Industry Vs. Sector: Definition And Comparative Analysis

By Indeed Editorial Team

Updated 30 September 2022 | Published 5 May 2022

Updated 30 September 2022

Published 5 May 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Economists organise businesses into distinct divisions based on services or products. Organising businesses into defined segments can help investors and economists understand the different levels of activities within an economy. If you are a student of economics, business or commerce, knowing more about the distinguishing features of an industry and a sector can benefit you. In this article, we define sector and industry and compare the characteristics of both.

Industry Vs. Sector

The primary purpose of creating segments in the economy and comparing industry vs. sector is to use the data for short-term and long-term economic planning. Governments, economists and policymakers analyse growth in each industry and track growth for economic planning and development. Such segmentation also helps investors understand which industry or sector has potential growth, presents more risks and can offer more profits. Industries and sectors do interlink at times, but have some distinctive characteristics that differentiate them. They are:

Definition

An industry is a group or cluster of companies that engage in similar business activities, such as producing similar goods or services. These groups are distinctly separate and name themselves after their primary products. A sector is a general term that describes a large economic segment that comprises many similar industries. Economies separate into multiple sectors, with different classifications of those sectors, based on their unique characteristics and economic activities. There are sectors, industry groups, industries and sub-industries that contribute to the overall economic activity and growth of a nation.

Classification

The International Standard of Industrial Classification (ISIC) classifies and lists similar industries into 24 broad categories. This classification depends on their input, output, the purpose of the goods and services and the character of the production process. The broad classification of industries, as per ISIC are:

  • Agriculture-based industries

  • Non-agriculture based industries including manufacturing, construction, mining, quarrying, electricity, gas and water supply

  • Market services like trade, transportation, accommodation, food, business and administrative services

  • Non-market services like public administration, community, social and other services and activity

Economists classify an economy into sectors, which are large groupings of companies with similar business activities. Classifying industries into sectors helps them to analyse how each sector is growing. The three main classifications of sectors are:

  • The primary sector includes industries that use natural resources like agriculture, mining and related activities.

  • The secondary sector includes manufacturing industries and industries that use the produce from primary industries.

  • Tertiary and quaternary sectors include knowledge and service-based industries.

Related: Types Of Economists: Work Environment, Job Role And Salary

Scope

An industry's scope is considerably narrow because it includes many companies or firms with similar characteristics. Industries are sometimes regional, which means they occupy specific geographical locations. Different regions interact with specific economic actions. A sector usually has a wider scope because it includes a broad economic division. A sector's scope can include thousands of industries and some sectors may have more industries than others.

Formation

An industry forms when there are multiple companies or firms that produce similar products or services. These industries can form quickly depending on the characteristics of the businesses, advancements in technology or economic growth. Industries can shift or change over time or even dissipate with economic changes. Sectors form when multiple similar industries combine as one group. Some sectors are more economically stable, so the shifting or changing of some industries rarely affects them. The secondary and tertiary sectors are more stable even during significant economic changes because they include some essential industries.

Analysis

There may be five or six sectors in every economy that do consistently well in revenue and employment generation. Sector analysis reviews and assesses a ‌sector to gauge its financial condition and prospects. Investors use sector analysis to identify promising sectors and forecast how they may perform in the future. An analysis of industry helps a specific business to understand its position in relation to other businesses. Industry analysis contains information about a company's demand and supply capabilities, market size and position, technology and competitors.

Taxonomy

The National Industrial Classification creates and develops a database of various economic activities. Their classification is closest to the ISIC and it assigns a 5-digit code to small, large and medium enterprises based on the type of industry and sector they belong to. It helps the government track and analyse industries' economic and business activities. The government then collects and merges data for sector-wise analysis, reporting and policy formulation.

Approach for investment

When investors study markets, they consider sectors more helpful because of their broader classification. Investors are in a better position to study the risk of each sector than an industry. Considering individual industries for investment may not give them a clear or comprehensive understanding. For example, investment advisors may advise clients to invest in agriculture, banking, aviation or telecom. Once they identify the right sector, they may narrow down the choice to specific industries based on current market analysis and the concerned company's financial position. Stocks of companies within the same industry are more likely to fluctuate in the same direction.

Policymaking

The government often designs policy frameworks for industries to improve productivity, enhance employment, optimise human resources and be globally competitive. Industrial policy hopes for economic transformation. These policies aim to improve or encourage economic performance. Sectoral policies address broader challenges by focusing on social and labour issues in specific sectors. Sectoral policies often remain flexible because they can cover hundreds of industries. Each industry can have its policy, so sector rules require adaptability to cover these varying parameters.

Hierarchy

Sectors and industries are segments of an economy. A sector is a bigger segment that includes multiple industries. An industry is a group of individual business entities. The economic hierarchy begins with placing the general economy at the top of the pyramid, as it is the basis for every business practice. Sectors are second in the hierarchy because they are larger segments. Industries rank last in the hierarchy because they make up the smallest and most specific economic elements.

Management

Managing a company within an industry can be relatively uncomplicated because the businesses define their activities, products and services. There is also limited scope for these activities, making it easier for managers to monitor and control operations. A sector can be hard to manage because of the many industries taking part in different enterprises within that general area. Managing or controlling a sector also usually requires a high level of expertise and experience.

Related: Your Guide To The Strategic Management Process

Examples

The primary sector includes businesses that use natural resources like agriculture, mining, fisheries, forestry and quarrying. Some secondary sector industries include textile, steel, automobile, consumer goods, clothing, construction and plastic. Tertiary industry includes transportation, health care, education, sales, retail, finance, tourism and entertainment. Examples of the quaternary sector are investment, consulting and research and development industries.

Related: 15 Popular Jobs In Tourism (With Salary And Primary Duties)

What Are The Advantages Of Industry And Sector Classification?

Classifying businesses into industries and sectors helps study economic trends and patterns. Without such classifications, governments may be unable to identify the sectors performing well and those needing budgetary support, financing or policy reforms. For example, if there is a dip in performance in agricultural and related industries, it could lead to inflation, reduction in exports and instability. Similarly, positive growth in the manufacturing industry can lead to more employment generation, increase purchasing power and can promote economic growth.

Segmentation of the economy into sectors and industries provides data for statewide and nationwide analysis. Industries are important contributors to Gross Domestic Product (GDP). Classification and segmentation make it easier to compare one industry with another. Apart from governments, analysts also use sectoral and industrial research, performance analysis and portfolio management workflows.

List Of Common Industries

Industries may classify as agriculture-based industries, non-agriculture based industries, market services and non-market services. ISIC also lists industries that can list under each sector. These industries include:

  • Agriculture, forestry and fishing

  • Mining and quarrying

  • Manufacturing

  • Electricity, gas and steam

  • Water supply, sewerage and waste management

  • Construction

  • Wholesale and retail trade

  • Transportation and storage

  • Accommodation and food service

  • Information and communication

  • Finance and insurance

  • Real estate

  • Professional, scientific and technical services

  • Administrative support

  • Public administration

  • Defence

  • Education

  • Health care

  • Social work

  • Arts, entertainment and recreation

Please note that none of the companies, institutions or organisations mentioned in this article are associated with Indeed.


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