What Is a Segment?
A segment is a component of a business that generates its own revenues and creates its own product, product lines, or service offerings. Segments typically have discrete associated costs and operations. Segments are also referred to as "business segments."
Usually, if a unit of a business can be separated or lifted out of the company as a whole and remain self-sufficient, it satisfies the criteria of being classified as a business segment. Financial information should be available for each separate segment's activities and performance.
Traditionally, each individual segment is periodically reviewed by the company's management before a decision can be made regarding the amount of capital that will be allotted to it for a particular operating period.
Key Takeaways
- A segment is a term used to describe a component of a business that generates its own revenues and creates its own product or product lines.
- Segments typically have their own discrete associated costs and operations.
- Usually, if a unit of a business can be carved out of the entire company and remain self-sufficient, it may be classified as its own segment.
- Business segments can provide companies with the revenues it needs to be successful when others fail.
- Companys often report the performance of each segment separately.
Understanding Segments
A business segment is a portion of a business that generates revenue from selling a product or a line of products, or by providing a service that is separate from the primary line of focus for the business. For accounting purposes, Financial Accounting Standards Board's (FASB) SFAS 131 is the definitive source when it comes to accounting practices involving segments.
A company may segment its business by region in the same way that Apple has one silo for North and South America, another for Europe (which includes all European countries, the Middle East, and Africa), and another separate segment just for Japan.
Benefits of Segments
Companies with different business segments can gain a competitive advantage by capturing markets not previously targeted by their main operations. They can also build customer loyalty as their existing customer base may become new customers of their additional business segments. This is particularly true when business segments complement each other.
Business units are often identified by their products or geographic locations.
Perhaps one of the main benefits of segmentation is that managers are better able to identify profit drivers, as well as segments that need improvements. Profitable business segments can make up for losses incurred by others. Since each segment produces its own performance results, managers can decide whether poor-performing business segments should be retired or improved upon.
Also, businesses can better track and respond to trends through segmentation, which enables them to better care for the needs of their customers.
Example of a Segment
Let's say XYZ Corporation makes widget presses. After years of sticking to this core product output, it decides that it can very easily use the widget presses to manufacture the actual widgets, as well. If the company successfully produces widgets and gets them on store shelves for retail consumption, the widget division may be viewed as its own business segment because it generates its own revenue and incurs its own expenses.
Another tell-tale sign that a company has siloed a function as its own segment can be seen when its sales figures do not directly impact the profitability of the business's core operations. In this case, if widget sales fizzle, but the sales of the widget presses climb, the widget arm can justifiably be deemed to be an autonomous segment.
Keep in mind that not every component of a company constitutes a segment. For example, XYZ Corp.'s marketing division would not be considered a segment because it does not perform operations that directly earn revenue.
Real-World Example
Apple Inc. is well-known for manufacturing phones, tablets, computers, music players, and many other items. Each of these areas may be considered to be its own segment. This is helpful in enabling Apple’s management to determine which area is enjoying the most success, and which areas are showing sluggish sales figures. The company can then adjust its marketing and research and development efforts accordingly in a bid to stimulate overall company profitability.
Segment FAQs
What Is a Market Segmentation?
Market segmentation is the act of segmenting a market of consumers into groups based on their preferences, or shared characteristics or behaviors.
What Are the Types of Market Segmentation?
The four main types of market segmentation are demographic, psychographic, behavioral, and geographic. Demographic segmentation includes measurable data such as age, gender, income, and education. Psychographic segmentation provides details about consumers' personas. Behavioral segmentation relates to how people behave, and geographic segmentation refers to the various locations of consumers.
Why Is Market Segmentation Important?
Market segmentation allows marketers to better allocate company resources and time to understand customers' needs and deliver products and services that meet those needs.
What Are the Steps of the Market Segmentation Process?
The market segmentation process includes placing potential buyers into segments, segmenting products into categories, identifying which products should be marketed to the segments and what those market sizes are, choosing which markets to target, and marketing to those target markets.
The Bottom Line
Business segments are the individual businesses within a company that generate their own revenues with their distinct products and/or services. Profits for these segments can make up for losses in others, as well as provide the company with a competitive advantage over its competitors.
