What is an Industry?
An industry – or sector – is the whole of all economic activities by companies, people, and organizations involved in the production of goods and services for a particular field. Industries are usually categorized by the goods and services they produce.
For example, the pizza industry is made up of all producers who produce and sell pizza in the market. It is important to note that for a pizza maker to belong to the pizza industry, he or she must sell the product they make in the market. A person cooking pizza at home for his or her children would not fit under this description as they are not selling any products or services.
Interactions Between Industries
All industries use material inputs from other sectors and factor inputs from the general economy and convert them into a finished product using the production process. Using the previous pizza example, a pizza producer uses material inputs from producers of other sectors. This includes cheese from dairy producers or vegetables from farmers. They would also use factor inputs from the general economy – pizza makers from the labor market – to create the finished product, pizza.
Industries are organized under different categories. These categories consist of whether they are heavy or light, domestic or foreign, durable or non-durable, or manufacturing or construction industries.
1. Heavy vs Light
This category describes how much capital is required to set up a business in this sector.
A heavy sector would include businesses that often employ a capital-intensive production process that requires a large initial investment in operating equipment and machinery. Examples that fall under the ‘heavy’ category would be most natural resource harvesting sectors, such as steel, coal, and other mining-related sectors. Other sectors that are considered ‘heavy’ are the aviation sector or the automobile sector.
Conversely, a light sector would have much lower capital requirements for a business to set up. However, these sectors usually have labor-intensive production processes. For example, the restaurant sector would be ‘light’ because most of its operating processes require labor as opposed to machinery.
For a more detailed look into modeling for mining-related sectors that have heavy capital requirements, check out CFI’s Mining Valuation Course!
2. Domestic vs Foreign
This category describes whether the sector operates and produces goods and services within a certain country’s borders. This classification is from the perspective of that country.
A country’s domestic industries are those that are located within its borders. For example, the United States of America maintains a domestic coal sector that is composed of all coal-related production activities within the US.
In contrast, foreign sectors are those that are not located within a country’s borders. Using the same example, all coal-related production activities that are outside the United States constitute the foreign coal sector for the US.
3. Durable vs Non-durable
This category describes whether the sector produces goods that last a significant amount of time and amortize over long periods.
A durable industry would be one that produces goods that last a long time. For example, the automobile and aviation sectors both produce goods (cars and planes) that will be used regularly and maintained over many years.
Alternatively, a non-durable sector produces goods that usually do not last very long, require immediate consumption, and are perishable. The agricultural industry would be a good example of a non-durable sector, as they produce food that easily perishes if it is not stored appropriately.
4. Manufacturing vs Construction
This category describes whether the sector produces a final product or raw materials and intermediate goods that are used in other sectors’ production processes.
Manufacturing industries are those that produce final consumption goods. These are the products that end up in the customers’ hands for consumption. Using two previous examples, both the pizza sector and the automobile sector would be classified as ‘manufacturing’ sectors, despite being very different.
Conversely, companies that produce intermediate goods – goods to be used by other companies to produce final consumption goods – would be considered a ‘construction’ industry.
Examples of Industry Categorizations
|Industry||Heavy vs Light||Domestic vs Foreign||Durable vs Non-durable||Manufacturing vs Construction|
A country’s level of industrial production is a key indicator of economic performance.
CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful: