What is the Standard Industrial Classification (SIC)?
The Standard Industrial Classification (SIC) is a four-digit classification system that classifies industries according to business activities. The SIC classification system was created in 1937 to help the U.S. government and government agencies analyze economic activities across the domestic economy.
The SIC code assigned to a company was determined by the size of the largest product lines produced by a company or the parent organization that the business is part of. Although the North American Industry Classification System (NAICS) code replaced the SIC code in 1997, some government departments and agencies continued to use the classification code to classify companies to specific industries.
- The Standard Industrial Classification (SIC) is a four-digit coding system that classifies companies based on their business activities.
- SIC codes were introduced in 1937 to standardize how government agencies collect, measure, analyze, and present statistical data on business activities.
- SIC Codes have been gradually replaced by NAICS, which is a collaborative effort between the United States, Canada, and Mexico.
SIC Code Explained
The SIC code was developed in 1937 to promote the comparability of establishment data for both the U.S. and Canadian economies. Before the SIC code was formulated, each department of the U.S. government would analyze business activities using different methods and metrics that were meaningless to other departments. The lack of a common standard made it difficult for the departments to share and compare data on the classification of business activities.
The creation of the SIC code made it possible for government departments and agencies to collect, measure, analyze, and present data easily. It also promoted uniformity and comparability in presenting data collected by the various federal and state agencies in both U.S. and Canadian economies. SIC codes were assigned to companies based on their shared characteristics in a product, service, or production of a business.
Structure of the SIC Code
The SIC code is a four-digit classifying system that begins with the general characteristics of a business and then narrows down to the specifics. The first two digits of the code show the primary industry group of a company. The third and fourth digits show the broader industry group and industry sector, respectively.
The system groups the economy into 11 broader divisions, which are divided into 83 two-digit groups that are then categorized further into 416 three-digit industry groups, and a final broader category of 1,005 four-digit industry sectors. The four-digit level is the most specific of the classification since it shows the specific category of a business.
The classifications progressively narrow the category in which a business belongs. Despite some government agencies and private organizations adding extra levels to the SIC code, the additional levels are not considered part of the official classification.
How the SIC Code is Used
Governments, government agencies, and public and private companies use SIC codes for a variety of reasons. Some of the common uses of SIC codes include:
- Key US government agencies, such as the IRS and the Census Bureau, use the SIC codes for business reporting purposes.
- Financial institutions use SIC codes to group potential borrowers when evaluating their competitiveness and market position in their specific industries.
- Marketing companies use SIC codes to group businesses according to their industries and specialization and create targeted marketing campaigns.
- Startup companies use SIC codes to identify competition in their industries and plan how to increase their competitiveness in relation to the dominant companies.
Changing from SIC Code to NAICS
With the changing economic conditions of the early 1990s, the government tasked the Office of Management and Budget (OMB) with the role of revising the SIC system into a classification system that would facilitate uniformity and comparison of statistical data across North America. It led to the formation of the Economic Classification Policy Committee in 1992. The committee was tasked with overseeing the process of revising the SIC coding system.
The revision came at the same time when the United States, Canada, and Mexico were negotiating a free trade agreement for North America, which went into effect in January 1994. The collaborative effort between the three partner countries led to the formulation of the North American Industry Classification System (NAICS). The first NAICS version took effect in 1997 for both the United States and Canada, and one year later in Mexico. The coding system is revised every five years to ensure that it remains relevant to the changing economic conditions.
NAICS expanded the SIC code’s four-digit code into a six-digit hierarchical coding system. It groups all economic activities into 20 industry sectors, comprising 15 sectors that provide a service, while the other 5 sectors produce goods. The 20 industry sectors are divided into 99 three-digit sub-sectors, then divided into a further 312 four-digit industry codes, further divided into 713 5-digit industry codes, and finally subdivided into 1066 six-digit industry codes.
The first two digits of the revised coding system show the main industry group of a company. The third digit represents the company’s subsector; the fourth digit represents the industry group; and the fifth digit shows the particular industry where a company operates. The final sixth digit shows the specific national industry of a company.
The primary NAICS code assigned to a company depends on its largest revenue source in the past year.
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