BUS501: Strategic Management

NAICS is erected on a production-oriented or supply-based conceptual framework that groups establishments into industries according to similarity in the processes used to produce goods or services. A production-oriented industry classification system ensures that statistical agencies in the three countries can produce information on inputs and outputs, industrial performance, productivity, unit labor costs, employment, and other statistics and structural changes occurring in each of the three economies.

When an industry is defined on a production-oriented concept, producing units within the industry's boundaries share a basic production process; they use closely similar technology. In the language of economics, producing units within an industry share the same production functions; producing units in different industries have different production functions. The boundaries between industries thus demarcate, in principle, differences in production processes and production technologies.

The reasoning behind the three countries' decision to base NAICS on a production-oriented concept is summarized as follows: An industry is a grouping of economic activities. Though it inevitably groups the products of the economic activities that are included in the industry definition, it is not solely a grouping of products; put another way, an industry groups producing units. Accordingly, an industry classification system provides a framework for collecting data on inputs and outputs together.

The uses of economic data that require that data on inputs and outputs be used together and be collected on the same basis include production analyses, productivity measurement, and studying input usage and input intensities. The North American statistical agencies developed NAICS using a production-oriented concept as the framework for two reasons: (1) an industry classification system groups producing units, not products or services; and (2) groupings of producing units permit the collection of data on inputs and outputs on a comparable basis, which is required for production-oriented analysis, but do not facilitate a comprehensive collection of data on the total output of any particular good or service, which is required for market-oriented analysis. Thus, the efficient organizing concept of an industry classification system is production-oriented rather than market-oriented.