Segment

Reviewed by Sweta | Updated on Aug 27, 2020

Introduction

Segment refers to a component of a business organisation which deals with distinct products or services. The operations of a segment are distinctly identifiable, with their own costs and revenues.

A segment is financially identifiable and operationally defined. Listed companies present segmental data consisting of revenues, costs, and profit/loss. A company tracks the performance, growth, and profitability of each segment.

Understanding Segments

In a general sense, if a product line or unit is functionally separate and distinct such that it is self-sufficient, it can be called a segment. A company may have separate segments dealing with different products or services.

For example, the company ITC has tobacco segment, hotels, FMCG, paper, and packaging. Each segment has different operating margins and different weightage in the overall sales of the company.

A company may also have regional segmentation of revenues and profits. For example, for TCS, Europe is a strong market place. The European continent contributes a major chunk of the revenues and profits for TCS. Segmentation helps in identifying competitors, risks, operational inefficiencies, areas for improvement, among other things.

Companies also need to report segmental information under the accounting and auditing guidelines of different countries. For example, the Accounting Standards prescribed by the Institute of Chartered Accountants of India (ICAI) mandate disclosure of segmental data in India. The Companies Act, 2013 also mandates disclosure of segmental data.

There are many divisions in a company, such as marketing or sales teams which are not part of the operations of the company. In such cases, the marketing or strategy teams are not separate segments and hence not reportable by the company.

Conclusion

A company having a foothold in a particular business segment may wish to diversify into different business segments. The reasons for diversification can be a change in technology, business conditions, and so on.

With the advent of new technologies and changing consumer preferences, a company traditionally into oil and gas exploration may initiate digital marketing and telecommunication operations. In such cases, new segments develop paving the way for new businesses.