Industry Classification Methods and Company Grouping

What Defines an Industry

An industry consists of firms that a customer would view as offering comparable products or services. This customer-facing definition matters because firms grouped this way tend to share similar competitive pressures and value drivers, which makes the grouping useful for both relative valuation (peer multiples) and broader industry-level analysis.

Third-Party Classification Schemes

Commercial providers apply consistent, global classification systems so that analysts can compare companies across markets. The three most widely referenced systems are:

• Global Industry Classification Standard (GICS) — developed by MSCI and S&P Dow Jones Indices
• Industry Classification Benchmark (ICB) — developed by FTSE Russell
• Refinitiv Business Classification (TRBC) — developed by Refinitiv, which also extends coverage to private companies, non-profits, and government entities, unlike GICS and ICB, which cover public companies only

Each of these systems is a strict hierarchical taxonomy. Every firm is placed into exactly one group at the lowest tier, and these groups roll up into broader sectors at higher tiers. National or regional systems, such as NAICS in North America, serve a similar purpose within specific jurisdictions.

Limitations of Third-Party Classification Schemes

Strict hierarchical taxonomies create several analytical challenges:

• Multi-segment firms are placed in a single industry based on their largest revenue-generating activity, which can obscure a meaningful secondary business line.
• Business model variation within a single assigned industry group can be substantial — two firms in the same industry bucket can have very different asset bases or revenue structures.
• Geographic segmentation is not captured — firms selling identical products in different, non-comparable markets (due to regulation or local competitive conditions) are still grouped.
• Reclassification over time changes the composition of an industry group, which distorts historical statistics and return comparisons unless the analyst restates the data to reflect current groupings.

Alternative Methods of Grouping Companies

Geographic grouping classifies firms by country of incorporation, primary listing venue, or headquarters location, often aggregated further into developed, emerging, or frontier market categories. This approach captures shared political, economic, and regulatory conditions that a product-based classification ignores.

Business cycle sensitivity groups firms into three categories:

• Cyclical companies — revenue and profitability fluctuate significantly with the broader economy (e.g., housing, automobiles, capital equipment)
• Defensive companies — demand for their goods and services is inelastic, so revenue and profitability remain comparatively stable across the business cycle (e.g., consumer staples, utilities)
• Growth companies — revenue expands at an above-trend rate largely independent of the business cycle, though profitability varies by stage of maturity.

Example

Vantage Media Group generates 55% of its revenue from streaming subscriptions, 30% from a cloud-hosting division serving enterprise clients, and 15% from a legacy cable-advertising business. Under GICS, Vantage is classified entirely within Communication Services because streaming is its largest segment, even though its cloud-hosting business shares more in common — in terms of margins, capital intensity, and competitors — with firms classified under Information Technology. An analyst comparing Vantage against pure-play cloud providers must adjust the peer set manually rather than relying solely on the GICS-assigned grouping.

Question

Which of the following statements best describes how a strict hierarchical industry classification taxonomy treats a company that generates meaningful revenue from two distinct industries?

1. The company is split proportionally across both industries based on its revenue mix
2. The company is placed into a distinct “diversified” category reserved for multi-industry firms
3. The company is assigned entirely to the single industry that represents its largest source of revenue

Solution

The correct answer is C.

Strict hierarchical taxonomies such as GICS, ICB, and TRBC assign each firm to exactly one group at the lowest tier of classification, based on the firm’s primary — typically largest — revenue-generating activity, regardless of how diversified its actual operations are.

A is incorrect. These classification schemes do not split a company’s classification across multiple industries in proportion to revenue. A firm receives one single-industry assignment rather than a weighted or blended designation.

B is incorrect. There is no separate “diversified” category under a strict hierarchical taxonomy. Every firm, regardless of the breadth of its operations, is forced into one of the existing industry groups based on its dominant business line.