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(Part 3/6) Segmentation: Understanding Your Business as the Sum of Its Parts

Third in a 6-part blog series from Steve Lantz, Strategic Business Advisor

In this series, we are exploring five fundamental principles any manufacturer should master to grow successfully. We began with discussing why a strategic plan is an essential tool for any company charting its long-term course. Now we’ll explain why managing your business effectively requires understanding the different aspects and characteristics of each piece, or segment, that make up the whole of your company.

Breaking It Down

“No man is an island,” as John Donne famously wrote, and similarly, no business is a single entity. Whether your company breaks down by markets, product lines, sales channels, or other areas, almost every business can be separated into segments that each generate their own revenue and require their own resources.

Segmentation is easy to identify when we look at the largest manufacturers in the world, as many of them are separated into divisions or even different companies to address the various product lines, brands, services, or geographic markets that fall under the company’s umbrella. But even a small operation may have different segments to consider, if that business offers its products through a retail store front, a website, and in-person sales events. And each of those components requires its own activities, energy, and costs, and brings in its own income. To grasp segmentation, you need to understand the unique innerworkings of each area of your company and then manage your business as the sum of its parts.

You can define your company’s segments in any way that makes most sense to you. Don’t make it too complex – three to five segments are manageable for most companies.

Crunching the Numbers

Once you’ve decided on the segments of your business, the real work begins in analyzing the distinct activities and costs associated with each. Revenue and product costs are usually easy to measure but identifying all the various overhead costs associated with each segment may take more thought and discussion. Here are just a few examples of resources and their associated costs that might differ between segments:

  • Personnel and their required skillsets
  • Go-to market strategy
  • R&D resources
  • Distribution channels
  • Regulatory concerns
  • Customer/technical service requirements
  • Required licensure
  • Supply chain requirements
  • Warranty requirements and liabilities

A segmented income statement, or segmented profit and loss statement, is a great tool to help guide you through this exercise. Take some time to research the various ways you can pull this information together and customize a worksheet specific to your company.  

Connecting the Dots

Once your financial analysis is complete, you will begin to see which areas of your business are the most profitable – and the results may surprise you! You might find that 90% of your customer service costs are attributed to a single product group that only accounts for 10% of your total sales. Or you might find that new regulation changes overseas have made it too expensive for you to continue selling to Europe. Or perhaps you didn’t realize that even though your company is profitable, you are actually losing money among one specific customer base.

With these realizations, you are now armed to make informed decisions about your company’s long-term growth strategy. And when building your strategic plan, you will incorporate individual plans for each segment. For example, you may decide to discontinue the product that is costing you too much in repair and maintenance fees. Or you might identify that one product line needs a large marketing budget, while another requires a larger R&D budget. Or you might decide to keep offering your least differentiated product line as a means of generating cash to fund the development of a new, more lucrative project.

With your segmented strategic plan in place, you’ll not only have a much clearer understanding of your company’s financial position, but you’ll be better able to identify when a segment is missing the mark on its goals, and act sooner to do something about it.

The Bottom Line

It can be easy for companies – especially small businesses – to think of themselves as a single entity and operate under the philosophy that “all sales are good sales.” But if you want to get bigger, you need to be honest about which segments of your business are doing the best and contributing the most to the greater good, and which are holding you back. When you hold yourself accountable for the sales, growth, and expenses for each segment of your company, you are more in control of your business.

If you’d like help identifying, analyzing, or planning for all the segments of your business, MD MEP is here to offer expert consulting and advice – just send us a message.

In part four of our growth series, we will discuss organizational design and how to ensure your company’s structure and skillset align with your objectives.