In An Era of Digital Convergence, Why Are We Still Classifying Companies By Industry?

If you are going to disrupt the economy, you had better be prepared to disrupt the way you analyze it.

Technology is no longer merely an industry. It's the means by which every business derives and delivers value. And it has blurred - or perhaps more realistically - emulsified the lines between what was once a clearly defined set of opportunities and threats.

Almost any business can enter any others' through deft application of data and digital power. Given that reality, an enterprise that limits its vision by staying within traditional bounds will be hard-pressed to optimize its variables. Economists, analysts and others who remain similarly constrained risk missing major future trends unless they, too, become more open minded about identifying contributions to growth. JL

Barry Libert and colleagues report in Harvard Business Review:

Industry walls are disintegrating. Apple and Google have made moves in the automotive, healthcare, media, and smart home markets,. They have expanded far beyond the “Information Technology” tag. LinkedIn, Uber, and Airbnb leverage our cars, homes, skills, and networks. Companies that invite a broad network to share in value creation achieve faster growth, lower marginal cost, higher profits, and higher market valuations. Business model is a better way of identifying competitors and comparing performance.
For more than 60 years, investors, analysts, business leaders, and even governments, have classified companies based on industries. First there were Standard Industry Classification codes, which were introduced in 1937, then the North American Industry Classification System, and now we have Standard and Poor’s Global Industry Classification Standard (GICS). Even though these systems are updated regularly, we can no longer rely on standards and measures that were developed in a different age to reflect today’s realities — especially when we’re evaluating tech firms.
Many of our current economic measurements saw their birth in the Industrial Age when the companies that were growing and shaping the world were giants with big physical plants and lots of material products — companies like Exxon Mobile and GE. There were no tech companies back then, at least not as we currently define them.
Times have changed. Industry walls are disintegrating at a rapid pace. Over the past five years, Apple and Google have made significant moves in the automotive, healthcare, media, and smart home markets, among many others. They have expanded far beyond the “Information Technology” tag attached to them by GICS. Today, technology is just a standard part of corporate infrastructure, like operations or marketing. It’s not an industry in itself.
And new companies such as LinkedIn, Uber, Pinterest, and Airbnb have sprung up to take advantage of new opportunities — to combine technology with more traditional offerings, and to build open platforms that leverage worldwide networks. Rather than build and manage everything themselves, these companies leverage the assets of you and me — our cars, homes, skills, and networks.
Consider the five most valuable companies in the world, according to S&P: Apple, Alphabet (Google), Amazon, Microsoft, and Facebook, which we call the Fab Five. Despite the fact that these companies make money in different ways — Apple makes most of its money on hardware, Microsoft on software, and Facebook and Google from advertising — they do share a lot of similarities. But Information Technology doesn’t seem like the right category to group them into. The fifth member of the group, Amazon, is officially a Consumer Discretionary firm. There’s no denying that it is a retailer, but it also has a digital platform rather than physical stores, and nearly 50% of the units sold through its website are sold by third-party sellers. With that in mind, Amazon seems closer in DNA to Facebook than Walmart. Like Facebook, it created an open platform that anyone, anywhere in the world, can use.
These companies, which are remarkable for beating out historical leaders like Exxon despite their relative youth, are all digital platform organizations that leverage a growing and virtual network of suppliers and customers.
So instead of focusing on vertical industries, it’s time to look at business models instead. To help begin this transformation, our research discovered four simple ways that companies create growth and value:

• Asset Builders make and sell physical things
• Service Providers use people to offer services
• Technology Creators generate and deliver intellectual property (software and data)
• Network Orchestrators facilitate transactions and interactions within a network

Today’s Fab Five leaders operate business models that span industries and countries. But they all certainly have elements of Network Orchestrators.
Our research has shown that companies that build and manage digital platforms, particularly those that invite a broad network of participants to share in value creation (such as how we all add content to Facebook’s platform or that anyone can sell goods on Amazon’s), achieve faster growth, lower marginal cost, higher profits, and higher market valuations. For organizations like these, business model is a better way of identifying competitors and comparing performance.
If leaders want to compete with the Fab Five and take their companies into the next decade, they need to start looking beyond their vertical industry designation and best practices. They should be focusing on business models and thinking about pivoting to a more valuable one. Putting digital strategy at the center of their organizations and beginning to leverage horizontal platforms and virtual networks is essential for keeping pace in our hyper connected and mobile world.
It’s time to update the Global Industry Classification Standard to reflect the wider view taken by today’s winners. New measures and standards are essential to helping investors, customers, and employees navigate the new strategic landscape with better insights.