Do the age-old ways of classifying a business by its industry still make sense in the digital era?

Posted by media on October 18, 2016 at 9:00 AM

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The tendency to classify companies by sector has remained virtually unchanged for much of the twentieth century. The United States still governs ordinations dating back to the 1930s, and Standard & Poor’s Global Industry Classification Standard (GICS) still applies from when it was established in 1999 for distinguishing IT companies from financial, health or energy companies, at a time when boundaries between these and other sectors are actually becoming increasingly fluid.

In Spain, the sector classification set out by the General Index of the Madrid Stock Exchange (IGBM) associates technology with telecommunications, as if there were no technological companies already present in sectors such as finance, insurance or health.

In a new digital context, does it still make sense to stick to the  traditional classification of companies? Are there any alternatives?

This post is also available in Spanish.

Should IT companies and Network Operators continue to be seen as separate?

Traditional classifications have rapidly caught up with the current times, and the GICS itself has recently announced a set of measures to adapt to the new digital context. However, companies with large capitalization and global projection are not easily pinned down in a single sector, but rather float in decided ambiguity that is not proper of companies with such great influence and future projections, thousands of employees and billions in revenue, like Google, Facebook, or Apple or Uber.

A substantial part of the problem lies within the traditional consideration of the IT sector, a label that made sense in the 1990s or early 2000s (and can still be applied to companies such as IBM, HP or Cisco), but today has little relevance, given that many tech-intensive companies now belong to other sectors, such as the health, automotive, or financial industries.

To make matters worse, companies like Google or Apple have angled its technology at other sectors: home automation, medicine, wearables, etc., although they still continue to be classified as purely IT companies.

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Generally speaking, Spanish companies may not be so far ahead in terms of their digital transformation to start raising red flags in terms of their classification, but there are already some Spanish companies that not only pertain to the IT or the Telecommunications sector, such as Telefonica, Indra or Amadeus.

In an interesting article published at the prestigious Harvard Business Review last August, Barry Libert - the CEO of business modelling company OpenMatters - together with digital consultant Megan Beck and academic Yoram Wind proposed a more holistic view of sector classification that no longer organizes companies under static verticals, but bases their categorization on their business models.

According to Libert, Beck and Wind, there are only four effective ways in which businesses can grow and create value for stakeholders:

  1. Being asset builders, manufacturing and selling physical objects.
  2. Being service providers, using people to offer services.
  3. Becoming technology creators, both creating and sharing intellectual property, either as software or data.
  4. Being network orchestrators, facilitating transactions and interactions within a network.

If universally applied, this simplified system of classification (which could also include a hybrid of two or more categories) would imply the disappearance of  the current sectoral divisions. Instead, the new classification would allow companies to define themselves using nothing more and nothing less than their own business model.

This post is also available in Spanish.

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