A business segment is a part of a company that can be identified by the products it provides or by the services or geographical locations it operates in. In other words, it a single part of a business that can be distinctly separated from the company as a whole based on its customers, products, or market places.
Management often divide companies into business segments to help gauge what areas of the company are performing well and what areas need improvement. During times of slow economic growth, managements also separate company performance into segments to make decisions about what discontinuing operations in certain markets or cutting departments altogether.
Example
Most companies operate in multiple segments. All large companies have tons of different segments. Take Apple for example. Apple originally started out as a personal computer manufacturer. They have almost always created software, but that was largely to support their hardware operations.
Today, Apple manufactures computers, tablets, phones, headphones, music players and more. Management at Apple can divide the overall company performance into smaller segments based on these products to measure where the company is succeeding. Without this type of segmentation, you might thing Apple’s steady profits are from the iPad because its one of the newest products to be release. In fact, the Apple tablet segment’s sales have slowed down in recent quarters because consumer demand has decreased. Apple’s steady profits are still attributed to the continued success of its phone segment.
With this information, management at Apple can choice what direction the company needs to take to improve areas or stop production of products altogether.
As you can see, separating a company into distinct business segments helps management analyze not only the current structure of the company, but it also helps them evaluate performance based on products, customers, and market locations.
