CFA Level I Exam · Industry and Competitive Analysis

Industry Classification and Peer Group Analysis for CFA Level I

Updated 7 October 2026 · Fact-checked

Industry classification groups companies by business activity so you can compare them. Commercial systems such as GICS and ICB classify by principal business activity, mostly using revenue, for investors. Government systems such as NAICS serve statistics. To build a peer group, pick the industry, then screen companies on similar business mix, demand drivers, cyclicality and financial profile.

Understand Industry Classification and Peer Group Analysis

An industry classification system sorts companies into groups with similar business activities. Analysts need this because valuation is often relative. A multiple means little until you compare it with firms that earn money in a similar way and face similar risks.

There are two broad families. Commercial systems are built by data and index providers for investors. Examples are the Global Industry Classification Standard (GICS), from MSCI and S&P Dow Jones Indices, and the Industry Classification Benchmark (ICB), from FTSE Russell. Government systems are built by statistical agencies to measure the economy. Examples are the North American Industry Classification System (NAICS) and the older International Standard Industrial Classification (ISIC), from the United Nations. The main difference is the purpose: commercial systems serve investors, government systems serve economic statistics.

Commercial systems classify a company by its principal business activity, usually the activity that produces most of its revenue. Earnings and market perception can serve as supporting evidence. Each company gets one classification at the level of the whole company, not each product line. Both GICS and ICB use a hierarchy that runs from broad to narrow. GICS has four levels: sector, industry group, industry, sub-industry. ICB has four levels too: industry, supersector, sector, subsector. Government systems tend to have more detailed levels and, as a rule, classify at the level of the establishment, not the whole company. NAICS uses a hierarchy of numeric codes. Government systems cover private firms as well as public ones, while commercial systems generally focus on publicly traded companies.

Another difference is coverage. Commercial schemes focus on companies that are publicly traded. Government schemes cover the whole economy, including private and small firms. Commercial schemes are usually reviewed and updated, and a company can move when its business changes.

A peer group is a set of comparable companies. The steps are: identify the subject company's business and its likely peers using classification as a starting point, examine each peer's revenue sources, sensitivity to the business cycle, and statistical and financial similarity, then adjust the group where needed. Classification gives a first screen, not a final answer. Two firms in the same industry can differ in size, geography, growth, leverage and business model, and a company in a different industry can sometimes be a good peer.

You can also group companies by cyclicality. Cyclical companies have earnings that swing strongly with the business cycle. Non-cyclical (defensive) companies have more stable earnings. This is a useful cross-check on a peer group, since firms in different classification groups can have similar cyclicality.

Key formulas to remember

Principal business activity rule: Classification = activity generating the largest share of revenue (earnings and market perception as supporting evidence); Commercial systems classify the whole company into one category using this rule.
GICS hierarchy: Sector → Industry group → Industry → Sub-industry; Four levels, broad to narrow.
ICB hierarchy: Industry → Supersector → Sector → Subsector; Four levels, broad to narrow.
Commercial vs government purpose: Commercial (GICS, ICB) = investment analysis; Government (NAICS, ISIC) = economic statistics; Government systems cover private firms as well as public ones, and classify by establishment.
Peer group test: Peers = similar business activities + similar demand drivers + similar cyclicality + similar financial profile; Classification is only the first screen; always confirm with these criteria.

How to solve Industry Classification and Peer Group Analysis questions

Use this order for any question on classification systems or peer groups.

1Identify what the question asks: the type of system, a specific system's feature, or how to build or judge a peer group.
2If it names a system, place it: GICS or ICB means commercial and investor-focused; NAICS or ISIC means government and statistical.
3Check the unit being classified: a whole company by principal business activity (commercial) or an establishment (government).
4For a peer group question, find the company's main revenue source and compare it with candidate peers.
5Test each candidate on cyclicality, demand drivers, size, geography and financial profile.
6Eliminate options that treat classification as a perfect match, or that mix up system types.
7Pick the option that treats classification as a starting point and checks business fundamentals.

Quickest way: Purpose-and-revenue shortcut

When to use it: Use it when you have about 90 seconds and the question is conceptual.

Ask: investor tool or statistics tool? That settles commercial versus government.
Ask: what produces most revenue? That is the commercial classification.
For peers, ask: same revenue drivers and same cyclicality? If not, the company is a weak peer.
Remove the two options that overstate what classification can do or reverse the system types.

Common mistakes in Industry Classification and Peer Group Analysis

Treating NAICS as a commercial investment classification
All the acronyms look alike and all classify industries.
Fix: Link NAICS and ISIC to government statistics, and GICS and ICB to investors.
Assuming a company is classified by every product it sells
Diversified firms have several business lines.
Fix: Commercial systems assign one classification based on principal business activity, mainly the largest revenue source.
Assuming same industry means perfect peer
The classification label feels like proof of comparability.
Fix: Check cyclicality, size, geography, leverage and business model before using firms as peers.
Ignoring peers from other classifications
Students think the group must stay inside one sub-industry.
Fix: Companies with similar revenue drivers and risks can be peers even if the labels differ, so use classification as a first screen only.
Mixing up hierarchy level names between GICS and ICB
Both have four levels, and the names are similar.
Fix: Remember GICS starts with sector and ICB starts with industry. Know the order, not just the count.
Thinking government systems cover only listed companies
Students assume all classifications are built for stock analysis.
Fix: Government systems cover the whole economy, including private and small firms, and are not designed for investors.

Worked examples

Example 1

An analyst wants a classification system built to support investment analysis, with each public company assigned to one category by its principal business activity. Which system fits best? A. NAICS B. ISIC C. GICS

Show the solution

The key words are investment analysis and principal business activity of each public company.
NAICS and ISIC are government statistical systems built for economic data, so they do not fit.
GICS is a commercial system that classifies each company by principal business activity.

Answer: C. GICS

Example 2

An analyst is valuing a software company and has found three firms in the same GICS sub-industry. One earns most of its revenue from consulting, one is much smaller and sells only in one region, and one has similar products, customers and growth. Which is the best peer? A. The consulting-led firm B. The one with similar products, customers and growth C. The regional small firm

Show the solution

Same sub-industry is only a first screen.
Check revenue sources: the consulting-led firm has a different business mix, so its risks and multiples can differ.
Check size and geography: the small regional firm has a different scale and market exposure.
The third firm matches on products, customers and growth, so it is the most comparable.

Answer: B. The one with similar products, customers and growth

Exam tips

Match the system to its purpose first. Most conceptual items turn on commercial versus government.
Remember that commercial systems assign one classification per company based on principal business activity.
Be wary of options that say classification guarantees comparability. The better answer says it is a starting point.
Know the level order for GICS (sector first) and ICB (industry first).
With three options, eliminate the two that confuse system types or ignore cyclicality and business mix.

Practice questions from Industry and Competitive Analysis

Industry Classification and Peer Group Analysis in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Industry Classification and Peer Group Analysis: frequently asked questions

What is the difference between GICS, ICB and NAICS?

GICS and ICB are commercial systems used by investors and index providers. NAICS is a government system used for economic statistics. Commercial systems classify listed companies by principal business activity, while government systems cover the whole economy.

How does GICS classify a company with several businesses?

It assigns one classification to the whole company based on its principal business activity. This is mainly the activity that generates most of its revenue. Earnings and market perception can also support the decision.

How do I identify a peer group for company comparison?

Start with the company's classification, then check the revenue mix, demand drivers, cyclicality, size, geography and financial profile. Remove firms that differ materially and consider adding firms from other classifications that share the same drivers.

Are government classification systems useful to investors?

They can help with economic analysis because they cover the whole economy, including private firms. They are generally not built for investment analysis, so commercial systems are the usual starting point for peer groups.