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 replaces 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—i.e., 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 underreporting 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.

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. However, the Georgetown library cautions that the new NAICS classifications do not always correlate directly with the previous SIC codes. In fact, 358 additional industry codes are included in the newer NAICS system that was not represented in the old system.

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 in order 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 SIC codes. Data is also available on CD-ROM format for ease of database referencing.