS is aligned more closely with ISIC than the 1987 SIC system. Statistics compiled on NAICS are comparable with statistics compiled according to ISIC, Revision 3.
REVISION OF NAICS
NAICS is more timely than the SIC system it replaced because of its revision process every five years. Revisions to NAICS are made in consideration of its four principles:
- Production-oriented classification
- Special attention to new and emerging industries, service industries, and industries involved in the production of advanced technology
- Time series continuity when possible
- Compatibility with the two-digit level of the ISIC
As scheduled, NAICS: United States, 1997 was revised to become NAICS: United States, 2002. NAICS: United States, 2002 included revisions to the structures of the Construction and Information sectors and additional detail in the Retail Trade sector.
The revision process for the 2007 NAICS began when the OMB published a Federal Register Notice in March 2005 seeking comments on the ECPC proposals, which were due by June 9, 2005. Proposals include separating the Telecommunications subsector into three groups (wired, wireless, and satellite), as well as a fourth group for other telecommunications services. Another proposal creates a separate industry for Biotechnology Research and Development, distinct from Research and Development in the Physical, Engineering and Other Life Sciences. These proposals reflect emerging industries and advanced technology.
NAICS AND THE NORTH AMERICAN PRODUCT CLASSIFICATION SYSTEM
The North American Product Classification System (NAPCS) is a ten-digit code that denotes the principal products and services of an industry. It extends the six-digit NAICS U.S. Industry code to the product level. The seventh digit identifies the product class. The eighth digit signifies the BLS link code. The ninth and tenth digits taken together uniquely designate the product. The Census Bureau uses the codes for its Current Industrial Reports program.
WEBSITES OF INTEREST
For updated information from the Census Bureau about implementation of NAICS: http://www.census.gov/naics
For information on updates to NAPCS: http://www.census.gov/eos/www/napcs/napcs.htm
see also Service Industries
Executive Office of the President, Office of Management and Budget. (2002). North American Industry Classification System: United States, 2002. Lanham, MD: Bernan.
Office of Management and Budget. (2005, March 11). North American Industry Classification System—Update for 2007. Federal Register 70 (47), 12390–12399.
"North American Industry Classification System." Encyclopedia of Business and Finance, 2nd ed.. . Encyclopedia.com. (May 25, 2017). http://www.encyclopedia.com/finance/finance-and-accounting-magazines/north-american-industry-classification-system
"North American Industry Classification System." Encyclopedia of Business and Finance, 2nd ed.. . Retrieved May 25, 2017 from Encyclopedia.com: http://www.encyclopedia.com/finance/finance-and-accounting-magazines/north-american-industry-classification-system
North American Industry Classification System
North American Industry Classification System
The North American Industry Classification System or NAICS (pronounced “nakes”) is a system for organizing data on industries and companies for standardized reporting. Implemented in 1997 for the United States and Canada and in 1998 for Mexico, the classification system replaced the U.S. Standard Industrial Classification (SIC) system, as well as the respective classification systems of the other two nations.
The system provides common industry definitions for Canada, Mexico, and the United States. It replaces the three countries' separate classification systems with essentially one uniform system, while allowing for nation-specific customization at the finest level of detail. This means at the broadest levels of the NAICS hierarchy the three countries share common industry codes, but at the most detailed level (represented by six-digit codes) each country may choose to recognize additional sub-industries that are of particular importance to their national economies, while remaining within the broader framework of the cross-national system.
The NAICS and previous SIC systems are administered by the U.S. Office of Management and Budget, but are used by numerous government agencies along with private firms and nonprofit organizations. The systems describe a company or organization, often termed an establishment, using a numerical code based on its type of economic activity or the kinds of products or services a company provides. Groups of firms in similar lines of business are thus grouped together under the same classification number. Companies are assigned a four-digit to six-digit code, with each additional code number adding more specific data to identify the exact activities of the organization. The first two digits indicate the broad business sector, the third digit designates the sub sector, the fourth digit identifies the industry group, the fifth digit indicates the industry, and the sixth digit designates national industries. For example, the broad category of “information” is winnowed down to groups such as “publishers” and “broadcasters,” which are further narrowed to highly specific industry designations like “software publishers” and “radio stations.” In light of such specific categories, many large and diversified firms fall into multiple NAICS categories; hence, the category that accounts for the largest share of sales is sometimes known as the company's “primary” industry classification.
Major libraries or the U.S. Government Printing Office in Washington, D.C., maintain detailed information to help researchers determine a particular firm's classification codes. Private publishers also produce listings and rankings of companies by their SIC and NAICS codes. The official NAICS codes assigned to specific companies by government agencies, such as the Census Bureau in its economic censuses, are usually considered confidential, although for the typical company the correct codes can be readily surmised based on public information.
Problems with the SIC system, including the under-reporting of services, led to the adoption of the NAICS
system. When the SIC system was created in the 1930s, the U.S. economy was heavily dependent on manufacturing. By 2000, however, services had grown to represent 80 percent of the U.S. Gross Domestic Product (GDP). As a result, the SIC codes were replaced in part to provide better information on service firms. However, the service-oriented data is not as detailed as it is for manufacturers and does not have the detailed historical data that is available for manufacturers. The NAICS system was also created to recognize developments in high technology—particularly Internet-related businesses—and increases in international trade following the North American Free Trade Agreement (NAFTA). The revised version known as NAICS 2002 included such new industries as Internet Service Providers, Data Processing Services, and Web Search Portals. NAICS classifications do not always correlate directly with the previous SIC codes. In NAICS 2002, 358 additional industry codes were included that had not been represented in the old system.
The NAICS was revised again in 2007, but the changes were minimal. Two new industries—executive search services and biotech research and development—were assigned codes in NAICS 2007. Additionally, some other industries have been integrated into broader classifications. For example, wireless telecommunication now includes paging, and wired telecommunication includes cable program distribution. The U.S. Census Bureau has published a detailed bridge to show the changes that were made to categories between 2002 and 2007.
Furthermore, in 1999 the statistical agencies in Canada, Mexico and the United States began work on the North American Product Classification System (NAPCS) as a complement to NAICS. The NAPCS aims to classify the products of services-producing industries. As of 2007 the services produced by NAICS sectors 48-49 to 81 have been classified. These product lists can be viewed on the U.S. Census Bureau Web site at www.census.gov.
The expanded and standardized coding system aids business reporting as well as assists researchers gathering and studying data across industries. The system provides a consistent framework for industrial statistics and can benefit anyone who uses industry-based data. According to the NAICS Web page sponsored by the Georgetown University Library, the system will most benefit economists, regulators, marketers, and publishers. Because the three governments designed the system jointly, it is expected to provide better standardization and comparability for nearly all North American industry data.
There are many uses of NAICS data. A firm can compare its own sales data in a particular NAICS classification to the total sales of all companies in the classification to estimate its market share and growth potential, or to gauge its general performance. If competitors have a larger market share, the firm may need to make adjustments in its strategy or target other subgroups within an industry that offer more sales or growth potential. Many organizations use these classifications; for example, Dun & Bradstreet publishes a plant list based on these codes that might be used by marketers or industry analysts to target particular types of firms.
Typical government census data arranged by NAICS classification include the number of establishments in a given category, the number of employees, payroll data, hours worked, value added by manufacturing, the quantity and value of products shipped, materials consumed, and even capital expenditures. Marketers can use the data to determine if categories are growing or not and thus discover new opportunities. Data will also aid in determining where particular industries are clustered.
The NAICS Association, a private company that markets NAICS-related information, lists four key questions that can be answered using their data:
- Who are potential customers?
- What industries should be targeted?
- How are lists of potential customers obtained?
- What are the NAICS or SIC codes of customers?
Manuals of NAICS information released by the U.S. government are available and include alphabetized lists of NAICS and codes. Data is also available on CDROM format for ease of database referencing.
SEE ALSO Free Trade Agreements and Trading Blocs
Garritt, Fran. “Whatever Happened to the NAICS?” RMA Journal, May 2002.
Georgetown University. “North American Industry Classification System (NAICS).” Available from: http://www.gulib.lausun.georgetown.edu/swr/business/naics.htm.
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Sabrosk, Suzanne. “NAICS Codes: A New Classification System for a New Economy.” Searcher, November 2000.
U.S. Census Bureau. “Guide to the 2007 Economic Census.” 17 July 2007. Available from: http://www.census.gov/econ/census/guide/g07work.htm.
U.S. Census Bureau. “North American Industry Classification System (NAICS).” Available from: http://www.census.gov/epcd/www/naics.html.
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"North American Industry Classification System." Encyclopedia of Management. . Encyclopedia.com. (May 25, 2017). http://www.encyclopedia.com/management/encyclopedias-almanacs-transcripts-and-maps/north-american-industry-classification-system
"North American Industry Classification System." Encyclopedia of Management. . Retrieved May 25, 2017 from Encyclopedia.com: http://www.encyclopedia.com/management/encyclopedias-almanacs-transcripts-and-maps/north-american-industry-classification-system