Explained: The difference between sector and industry

Although the terms ‘industry’ and ‘sector’ are commonly used interchangeably, they do, in fact, have to a great extent different meanings. The difference in both the words pertains to their scope.

Explained: The difference between sector and industry
Difference between sector and industry

Although the terms ‘industry’ and ‘sector’ are commonly used interchangeably, they do, in fact, have to a great extent different meanings. The difference in both the words pertains to their scope. A sector refers to a large segment of the economy, while the term industry describes a much more specific group or a narrowed focus of businesses.

A sector is one of a few general segments in the economy within which a large group of companies can be categorised. An economy is broken down into about a dozen sectors for analysis, which can describe nearly all of the business activity in that economy. For example, let’s look at the defence sector—you will find a number of industries, such as ammunition and missile, avionics (the electronic systems used on aircraft, artificial satellites and spacecraft), specific transport vehicles, naval ships, shipbuilding, aerospace, metallurgy, small arms, ammunition, combat vehicles, artillery, tanks, etc.

When breaking down an economy, the first groups are sectors that describe a general economic activity. Then all of the companies that fall into that sector are categorised further into industries where they are grouped only with companies with which they share very similar business activities. The definition does not end here; industries can be further sub-categorised into various, more specific groupings.

An industry, on the other hand, describes a much more specific grouping of companies with highly similar business activities. Fundamentally, industries are created by further breaking down business segments into more structured groupings. Each of the dozen or so sectors will have a varying number of industries; it can go up to in hundreds of companies. For example, the financial sector is broken down by a broad range of businesses that manage money; this includes credit unions, banks, credit card companies, insurance companies, accountancy firms, consumer finance companies, mutual fund companies, asset management companies, asset recovery companies, etc.

It should be noted that you may find situations in which these two terms are inverted. However, the general idea remains: one breaks the economy down into a few general segments, while the other further categorises those into more specific business activities. In the stock market, the generally accepted terminology cites a sector as a broad classification and an industry as a more specific one.

Fast-moving consumer goods (FMCG) is one of the largest sectors in the global economy. There are three main segments in the sector: food and beverages, healthcare and personal care. Look at the other industries which fall under the FMCG sector: processed foods, beverages, dry goods including things such as coffee, tea, sugar and beans, prepared meals, cosmetics and toiletries, over-the-counter medications sold without prescription, confectioneries, fresh foods such as milk, curd, buttermilk, vegetables and fruits, frozen food, bakery products, consumer electronics such as memory cards and head phones, stationary supplies such as pens, pencils and paper, cleaning products such as detergent and baking soda, necessary clothes such as socks and undergarments, and so on.

Sector analysis gives a review and assessment of the current condition and future prospects of a given sector of the economy. Sector analysis serves to provide the investors with an idea of how well a given group of companies is expected to perform as a whole. More or less all economies are comprised of four, high-level sectors, which are then each made up of smaller sectors. Of the large sectors within an economy, the first is called the primary sector, which involves companies that participate in extraction and harvesting of natural products from the earth, such as agriculture, mining and forestry. The secondary sector consists of processing, manufacturing and construction companies. The tertiary sector is comprised of companies that provide services, such as retail sales, entertainment and financial organisations; it also comprises of the quaternary sector (knowledge-based sector) made up of companies in the intellectual pursuits, such as educational businesses.

Industry analysis is a tool that facilitates a company’s understanding of its position relative to other companies that produce similar products or services. Understanding the forces at work in the overall industry is an important component of effective strategic planning. It consists of the total working and production capacity of the industry. It has information about imports and exports, and the demand and supply-related activities. It contains data regarding the forces that determine the demand and supply of the company. Besides, this document also possesses information about the market size, the technology used to manufacture the goods and services, price variations, position in the global market, and the company’s competitors.

Investors need to study statistical relationships between industry trends and a range of economic and business variables, and they need to develop practical, reliable industry forecast by using various approaches to forecasting. One needs to check the chosen industries’ past trends, demand-supply mechanics and future point of view. Investors also need to examine industry performance in relation to other industries to identify industries with better/lesser returns and, over time, to conclude the degree of consistency, stability and risk in the returns in the industry. Investors do analysis to identify industries that offer the highest potential for investment returns and lesser risks.

Industry trends are examined to make predictions. The study includes trends related to consumer behaviour, employment, technological advancements, new product development, competition, government norms and other factors that impact the industry. The dimensions of industry trends can be measured by locating a pattern of movement of certain companies within an industry.

By- Vidya Hattangadi. Management thinker and blogger

Get live Share Market updates and latest India News and business news on Financial Express. Download Financial Express App for latest business news.