Last Updated 28 Jan 2021

The SIC codes divide firms

Category Manufacturing
Words 750 (3 pages)
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The SIC codes divide firms into the following broad industry divisions: agriculture, forestry, fishing; mining, constructions; manufacturing; transportation, communication, electric, gas, and sanitary services; wholesale trade; retail trade; finance, insurance, and real estate services; public administration; and non-classifiable establishments. The scheme assigns each major category within these classifications its own two-digit number.

Three-digit and four-digit numbers subdivided each industry into smaller segments. For example, a major group such as food and kindred goods is assigned SIC 20. A specific industry group such as meats has its own three-digit number, SIC 201. The next category, the specific industry, is indicated by the four-digit. Poultry slaughtering and processing, for example, is SIC 2015. Government operations and not-for-profit organizations also have SIC numbers. For example, hospitals are SIC 8062.

In its Census of manufacturers report, the Bureau of the Census assembles data at two additional levels; five-digit product classes and seven-digit product or commodity categories. Using SIC Codes Most publications on organizational markets label data according to the SIC system. The detailed information for each market segment provides marketers with a comprehensive description of the activities of potential customers broken down by both geographic area and specific industry.

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SIC codes provide a useful tool for segmenting markets and identifying new customers. Since each SIC code identifies a relatively homogeneous group of firms, marketers can usually assume that all companies listed within a category share similar business requirements and concerns. For instance, SIC category 3715 includes firms that manufacture truck trailers. Most, if not all, of these firms need to purchase similar raw materials, such as steel wheels, sheet metal, oil, plastic and electric parts, and tires. Suppliers of these components can target potential customers by tracking companies in the 3715 category.

However, marketers must recognize certain limitations of the SIC system. It assigns an individual code to each physical location (a plant or office, for example). A major corporation with many facilities will have multiple SIC codes, depending on the primary products made at specific locations. The four-digit code for the whole organization is based on the product group with the greatest value. Relying solely on SIC codes could give an erroneous picture of a company's operations.

Businesses use SIC code data for more than segmentation. These codes also help them estimate demand and forecast sales. A supplier of steel wheels, for instance, might analyze present customers and determine that SIC 3715 customers tend to spend about eight cents per dollar of their final shipments on wheels. By obtaining information on the total shipments of SIC 3715 firms, the supplier could develop a market estimate of total wheel sales to companies in this category.

Segmentation by End-Use Application A third basis for segmentation, end-use segmentation, focuses on the precise way in which a business purchaser will use a product. For example, a printing equipment manufacturer may serve markets ranging from a local utility to a bicycle manufacturer to the U.S. Department of Defense. Each end use of the equipment may dictate unique specifications for performance, design, and price.

Praxair, a supplier of industrial gases, might segment its markets according to user: Steel and glass manufacturers might buy hydrogen and oxygen, while food and beverage manufacturers need carbon dioxide. Praxair also sells krypton, a rare gas, to companies that produce laser, lighting, and thermal windows. Many small and medium-sized companies also segment markets according to end-use application. Instead of competing in markets dominated by large firms, they concentrate on specific end-use market segments.

Segmentation by Purchasing Situation Yet another approach to dividing business markets centers on purchasing situation. Organizations institute purchasing procedures more complicated than those of consumers. Companies also structure their purchasing functions in specific ways, and for some business marketers, this may be the best way to segment the market. Some companies designate centralized purchasing departments to serve the entire firm, while others allow each unit to handle its own purchasing. A supplier may deal with one purchasing agent or decision makers at several levels. Each of these structures results in different buying behavior. Sellers who understand this fact can separate markets by needs and marketing requirements and respond with appropriate strategies.

Another way to segment customers is by buying situation: Has the company bought the product before, or is this the customer's first order for the good or service? For example, IBM's Integrated Systems Solutions Corp. subsidiary would use a different marketing approach to sell to Lucent Technologies, an existing customer of its computer support services, that to a potential new customer who is unfamiliar with its offering.

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