How do sectors work?
A business sector is typically defined by the type of products or services a company provides. Under the Global Industry Classification Standard (GICS), the economy is divided into 11 sectors, which are further segmented into 24 industry groups. These industry groups are then broken down into 68 industries, encompassing a total of 157 sub-industries.
For investors, sectors serve as a useful way to categorise companies that operate in similar markets. For example, General Motors Co. (GM) falls under the consumer discretionary sector, specifically within the automobile industry.
Classifying stocks by sector also allows for easier comparison and analysis across different areas of the market. Since 2018, the information technology sector has held the largest market capitalisation, according to PwC, positioning it as a leading force in the global stock market.
Types of economic sectors
The economy is broadly categorised into four main sectors: primary, secondary, tertiary, and quaternary. Each sector represents a distinct segment of economic activity, contributing uniquely to the overall economic landscape. Here are the types of different economic sectors:
Primary sector
The primary sector includes:
- Agriculture: Includes farming, crop production, and livestock rearing.
- Fishing: Encompasses commercial fishing, aquaculture, and seafood processing.
- Forestry: Involves timber harvesting, forest conservation, and related activities.
- Mining: Covers the extraction of minerals, oil, and natural gas.
- Natural resource management: Focuses on sustainable practices in exploiting natural resources.
Secondary sector
The secondary sector includes:
- Manufacturing: Involves producing goods from raw materials, including factories and assembly lines.
- Construction: Includes building infrastructure like roads, bridges, and buildings.
- Textile production: Encompasses the creation of fabrics and clothing.
- Automotive industry: Focuses on the production of vehicles and related components.
- Chemical processing: Involves transforming raw chemicals into usable products like pharmaceuticals and plastics.
Tertiary sector
The tertiary sector includes:
- Retail and wholesale: Includes businesses that sell goods directly to consumers and other businesses.
- Healthcare: Encompasses hospitals, clinics, and medical services.
- Education: Covers schools, universities, and educational services.
- Financial services: Includes banking, insurance, and investment firms.
- Transportation and logistics: Focuses on moving goods and people, including shipping, airlines, and public transport.
Quaternary sector
The quaternary sector includes:
- Knowledge-based services: The quaternary sector focuses on industries involved in knowledge and information services, including education, research and development, and consultancy.
- Intellectual property: It encompasses activities related to the creation and management of intellectual property, such as patents, copyrights, and trademarks.
- Technology and innovation: This sector drives technological advancements and innovation, contributing to the development of new products and processes.
- Data analysis: It involves the collection, analysis, and interpretation of data to support decision-making and strategic planning.
- High-skill employment: Jobs in the quaternary sector typically require advanced skills and education, often in specialised fields. Understanding entrepreneurship within the quaternary sector can lead to innovative breakthroughs and business success.
How are sectors categorised?
- Economic activities: Sectors are divided based on primary economic activities like agriculture, manufacturing, and services.
- Industry groups: Within sectors, companies are further categorised into industry groups based on specific functions.
- Market characteristics: Sectors can be classified by market characteristics such as consumer demand, regulatory environment, and technological advancements.
- Standard classifications: Systems like the Global Industry Classification Standard (GICS) and the North American Industry Classification System (NAICS) provide standardised sector classifications.
Example of sectors
- Technology: Includes software companies, hardware manufacturers, and IT services.
- Healthcare: Encompasses hospitals, pharmaceutical companies, and medical device manufacturers.
- Finance: Consists of banks, insurance companies, and investment firms.
- Manufacturing: Covers automotive, aerospace, and electronics production.
- Consumer goods: Involves companies producing goods for direct consumption, like food, beverages, and clothing.
Importance of sectoral analysis
- Investment decisions: Helps investors identify profitable opportunities and risks.
- Market trends: Provides insights into emerging trends and innovations.
- Performance benchmarking: Enables comparison of a company's performance with its peers.
- Strategic planning: Assists businesses in making informed strategic decisions.
- Risk management: Helps in identifying sector-specific risks for better risk mitigation.
Understanding sectoral performance is also influenced by working capital, which helps businesses maintain financial stability in response to industry dynamics.
Key Sector Trends and Associated Challenges
- Technology: Trend towards artificial intelligence; challenge in data security.
- Healthcare: Rise in telemedicine; challenges in regulatory compliance.
- Finance: Growth of fintech; challenge in managing cybersecurity risks.
- Manufacturing: Shift towards automation; challenge in maintaining supply chain stability.
- Retail: Increase in e-commerce; challenge in maintaining customer loyalty.
Difference between industry and sector
While often used interchangeably in business and economics, industry and sector represent distinct levels of classification within the economic structure. The table below highlights the key differences:
Sr. no.
|
Industry
|
Sector
|
1
|
A specific category of economic activity focused on similar products or services
|
A broad classification that includes multiple related industries
|
2
|
Falls under a particular sector as a narrower grouping
|
Encompasses several industries with shared economic functions
|
3
|
Defined by product type, production methods, or target market
|
Defined by economic factors or overarching market dynamics
|
4
|
Examples include automotive, retail, finance, healthcare
|
Examples include consumer discretionary, energy, IT, and healthcare sectors
|
5
|
Companies within an industry often compete directly for the same customers
|
Companies within a sector may operate independently or collaborate across industries
|
6
|
Subject to industry-specific regulations, compliance, and benchmarks
|
Sector-wide policies and standards may apply across multiple industries
|
7
|
Industry analysis focuses on competition, market share, and innovation
|
Sector analysis covers overall performance and macroeconomic trends
|
8
|
Economic factors may impact industries in different ways
|
Broader market shifts may influence several industries within a sector
|
9
|
Companies may share similar customer bases and distribution models
|
Sectors may include companies serving diverse markets and audiences
|
10
|
Trade associations and publications often cater to specific industries
|
Sector-based organisations address common concerns across related industries
|
11
|
Uses industry-specific KPIs and benchmarks for performance measurement
|
Uses sector-level indicators to assess overall trends and competitiveness
|
12
|
Firms often specialise in one particular industry for operational focus
|
Businesses may diversify and operate across multiple industries in the same sector
|
13
|
Requires in-depth technical and market knowledge of the specific industry
|
Understanding sector-wide patterns supports strategic investment and planning
|
14
|
Industry boundaries are well-defined and narrowly scoped
|
Sector boundaries are broader and more inclusive of diverse industries
|
15
|
Industry-specific research tracks trends, challenges, and technology shifts
|
Sector-level research explores macro trends, investment cycles, and economic indicators
|
16
|
Companies benchmark against direct industry competitors
|
Sector benchmarks help evaluate broader performance across grouped companies
|
Industry vs. sector: What's the difference?
- Scope: A sector is broader, encompassing multiple industries.
- Focus: An industry focuses on a specific type of economic activity within a sector.
- Examples: The healthcare sector includes industries like pharmaceuticals, hospitals, and medical devices.
- Classification: Sectors are often classified by major economic activities, while industries are more narrowly defined.
- Analysis: Sector analysis provides a macro view, while industry analysis offers a micro perspective.
What’s bigger: A sector or an industry?
- Hierarchy: A sector is larger, containing multiple industries.
- Examples: The finance sector includes industries like banking, insurance, and investment services.
- Economic impact: Sectors have a broader impact on the economy than individual industries.
- Diversity: Sectors encompass a wider range of activities and businesses compared to industries.
- Investment: Sector-based investment provides broader exposure than industry-specific investment.
A key consideration when structuring your business for expansion is your capital structure, which affects how you manage funding and investment across sectors.
Conclusion
Understanding the key trends, challenges, and differences between sectors and industries is crucial for making informed business decisions, whether for investments or strategic planning. The sectoral analysis provides valuable insights into economic activities, helping businesses and investors manage risks and identify opportunities. For businesses, obtaining a business loan might be easier with a clear understanding of their sector and industry dynamics, ensuring better financial management and growth potential. One critical aspect of this is maintaining an efficient working capital cycle to optimise cash flow and support operational needs. Here is what makes a Bajaj Finserv Business Loan an ideal choice when you need funds to scale your business:
- Quick disbursal: Funds can be received in as little as 48 hours of approval, allowing businesses to respond promptly to opportunities and needs.
- No collateral required: You do not have to pledge any collateral to get our business loan, which is beneficial for small businesses without substantial assets.
- Competitive interest rates: The interest rates for our business loans range from 14% to 25% per annum.
- Flexible repayment schedules: Repayment terms can be tailored to align with the business's cash flow, helping manage finances without strain. You can choose a tenure ranging from 12 months to 96 months.
