23.4. The benefits and threats diversification of production and method of determining its level

23.4. The benefits and threats diversification of production and method of determining its level

Diversification as a social form of production organization can provide the company several advantages. First, it is an important means of financial risk management. If, say, the company receives a greater share of profits from the sale of any one product, the deteriorating market conditions for these products or a natural disaster type of the epidemic could lead to serious economic losses or even to bankruptcy. In terms of diversification of production loss of profit in one industry can be offset by achieving greater profits from the sale of products of other industries. In the case where such compensation has not occurred, it is likely that economic losses in one sector may not materially affect the financial position of the company, as its share in the income ceases to be dominant. Therefore, the companies with diversified production are characterized by higher stability of the economy, especially in the context of a changing external environment and manifestations of crisis: inflation, defaults, low solvency of the population, etc.

Secondly, diversification allows businesses to better leverage their material resources, land and labor, and to mitigate the seasonality of production, increase employment of workers to earn extra income from timely and thoughtful industry maneuverability, faster to increase production of those products, for which there is a demand and reasonable price is formed, and partially to reduce the production of other types of products that began to show unfavorable market conditions. It is clear that such a maneuver specialized households to carry out much more difficult, as they need to start a new production, and this requires considerable resources and long time.

Thirdly, diversification of agricultural enterprises, in particular vertically integrated industrial diversification allows them to obtain a synergistic effect and thus, under identical other conditions, improve production efficiency.

Simultaneously, the diversification of enterprises and carries certain threats. It is not always possible to use the advantages of specialized production, and therefore to a certain extent is its antithesis. Indeed, the development of many industries atomizes the resources of the enterprise, and therefore often cannot achieve some rational concentration. As a result, the company loses economies of scale. It should also be borne in mind that to manage diversified production is much more complex than non-diversified. Here managers and specialists must have diverse training, they have to consider much more factors external and internal environment, and this increases the risk of making insufficiently informed decisions.

Therefore, given the arguments “for” and “against” diversify, each company must decide how much it price
but to diversify production. It should teach-
wool the state of the external environment (stable or unstable economy, market conditions, solvency of the population) and the size of the enterprise, the actual state of its economy. It is obvious that larger companies have more opportunities for diversification. They are able to develop new industry with rational concentration of production and thereby eliminate or significantly mitigate the contradictions between diversification and specialization of production, to achieve the best results of managing. These companies have more financial resources to open new businesses. This reduces the need for loan capital, and hence reduces the cost of its involvement. Conversely, small businesses with low level of production concentration is not able to develop many industries, but because they have to gravitate to more specialized production.

To assess the impact of diversification on the results, it is reasonable to measure its level. This purpose can be used such parameters:

1. The absolute level of diversification. Determined by the total number of sectors, technologically related between each other at the stage of production of agricultural products for final consumption, intermediates and raw materials. For a full understanding of the nature of diversification highlights the number and proportion of sectors: a) primary production; b) vertically integrated industries; b) vertically integrated industries.

The weight of these groups of industries is determined by dividing the number of branches of a particular group by the total number of branches of the enterprise. In this case, we note that in determining this indicator takes into account only those industries whose products are produced for sale and acquires a commodity form.

2. Integral indicator of diversification of production, taking into account the number of industries and their contribution to the formation of monetary income of the enterprise.

In the economic literature there are several approaches to the definition of this indicator. Here are two of them, as the most acceptable for calculation and analysis.

The first is based on the use of the formula Herfindale-Hirschman index and is determined from the expression:

where is the share of i-th industry in the structure of commodity output of the enterprise, the coefficient.

The second approach is based on the use of the formula for determining the coefficient of concentration of industries. Coefficient of diversification for this approach is calculated from the expression:

where Ni — serial number of the sector in ranawana range, built on a top-down approach: the sector that occupies the largest share in the structure of commodity production, is assigned the first number and lowest the last.

In table. 23.1 shows the four variants of the sectoral structure of enterprises in commodity production, in each of which there are three sub-options. The latter differ in the degree of concentration of industries. The calculation using these formulas, the coefficient of diversification for each option shows that these methodological approaches to their definition have a close in its absolute value, the results (table. 23.2): the higher the value, the higher the level of diversification of production, and Vice versa. At the same time for the same number of commodity sectors, this share will not be identical provided that there is a different ratio of their contribution (specific gravity) in cash the company’s revenue. Coefficient of diversification will be higher in the case when there is a minor deviation of specific gravity of the absolute majority of industries in the structure of commodity production (option 1). At the same time the indicator will be less when there are a small number of branches (2-3), which account for the overwhelming share of such contribution. From table 23.2 shows how changing the coefficient of the diversification in the direction of its decrease from the second to fourth variants, when increasing the degree of concentration of industries.

In the fourth embodiment, the coefficient of diversification is significantly reduced due to the fact that here the production is concentrated mainly in two commodity sectors — first and second. When most resserected production, as is typical for option 1, the coefficient of the diversification will be the highest.

The data of table. 23.2 also convinced that the level of diversification of production is significantly affected by the number of commodity sectors, which develops the company.

While maintaining about the same distribution of deposits of the branches in the formation of commercial products, but if the increase in the number of industries coefficient of diversification increases. Thus, the increase in the number of branches from 6 to 8 resulted in the growth of cdhs in the first embodiment with 0,822 to 0,872, and on ten sectors of
zei — to 0,887. The same trend applies to other variants. It is obvious that minor changes in the distribution between the sectors contribution to the formation of commercial products, the increase in the number of commodity sectors in one industry leads to the increase of the coefficient of diversification up to 10 %. This percentage will be higher (within 10 %), if the conditions of growth in the number of industries, there is a simultaneous concentration of production on a small number of industries, and Vice versa.

It is important that the coefficient of diversification is sensitive to the change of the ratio of branches for the same number of them in the enterprise. For example, six commodity sectors Kdz decreases with 0,822 in an embodiment, the ratio of 1A to 4A in the embodiment 0,640; in eight sectors — from 0,872 to 0,731 and ten industries with 0,887 to 0,766.

It is clear that such sensitivity is caused by a different degree of concentration of industries. With increase in the coefficient of diversification is reduced because most of the industries in this case do not play more or less significant role in the formation of monetary income of the enterprise. However, with the increase in concentration of industries increases the risk of loss of financial stability. Because of the enterprise, where one or three industries dominated in the formation of their cash income for the unfavorable market conditions for the products of these industries can suffer significant losses and even to be on the verge of bankruptcy.

In contrast, in companies with a more or less uniform distribution of the contribution of individual sectors in the cash income of the enterprise, this situation is excluded. To approximately calculate the degree of growth risk from higher concentration industries, it is useful to define the third measure of diversification, using the formula of coefficient of concentration of industries, but rangamani the number of branches is not decreasing, and growing the principle, when industry, which is the lowest share in the structure of commodity products, the first number is assigned and with the highest proportion — the latter according to the number of industries. The level of this indicator (KDR) are shown in column 7 of the table. 23.2.

As you can see, the coefficient of the DLC from the first to the fourth option increases because it increases the weight of the sectors that occupy a large share in the structure of commodity products. The approximate increase in risk from increasing the degree of concentration of industries can be determined from the expression: HP = (KDR : Cdhs) · 100. Column 9 of the table. 23.2 shows the values of this indicator. As you can see, according to the first embodiment with a more or less uniform distribution of the contribution of industries indicator of the approximate risk is low. But it significantly increases with increase in the degree of concentration of industries. For example, in the fourth embodiment, where the level is highest, and high risks of destabilization of the financial condition of enterprises and it is approximately 120.5% as pavarot to 4B of 139.2 % in pavarot 4A.

Thus, agricultural enterprises in the development strategy of the production activities must take into account not only the pros and cons of diversification, and a ratio of industries and the closely related risk of disruption of financial stability[1].

[1] some provisions of subdivisions 23.3 and 23.4 are designed with the participation of Nechiporuk O. Yu.

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