Industry

It consist of companies that have similar major business activities.

Author: Almat Orakbay
Almat Orakbay
Almat Orakbay

Almat currently works as a Financial Advisory Services (Business Valuation) Consultant 2 at Deloitte Kazakhstan, where he works with clients across multiple industries. Prior to joining Deloitte, Almat spent 9 months as an Audit Assistant 1 for KPMG Caucasus and Central Asia, where he focused on the asset management and banking services industries.

Almat has a Bachelor of Finance from KIMEP University.

Reviewed By: David Bickerton
David Bickerton
David Bickerton
Asset Management | Financial Analysis

Previously a Portfolio Manager for MDH Investment Management, David has been with the firm for nearly a decade, serving as President since 2015. He has extensive experience in wealth management, investments and portfolio management.

David holds a BS from Miami University in Finance.

Last Updated:January 28, 2024

What Is an Industry?

In what companies do you want to invest or work? What kind of businesses do you want to start? Who are your clients? These questions have common factors to consider, sectors and industries.

Sector and industry are related terms that are used interchangeably. Yet, there are some significant differences between them.

The industry consists of companies that have similar major business activities. We can classify the companies according to the goods and services they offer.

For example, if the company manufactures semiconductors, it operates in the semiconductors segment.

The industries can be further grouped into sectors. However, the sector is much broader and represents a more significant economic segment. E.g., Automobile, Construction, Power, Capital Goods, etc., come under the Infrastructure Sector.

For example, the technology sector consists of: 

  • Computers & Hardware
  • Software
  • Semiconductors
  • Internet 
  • Consulting

Ok, now we've discussed the main difference between industry and sector. But why do we need them? How do we use that knowledge?

Suppose you work as an investment banking analyst. Let's imagine you work in the industry group of the investment banking division. You work with clients from the automotive segment.

You want to offer M&A and other advisory services to your clients in the best possible way. But, to provide excellent services to your clients, you must first know your clients and understand their needs.

Industries and sectors are vital for the economy because they offer goods and services that meet the needs of each other. For example, the law firm gets insurance from an insurance company. That insurance company can get legal advice from the law firm.

There is always a beneficial relationship among industries and sectors. So, first, let's talk about the sectors.

What Are Sectors?

A sector, as mentioned before, is a large group of industries and represents a segment of the economy. Examples of that economic sector are financial, I.T., and healthcare. The sector can be divided into industry groups.

Below are five main types of sectors in any economy.

Primary

Primary sectors include mining, fishing, agriculture, forestry, hunting, packaging, and processing. In emerging economies, this is the primary source of employment, meaning that a large portion of the population works in this sector.

Secondary

The secondary sectors include: 

  • Automobile production
  • Textile
  • Chemical engineering
  • Aerospace defense
  • Shipbuilding 
  • Energy utilities

All these groups consist of processing, construction, and manufacturing companies.

They produce finished goods from natural resources. Most of the developed countries have developed by improving their secondary sectors. Even today, these sectors can give an edge in the advancement of emerging countries.

Tertiary

The tertiary sector includes retail sales, transportation and distribution, restaurants, insurance and banking, healthcare, and legal services. The main job of these companies is to sell the goods manufactured by the secondary sector. Thus, we also can call it a services segment.

According to the IMF, in 2016, the leaders of the tertiary sector output were the United States, China, Japan, Germany, and the United Kingdom.

Quaternary

The quaternary sector comprises: 

Also, companies operating in this sector have knowledge-based or intellectual economic activities.

Initially, it was part of the tertiary sector. However, the only and essential thing that differentiates the quaternary industry is information. Data collection, processing, and analysis are vital for today's economy's growth.

That importance separated it into different sectors.

Quinary

The last sector is quinary. This is a new term. According to different sources, it is a human services sector. It consists of non-profit organizations (charities, NGOs) and the government.

Some other sources say that it also includes 

Often the organizations operating in this sector are influential and are leaders. These leaders are the rulers who set the world economic order and standards.

Sector & Industry Categorizations

Now let's talk about the industry categorization. There are four ways to categorize industries.

Heavy Vs. Light

The industry can be light or heavy depending on the capital needed to start a business.

If the business requires significant capital investments, it's operating in heavy industry. The capital-intensive business might need expensive operating equipment and machinery. Examples of heavy industries are mining, aviation, and automobiles.

The light industries are the opposite of heavy industries. As the word suggests, the company in the "light" industry needs less capital to set up and maintain its operations. Also, the industry process is labor-intensive or highly automated.

For example, setting up a restaurant is cheaper than starting an oil & gas company. This is because most of the restaurant's operations need labor. At the same time, the oil & gas company needs more machinery and equipment

Domestic Vs. Foreign

The classification also differs from country to country. From a particular country's point of view, industries can be:

  • Domestic 
  • Foreign 

Let's take the industry classification from the perspective of the U.S.

All companies operating within the border of the United States are classified as domestic industries. For example, the automobile manufacturer in the United States is the household sector.

But, all the businesses operating outside the United States are in foreign industries. So for example, the Chinese automobile manufacturer is in the foreign automobile sector for the United States.

Durable Vs. Non-durable

The other way to divide the industries depends on the durability of the goods over time.

Durable industries produce durable goods (that last longer over time). For example, the automobile industry manufactures cars. We have used and maintained those cars over the years. Home appliances, furniture, and medical equipment are also durable goods.

Companies in non-durable industries produce non-durable goods. These goods require immediate consumption and don't last too long.

The best example of non-durable goods is agricultural products. The farm company makes food that has expiration dates and storage requirements.

Cyclical Vs. Non-cyclical

The cyclical industry is more dependent on the economic and credit cycles. The companies in this industry produce non-necessity goods and services whose purchases can be delayed until the economy improves.

Cyclical industries include basic materials, consumer discretionary, financial services, and technology.

Non-cyclical firms offer goods and services that are relatively stable regardless of the business cycle or economic conditions. Examples of non-cyclical industries are health care, utilities, telecommunications, and consumer staples.

Other Industry Classifications

There are two other ways to classify sectors and industries besides the former classifications.

First, it's a government classification. The government and regulators set their rules to classify industries and sectors. There are three great examples of that classification system:

The main downside of government classification is the lack of specific companies in each category. The government doesn't include any company for each segment, making the work of analysts complex. Also, the database is updated rarely.

For example, NAICS is updated only every five years. However, the commercial classification system addresses those issues and provides more realistic, accessible, and reliable data about sector classification.

The most widespread commercial classification systems are:

  1. Global Industry Classification Standard (GICS) developed by Standards & Poor's
  2. Industry Classification Benchmark (ICB) designed by Dow Jones and FTSE

Both systems are similar, with some minor differences. For example, GICS uses the sector as a broad category and the industry as a narrow category. At the same time, ICB shows industry as a general category and sector as sub-groups of the industry.

In the next section, we discuss GICS classification since it's the most common system practically used by many finance professionals.

Materials

All finished goods are made by processing raw materials. This sector's primary business is providing raw materials for other sectors. We can also say that companies in the materials sector are the first line of supply chains.

There are five industries in the materials sector:

  • Building Materials
  • Chemicals
  • Paper and forest products
  • Containers and packaging
  • Metals, minerals, and mining

The main feature of the sector is that it is cyclical or sensitive to the overall economic conditions. For example, if the economy is good, the consumption of finished goods will rise. Subsequently, the demand for raw materials will increase. However, during the crisis, the opposite is true.

Also, starting a business in this sector is capital-intensive, meaning a "heavy" sector.

For the U.S., the Dow Jones Basic Materials Index is probably a good measure of the performance of public basic materials firms. In Canada, the TSX Capped Basic Materials Index shows the performance of the basic material stocks on the Toronto Stock Exchange.

The Dow Jones Basic Materials Index is an index that tracks the performance of U.S. basic materials companies. The TSX Capped Basic Materials Index tracks basic material stocks on the TSX in Canada.

International PaperEcoLab, and PPG Industries are well-known companies in this sector.

Consumer Discretionary

A consumer discretionary sector is a group of companies that produce non-essential goods and services.

 In other words, customers buy these goods and services with discretionary income (income after paying for all the necessities like utilities, food, and healthcare).

The sector consists of:

  • Automotive
  • Apparel
  • Hotels and Restaurants

This list can include sub-industries such as cars, jewelry, sporting goods, and electronic devices.

The feature of this sector is cyclicality. The businesses in this sector are susceptible to the overall economic growth or business cycle. If the economy is doing good, the salaries and income of the population will rise.

With the rise in income, more people will be willing to spend it on leisure, automobiles, hotels and restaurants, and luxury services. However, during the economic turmoil, the sector experiences a substantial crisis with declining demand.

Companies such as Starbucks, Best Buy, and Amazon operate in this sector.

Consumer Staples

The consumer staples sector is the complete opposite of the consumer discretionary sector. The main difference is that goods and services offered by consumer staples have stable demand regardless of the economic condition.

These goods and services are called "necessity" products. The major industries in this sector are:

  • Food
  • Beverage
  • Tobacco
  • Personal care products

The sector is non-cyclical and is considered "defensive." People quickly recognize consumer staple companies and brands since they use those products daily.

Companies in this sector have steady dividends and earnings, little volatility, and low risk. However, the growth is slow and limited.

The well-known companies in this sector are Procter & GambleWalgreensCostcoCoca-ColaKrogerPhilip Morris, and many others.

Energy

The energy sector companies produce and supply energy. The energy sector firms are involved in the following industries:

  • Exploration
  • Refining
  • Production
  • Energy equipment
  • Energy services

Also, companies in this sector are either involved in the non-renewable or renewable energy category. Non-renewable energy consists of petroleum products, natural gas, gasoline, diesel fuel, heating oil, and nuclear.

Renewable energy consists of hydropower, biofuels (ethanol), wind, and solar power.

The companies in the energy sector are sensitive or in the middle of the cyclical and non-cyclical sectors. Therefore, the overall economy affects the sector but is also dependable and consistent.

ExxonMobilChevronKinder Morgan, and ConocoPhillips are the largest energy companies.

Financials

One of the most and probably the most leveraged sectors is the financial sector. The main business of this sector is to allocate money effectively. As a result, the industry is cyclical and heavy.

Financial companies invest in all sectors of the economy. Thus companies are highly dependent on the performance of those sectors. Thus it is cyclical. Why is it heavy? Because government regulations worldwide demand high capital to establish and operate financial businesses.

There are five industries in the financial sector:

The companies are typically stable and well-established, with more than a century of history.

The most notable financial companies are Bank of AmericaJPMorgan Chase & CoGoldman SachsBerkshire HathawayBlackRockAmerican International Group (AIG), and NASDAQ.

Want to build a career in finance but don't know where to go? Check out our Industry Comparisons course.

Health Care

The Healthcare sector consists of the following industries:

  • Pharmaceuticals
  • Biotech
  • Medical devices
  • Health care equipment
  • Medical supplies
  • Health care services

As the name suggests, the sector's primary focus is the improvement of health (or the human body and mind). As a result, the industry is defensive. During economic turbulence, the demand for medical goods and services will stabilize.

(You don't stop buying medical treatment when you are sick, even if your income decreases).

The volatility of the healthcare sector is one of the lowest among other sectors.

However, the barriers to entry in this sector are relatively high. The obstacles are professional licenses, regulation, intellectual property (IP), and research & development costs.

The emerging trend in this sector is the growth of cannabis companies. The well-known cannabis firms are Canopy Growth Corp, with a market cap of $23 billion, and Aurora Cannabis, with a market cap of $12 billion.

The most famous companies in the overall healthcare sector are Johnson & JohnsonPfizerModernaTylenol, and Abiomed.

Industrials (or Industrial Goods)

Industrial companies operate in the following industries:

  • Heavy machinery and equipment
  • Aerospace
  • Defense
  • Transportation
  • Commercial services and supplies

Overall, there are 14 different groups in these industries. So the industrial sector is quite large. Aerospace, defense, construction & engineering are probably the most prominent groups in the industrial sector.

The main customers of the industrial sector are companies in other sectors. Other sector companies use machinery, equipment, and many other goods and services to offer the finished goods or services to the average consumer (like you and me).

For example, Boeing Company produces airplanes for airlines that sell you and me tickets for our vacations.

The industrial sector lies in between the cyclical and non-cyclical sectors. The industry is sensitive to the overall economy but doesn't fluctuate much like the cyclical sectors. Therefore, industrial is probably the average-performing sector with moderate risk.

The businesses require significant capital to operate; thus, the sector is considered a "heavy" sector.

Delta Air LinesSouthwest AirlinesFedEx Corporation, Boeing Company, General ElectricCaterpillar, and 3M are the most famous companies in this sector.

Real Estate

The real estate sector is considered a consistent sector. However, the sector performance tends to be cyclical. It depends on the economic conditions—the better the economic condition, the better the sector's performance. Vice-versa is valid for the economic downturn.

Some real estate industries (development companies) perform poorly during the turmoil (for example, the 2008 financial crisis).

Overall, there are two groups in this sector:

  • Real estate investment trusts (REITs)
  • Real estate services firms

Real estate companies work with one of the following types of real estate:

  1. Land
  2. Residential (housing for individuals, households, and families)
  3. Commercial (business properties like shopping malls, office buildings, and parking)
  4. Industrial (factories, research & development, construction, logistics, warehouses)

The leading players in the RE sector are:

  1. Developers (who build properties)
  2. Sales & marketing (work with the builders to sell their properties)
  3. Brokerages (help to facilitate the transaction between buyers and sellers in the best possible way)
  4. Property managers (rent out the unit in the building, e.g., apartment or office)
  5. RE Lenders (banks, credit unions, private lenders, government institutions)
  6. Professional services (lawyers, interior designers, general contractors, tradespeople)

American Tower Corp.Simon Property GroupBoston PropertiesCrown Castle International, and Equinix are the most well-known real estate companies.

Want to learn more about real estate modeling? Check out our Real Estate Modeling course.

Technology

A technology sector is a group of companies related to the research and development or distribution of technology goods and services. The sector is divided into the following industries:

  • Computers
  • Software
  • Semiconductors
  • Communications equipment
  • Internet services
  • Electronic entertainment
  • IT Consulting and services

Examples of information technology companies are MicrosoftOracleMastercardAppleAmazonMeta (FaceBook)Alphabet (Google), and IBM.

The IT sector is the sector with the highest market capitalization. The sector is considered a growth sector and heavily depends on innovation. The sector is cyclical and correlates with the overall economy.

The sector's performance is extraordinarily high if the economy is doing well. This is because companies have money to invest in technology in an excellent economy. But, in the economic crisis, the sector will be the worst-performing due to its sensitivity.

The U.S. Bureau of Labor Statistics forecasted that this sector's jobs will increase by 13% between 2020 and 2030.

Programming skills are vital for this sector, and Python is one of today's most popular and accessible languages. Our Machine Learning - Python Fundamentals will equip you with the relevant knowledge for your work in IT.

However, if you want to know the application of Python in finance, check out our Applied Machine Learning course.

Media & Telecommunication services

The Media & Telecommunication services sector companies provide communication services for people. There are four industries within the telecommunication sector:

  • Fixed-line and wireless communication services
  • Media (Print & Digital)
  • Entertainment
  • Interactive media and services

The main segments within the sector are:

  • Wireless communications
  • Communications equipment
  • Processing systems and products
  • Long-distance carriers
  • Diversified communication services

The recent innovations in the sector include Voice over Internet Protocol (VoIP) services and 5G. You can use platforms such as Skype to call others without a telephone connection. The main feature of the sector is the concentrated market.

There are few internet and telecommunication companies in almost all countries. Due to high regulations, those companies are under government control through ownership of quasi-government entities or sovereign wealth funds.

Those industries are considered "non-cyclical" or defensive.

However, in the media and entertainment industries, the picture is different. These industries are highly competitive, and there is less market concentration. These companies are probably considered cyclical and more dependent on economic conditions.

Overall, due to infrastructure costs, the telecom sector is considered a "heavy" sector.

The most well-known firms in this sector are Walt DisneyNetflixAT&TVerizon, etc.

Our TMT Investment Banking course will equip you with practical knowledge about the Technology, Media & Telecommunication group at an Investment Banking Division.

Utilities

Utilities are one of the most defensive non-cyclical sectors in the economy. The utility sector is divided into the following industries:

  • Electric
  • Gas
  • Water
  • Sewage removal

Sometimes, we can add the telecommunication and energy sector companies to this list. However, remember that the latter two sectors are not officially considered under the utility sector.

The sector is concentrated and thus heavily regulated by the government. In addition, the utility infrastructure is quite expensive, and many companies take out colossal debt. The high debt levels make the companies' bonds more sensitive to interest rates.

Many governments demand utility companies meet the "net-zero greenhouse gas emission" by 2050. The movement toward clean energy challenges the current utility players.

The biggest companies in this sector are Duke EnergySouthern CompanyÉlectricité de France SA (ECIFY)Enel SpA (ENLAY)Exelon Corp. (EXC), and Centrica.

Researched and authored by Almat Orakbay | LinkedIn

Reviewed and Edited by Aditya Salunke I LinkedIn

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