Business segment is a recognizable component of an enterprise that is involved in the provision of a single product or service or a group of related products or services and that is subject to risks and returns different from other business segments. The business segment should not enclose products and services that are significantly different in terms of risk and returns. Products or services that are similar in many respects but differ in several relevant factors should not be included in the same segment. According to Bhattacharyya A.K. factors that should be considered in determining products or services are related include:
- "The nature of the products or services"
- "The nature of the production processes"
- "The type or class of customers for the products or services"
- "The methods used to distribute the products or provide the services"
- "If applicable, the nature of the regulatory environment, for example, banking, insurance or public utilities"
Business segment rules
This form of segmentation is considered important for users. The business segment serving the purposes of the standard is a part of business that can easily be identified as a separate one. Provides a single product or service or group of related products or services. If we want the business segment to be reported separately, it must have a significant size. This is because it must account for at least 10% of the company's revenues or operating results or total revenues.
Business segment in Environmental Resources Management
The primary role of business segments is to take risks. This is only a normal part of doing business, despite the fact that environmental resources management information is integrated into decision-making processes. Business segments also ensure many of the qualitative risk assessment participants. According to Segal S. business segments plays an important role in ERM, for example:
- Risk identification - Qualitative risk assessment (takes place in this area in which business segments provide a survey to participants).
- Risk quantification - Business segment forecasts provide support in calculating the base value of the company and support the financial forecasts of strategic plans.
- Risk decision - Management of business segment risk exposure within risk limits (this includes the extent to which risk limits are set by the business segment).
Examples of Business segment
- Automobile Manufacturing: This segment involves the production of cars and other vehicles and encompasses activities such as design, engineering, assembly, and marketing. It is subject to market forces such as demand and competition, as well as economic conditions such as gas prices and labor costs.
- Retail: This segment involves the sale of goods and services to the public. It includes activities such as product selection, pricing, marketing, and customer service. It is subject to market forces such as competition and demand.
- Banking: This segment involves the provision of financial services such as loans, deposits, and investments. It includes activities such as underwriting, risk management, and customer service. It is subject to market forces such as interest rates, regulation, and competition.
- Technology: This segment involves the development and sale of technology products and services. It includes activities such as research and development, product design, and marketing. It is subject to market forces such as competition and technological change.
Advantages of Business segment
- Business segmentation allows businesses to better understand their customers and their target markets in order to create more personalized and effective customer service and marketing strategies.
- It helps businesses to allocate resources more accurately and efficiently by identifying the areas that are most profitable and require the most resources.
- It enables businesses to identify opportunities for growth and development by analyzing the performance of different segments and discovering where the most potential lies.
- It allows businesses to develop a better understanding of their competitors and the competitive landscape by observing the strategies used by other businesses in their segment.
- It helps businesses to anticipate customer needs and trends in order to stay ahead of the curve and remain competitive.
- It enables businesses to create more efficient and effective pricing strategies by understanding the factors that influence customer purchasing decisions.
- It helps businesses to plan and measure progress more effectively by tracking the performance of different segments over time.
Limitations of Business segment
The limitations of business segmentation include:
- Difficulty in properly identifying segmentation criteria that can accurately reflect the differences in the products and services offered.
- Difficulty in accurately tracking and measuring customer preferences and needs.
- Difficulty in accurately assessing the potential customer base for each segment.
- Difficulty in determining which segment should be the focus of the company’s marketing efforts.
- Difficulty in properly allocating resources among different segments in order to maximize returns.
- Difficulty in accurately predicting the future performance of each segment and the overall business in general.
- Difficulty in accurately determining the profitability of each segment.
- Difficulty in maintaining customer loyalty across different segments.
- Difficulty in ensuring that each segment is adequately represented in the company’s overall strategy.
Apart from being a recognizable component of an enterprise involved in the provision of a single product or service, business segments can be identified in other ways as well. The following are some additional approaches used to identify business segments:
- Market Segmentation: This approach involves dividing the market into distinct segments that have different needs, wants, and preferences. Marketers use this approach to target their products and services to the right segment in order to maximize their sales.
- Geographic Segmentation: This approach involves dividing the market into distinct geographic regions and then targeting products and services to each region accordingly.
- Demographic Segmentation: This approach involves dividing the market into distinct demographic groups and then targeting products and services to each group accordingly.
- Product Segmentation: This approach involves dividing the market into distinct product categories and then targeting products and services to each category accordingly.
- Psychographic Segmentation: This approach involves dividing the market into distinct psychographic groups and then targeting products and services to each group accordingly.
- Behavioral Segmentation: This approach involves dividing the market into distinct behaviors and then targeting products and services to each behavior accordingly.
In summary, business segments can be identified in various ways including market, geographic, demographic, product, psychographic, and behavioral segmentation. Each approach has its own advantages and disadvantages and should be used accordingly.
- Bhattacharyya A.K. (2012), Financial accounting for business managers PHI Learning Private Limited, New Delhi
- Kolbusa M. (2013), Strategy Scout: How to Deal with Complexity and Politics During Strategy Development Springer Science & Business Media, Hamburg, Germany
- McLaney E. (2008), Accounting Fourth Edition, Pearson Education Limited, England
- Segal S. (2011), Corporate Value of Enterprise Risk Management: The Next Step in Business Management John Wiley & Sons, New Jersey, Canada
- Bhattacharyya A.K. (2012), p.590
- Bhattacharyya A.K. (2012), p.590
- McLaney E. (2008), p.172,174
- Segal S. (2011), p.313
- Segal S. (2011), p.313,314
Author: Aleksandra Majcher