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    Various Measures OF: Diversification

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    Shabaz Patel
    This document discusses various measures used to quantify a firm's level of diversification. It presents several commonly used methods: [1] the simple method, which calculates diversification as a weighted average of a firm's market shares across industries; [2] Berry's index, which uses the Herfindahl index to measure diversification based on a firm's output shares across industries; and [3] the entropy method, which quantifies diversification based on the information content of a firm's sales across different industries. The entropy method can further decompose diversification into inter-industry and intra-industry components. These quantitative measures provide insight into firms' diversification strategies and allow for comparisons between different firms.

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    Various Measures OF: Diversification

    Uploaded by

    Shabaz Patel
    52 views9 pages
    This document discusses various measures used to quantify a firm's level of diversification. It presents several commonly used methods: [1] the simple method, which calculates diversification as a weighted average of a firm's market shares across industries; [2] Berry's index, which uses the Herfindahl index to measure diversification based on a firm's output shares across industries; and [3] the entropy method, which quantifies diversification based on the information content of a firm's sales across different industries. The entropy method can further decompose diversification into inter-industry and intra-industry components. These quantitative measures provide insight into firms' diversification strategies and allow for comparisons between different firms.

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    Original Title

    DIVERSIFICATION

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    This document discusses various measures used to quantify a firm's level of diversification. It presents several commonly used methods: [1] the simple method, which calculates diversification as a weighted average of a firm's market shares across industries; [2] Berry's index, which uses the Herfindahl index to measure diversification based on a firm's output shares across industries; and [3] the entropy method, which quantifies diversification based on the information content of a firm's sales across different industries. The entropy method can further decompose diversification into inter-industry and intra-industry components. These quantitative measures provide insight into firms' diversification strategies and allow for comparisons between different firms.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    52 views9 pages

    Various Measures OF: Diversification

    Uploaded by

    Shabaz Patel
    This document discusses various measures used to quantify a firm's level of diversification. It presents several commonly used methods: [1] the simple method, which calculates diversification as a weighted average of a firm's market shares across industries; [2] Berry's index, which uses the Herfindahl index to measure diversification based on a firm's output shares across industries; and [3] the entropy method, which quantifies diversification based on the information content of a firm's sales across different industries. The entropy method can further decompose diversification into inter-industry and intra-industry components. These quantitative measures provide insight into firms' diversification strategies and allow for comparisons between different firms.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 9

    VARIOUS MEASURES

    OF
    DIVERSIFICATION
    DIVERSIFICATION
    When a firm chooses to produce a product which is not the substitute for any
    of its existing products, the phenomenon is called Diversification.

    It is a form of corporate strategy of a firm.

    It is mainly done to increase profitability through greater sales volume


    obtained from new products and new markets.

    e.g. :-
    1)Virgin Media moved from music producing to travels and mobile phones.

    2)Reliance has products ranging from telecom sector to petrochemicals.


    MEASUREMENT APPROACHES
    There is no
    unique
    method to
    determine • Simple Method
    the • Berry’s Index
    diversificatio • Entropy Method
    n of a firm. • Inter-Industry Diversification
    The widely • Intra-Industry Diversification
    used
    measures are
    as follows:
    (i) Simple Method
    I= W i Pi

    Wi
    Pi represents
    i represents represents its
    market share
    weight
    attached to
    the ith firm in an the ith firm
    industry among all the
    firms.
    (ii) Berry’s Index
    Berry applied Herfindahl index of concentration to
    measure the product diversification as follows:
    DH =1- (Pi )2

    Where DH is the degree of diversification and Pi is the ratio of the firms’


    output in the ith industry to the firms’ total output in n industries.

    equal when n is
    single product
    firm
    diversification in very large
    n industries
    (infinity).
    index=0 ●
    index=(1-1/n) ●
    index=1
    ●
    (III) Entropy Index
    • where Pi = (firm’s
    DE = ∑ Pi sales in ith industry/its
    ln(1/Pi)
    total sales in n
    industries)

    when a . firm is
    operating only • DE = 0
    in one industry.
    • inter industry
    very useful index
    diversification
    because it can be •
    decomposed into intra industry
    diversification
    two components
    INTER AND INTRA INDUSTRY
    DIVERSIFICATION
    The term Ps is
    evaluated by
    grouping the
    industries into s
    sectors and then
    calculating the share
    of each sector in
    total sales.

    Here, the first term It can be verified


    in (1) indicates the practically that
    inter- industry the sum of the
    diversification and
    the second term
    individual
    indicates the intra components will
    industry be equal to the
    diversification. total entropy.
    Conclusion
    We have seen These measures
    how different thus help us in
    indices of assessing the
    measurement comparative levels
    of diversification
    can give us a between different
    general insight firms in fray and to
    into a firm’s make policies
    level of accordingly to
    diversification achieve the goals.
    “THE THREE MUSKETEERS”
    - ADITYA T. SRINIVAS
    - TUSHAR KUMAR ROY
    - SHABAZ PATEL
    BASHEER

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