BUS501: Strategic Management

NAICS is based on the economic principle that establishments should be grouped together based on their production processes. The NAICS definition of the establishment ensures that, at some level, "establishments": (1) identify the most refined (generally smallest) individual entity possible; (2) can provide the information needed when surveying economic activity; and (3) when aggregated, approximate the statistical universe of economic activity. Each economic survey program, in practice, determines whether the establishment is the most appropriate reporting unit to meet the three criteria listed above with respect to the program's objectives. If not, an alternative reporting unit is identified.

For example, an economic survey of employment or wage data may choose the establishment – generally a physical location – as the reporting unit. Physical locations generally have records for the number of employees and their wages readily available. Therefore, it is reasonable to expect that separate wage and employment data are available for each switching station in a multiunit telecommunications carrier enterprise and the physical location is a logical choice for the reporting unit.

If the economic survey collects output data, the individual switching stations would not have the total number of telephone calls or a complete accounting of inputs and outputs of the multiunit telecommunications carrier. If a telephone call is routed through three different switching stations and the price is determined at a fourth location, all of the related locations would need to be merged into an alternative reporting unit to measure the volume and value of the output. In this case, the physical location is not an appropriate reporting unit. The level of aggregation of physical units required to create reporting units will vary greatly depending on the business activity being studied. To efficiently define reporting units, statistical surveys need to evaluate the characteristics of the activities being studied and the organizational structure of the entities producing goods or services. In some cases, the physical location is appropriate, sometimes units will need to be grouped based on homogeneous production characteristics or geographical groupings, and in other cases, the enterprise (company) may form the most appropriate reporting unit.

The practical variation in reporting unit definitions affects comparability of data. A count of units defined as physical locations will be different from a count of units defined based on the need for complete input and output records in the telecommunications industries. It is critical that each data provider clearly identify the reporting unit definition used when presenting summary statistics. The analysis of statistical data from a variety of sources requires the transparency of clearly defined reporting units.

While the reporting unit definition can vary, NAICS is a classification system for establishments and is based on grouping establishments with similar production function characteristics.