In a previous post entitled Two Critical Needs I defined the twin needs of business leaders today as strengthening current operations and preparing for transforming to a new pattern of business aligned with emerging business environments. I emphasized these needs are inter-related and both are critical - With the strengthening coming first.
Now the question is - How do you begin satisfying these needs? - What techniques and tools do you use? We believe the best answers are first, a special type of business segmentation and second, a special type of accounting system that allows you to put your business segmention directly into your Chart of Accounts. Thereby, you can measure both the financial operating performance of each of your business segments and also the overall company.
Let's outline first the Isis Consulting approach to Business Segmentation.
Conventional segmentation focuses upon Market Segmentation. That is one dimension of the Isis Consulting type of segmentation. We call it the Market/Customer dimension of Business Segmentation.
Market/Customer segments are displayed along the vertical axis of the two dimensional Business Segmentation Matrix we use. Each Market/Customer segment is a specific type of market channel and customer the company serves.
The other dimension of Isis segmentation focuses on products and services the company creates and produces. We call it the Product/Service dimension of Business Segmentation. Its segments are displayed along the horizontal axis of the two dimensional Isis Business Segmentation Matrix. Each Product/Service segment is a specific type of product and/or service the company offers.
Business Segments are defined as areas on the matrix - Areas where one or more types of Product/Service segments are offered to one or more types of Market/Customer segments. In some cases only one Product/Service segment is offered to one Market/Customer segment. This is the simplest type of Business Segment. In other cases one Product/Service segment is offered to several Market/Customer segments. This is like a gasoline station selling one grade of gas to many different customers. In still other cases several Product/Service segments are offered to one Market/Customer segment. This is like a super market selling many things to one person.
Now let's outline second the Isis Consulting approach to Segmented Accounting Systems.
Conventional accounting systems have a Chart of Accounts where each type of financial account for Asset, Liability and Equity items has a unique account number that defines that account for the overall company. Financial Statements - Income Statement, Balance Sheet and Cash Flow Statement - are generated from the quantities entered into the accounts of the Chart of Accounts. But recall, the amounts entered are for the overall company - So the financial statements report only the performance of the overall company. You have no visiblity into the financial performance of specific segments.
Why? For two reasons. The Business Segments were not defined and their specific financial quantities were not properly coded and the amounts entered into a segmented Chart of Accounts.
The Isis approach to Segmented Accounting Systems uses an accounting system that first, can be segmented and second, each Chart of Accounts item number is made longer to include codes for the Business Segment. The accounting data put into the system must be entered into the proper segmented items. If so, then we can generate separate financial statements for each Business Segment and also for the consolidated company.
These Business Segment financial statements are powerful tools to analyse the operating dynamics within the company and begin the process to audit operating performance. This analysis and audit are the base for learning - using additional Isis tools I will not detail here - what specific decisons and actions are needed in which specific Business Segments to strengthen current operations and thereby strengthen the overall company.
The point is that Isis Business Segmentation is the essential beginning point for both strengthening current operations and then studying the strategic issues for preparing to transform specific Business Segments.
John Clayton Caris
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