The article proves the suitability of carrying out of diversification of production at enterprises at expense of complementary goods and services and devises the formula of the multiplier of complementarity. This formula allows calculating in how many times the general profit of the enterprise will increase due to increase of volumes of realization of one of complementary goods.
Problem statement. The powerful contribution of industry to economy defines its leading role and place in support of major strategic interests of the state. Therefore national interests of Ukraine demand immediate and effective measures directed on creation of a competitive industrial complex. Transition of a domestic production to an innovative way of development is a perspective direction of the decision of problems in this sphere. While the leading countries of the world widely use possibilities of innovative development of economy, creation and use of achievements of scientific and technical progress are still essential problem in Ukraine.
Industrial structure is uneffective. The majority of total amount of an industrial output is related to sectors which produce raw materials, materials and power resources. The raw bias of industrial structure oriented mainly to needs of export, turns industry and economy as a whole to extremely dependent on a foreign market conditions, holds back home market development. The problem of a technological condition of industrial production is extremely critical also. So modernization of manufacture and output of commodities of final consumption are strategic targets of Ukraine.
The analysis of latest researches and publications. All foreign and Ukrainian scientists investigating the questions of formation of competitive advantages of enterprises have paid attention to the fact that expanding the range of goods is the powerful factor of success in the market which constantly changes.1, 2, 3, 4, 5, 6
Tasking. Article considers the diversification of production as a possible organizational form of strategy of development of national industry which will allow holding out against the conditions of an aggravation of competitive struggle and constant crises.
Statement of the basic material. The term „diversification” occurs from Latin words „diversus”– directed to other side, different, divergent, opposite, remote and „facio”– to do, to form, to develop, to create, to behave, to transform.
The profoundly analysis of the sources of information allows offering definition of a diversification of production as investments into production of goods and rendering of services which are innovation concerning traditional activity of the enterprise for the purpose of minimization of market risks and strengthening of competitive positions.
As usual authors distinguish such kinds of diversification of production as:
- Horizontal (replenishment of range by products which are not connected with traditional, but can attract interest on the traditional markets);
- Concentric (replenishment of nomenclature by products which are similar to the traditional goods;
- Conglomeratic (replenishment of range by products which do not concern traditional technologies, goods or markets).4
Advantages and shortcomings of different kinds of diversification of production are systematized in table 1.
Table 1 – Advantages and shortcomings of different kinds of diversification of production
We can see that the diversification has as essential advantages as shortcomings compared with specialization and concentration.
In this respect we will recollect difference between the American and Japanese methods of use of human resources. In Japan there is no conception of function of one person and there are conceptions of function of group. Each member of group should know and in case of need carry out function of other members. Contrary to the Japanese experts, in the USA the highly skilled expert is an employee who knows perfectly only a narrow area of activity. It is common knowledge that in such major areas of industry as machine building, metal-based manufacturing industry, iron and steel industry and household electronics Japan takes the lead over USA on labor production on 15–45%.3
Therefore we consider that the diversification of production is the powerful factor of success in competitive struggle. We are also sure that concentric diversification is preferable because it allows reaching the maximum effect by the minimum risk.
We think that the basic advantages of replenishment of range of goods are:
- Reduction of transport expense, increase of the discount, strengthening of contacts between firms because customer can buy different groups of goods of one supplier.
- Possibility of successful sell of different goods of one manufacturer in the market.
- Decrease of expense on product promotion.
- Use of free plant capacity.7
- Use of all manufacturing resources and industrial waste.
- Decrease of risks
Other authors also hold this opinion.5
It is reasonable to conduct replenishment of range at the expense of production of complementary goods. Complementary goods (from Latin word „complementum” – addition, completion) – feature of the goods to satisfy a demand only in a complex.6
Rendering of services develops faster than manufacture of goods. In the past consumers preferred bulk commodities. Now they desire to receive the personified services.3 At the same time the term „complementary goods” is often used in scientific literature, but we couldn't find the term „complementary services”. Also we suggest bringing the terms of conducting and conducted complementary good or service. It is not reasonable to buy the conducted commodity (service) in the absence of the conducting.
We have summarized definitions and properties of complementary goods and services and have arrived at conclusion that change of volume of realization of one good leads to change in realization of volumes of complementary goods. This influence can be insignificant in the short-term period, but it is essential in case of taking into account of time slice. So the general profit of the enterprise will increase due to increase of volumes of realization of one of complementary goods. It is very important because profit is the task of high priority of each enterprise.
For example, the tendency of last years is use of principle of concept store in multibrand shops. Commonly such shops sell complementary goods of partner producers. As a rule mutual concept store create are created by companies which have concluded long-term cooperation agreements in a mode of cross-promotion. A typical example of such concept store is „N0 42” (New York) which sells luxury goods. An interior of this shop copies elite furniture. Customers can buy clothes, accessories, furniture, bedclothes, perfumery and cosmetics as in the lodging of famous owner.1
For scientific prognostication and regulation of this phenomenon we suggest introducing the multiplier of complementarity.
We have conceded the form of the formula on the basis of statistical data:
We have conceded the form of the formula on the basis of statistical data: k – coefficient of complementarity that shows relationship between the new good (service) and already existing earlier; c – specific gravity of new good (service) in a total turnover.
This formula is rather like the multiplier entered into macroeconomic by John Maynard Keynes.2 Introduction of the multiplier of complementarity into microeconomics, economy of the enterprise and marketing from macroeconomic is a step forward search of single economic laws which operate at several levels at the same time.
The formula should have another form in the case of gratuitous good (service), for example, gratuitous delivery of good. In this case influence on psychology of the customer is considerable. Therefore we suggest taking into account of such goods (services) with double specific gravity. It allows transforming the formula in the following way:
Such method of approach gives the chance to show considerable growth of the multiplier in comparison with paid goods (services).8
We offer to calculate coefficient of complementarity on basis of price cross elasticity of demand. It is defined as percentage change of quantity of the requested product , divided into percentage change of price of product.6 Mathematical species of price cross elasticity of demand is:
Q – demand;
P – price.
This formula can calculate the degree of connection between different products.
For example, if the price of product has increased and it has led to growth of demand for product , price cross elasticity of demand is positive (nij > 0). In this case these gods are substitutes (interchangeable).
If the price of product has decreased and it has led to growth of demand for product , price cross elasticity of demand is negative (nij < 0). In this case these goods are complementary.
We affirm that this indicator can not equal 0 (nij ≠ 0), because really professional salesperson is capable to sell complementary goods (services) together with the basic. So the formula of the multiplier of complementarity is:
This formula allows calculating in how many times the general profit of the enterprise will increase due to increase of volumes of realization of one of complementary goods.
Mathematical nature of the multiplier of complementarity provides data accuracy to a certain extent. But there are still a lot of complicated problems connected with analysis and prognosis. It is explained by big number of factors influencing resulting effect. So this topic is very promising.
Summary. Economic instability, especially in countries with transitive economy, cause necessity of effectiveness increase, planning strategy of development. Putting of new products on the market, attraction of customers, finding a ready market, production distribution are integral parts of growing of the enterprise. Therefore we consider that the diversification of production is the powerful factor of success in competitive struggle. We are also sure that it is reasonable to conduct replenishment of range at the expense of production of complementary goods, because change of volume of realization of one good leads to change in realization of volumes of complementary goods. The formula of the multiplier of complementarity was devised in the article. It allows calculating in how many times the general profit of the enterprise will increase due to increase of volumes of realization of one of complementary goods. The offered methodology is interesting for enterprises because it can be really introduced.
- 1. M. Bondar: Lets Have a Talk. Contracts, 2008, N0 20.
- 2. S. Budagovska: Microeconomics and Macroeconomic. Kiev, 1998.
- 3. Economy of the United States. From Wikipedia, the free encyclopedia.
- 4. P. Kotler: Theory of Marketing. Moscow, 1996.
- 5. E. Krikavskiy: Marketing Commodity Policy. Lvov, 2008.
- 6. A. Selishchev: Microeconomics. Market Analysis, Price Theory, Market and Society. St. Petersburg, 2002.
- 7. E. Boguslavskiy–I. Shybalkina: Strategy of Diversification: Choice of Start Time. Social Economy, ? 2., 2009, p. 182–189.
- 8. E. Boguslavskiy–I. Shybalkina: Research of the Multiplicative Effect at Level of the Economy of Enterprise. Economy of the Development, N0 4. (48)., Kharkiv, 2008, p. 70–73.