5 Disadvantages of unrelated diversification

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Disadvantage 1: No shared resources

The first disadvantage of unrelated diversification is really the lack of advantages – if there aren’t shared resources between the divisions, it is hard to achieve any advantages relative to separate businesses. While in related diversification there can be cost savings from sharing of resources, in unrelated diversification, with unconnected business areas, there is not the opportunities for sharing resources between areas. 

Disadvantage 2: Management spread too thin

The next disadvantage associated with unrelated diversification is management being spread too thin. It is hard to manage one business area effectively – trying to manage multiple separate business areas well, and make effective strategic decisions, may mean that one of them gets the attention that they need. 

Disadvantage 3: Politics between divisions

Another disadvantage of unrelated diversification is that it may lead to politics between divisions. There may for example be conflicts over resource allocations – with different divisions fighting over the limited financial and other resources that the company has. 

Disadvantage 4: Inefficiencies of divisions can be hidden

Another disadvantage of unrelated diversification is that it can hide inefficiencies – divisions that are unprofitable may continue, subsidized by other parts of the business. Rather than such decisions close or make improvements, being part of a larger conglomerate can allow such decisions to persist past the point at which they are generating profits for the business. 

Disadvantage 5: Slower decision making

A final disadvantage of unrelated diversification is that it can lead to slower decision-making. Requiring decisions to gain the approval of a new layer of corporate management increases the bureaucracy within a  firm – there is an extra step for all key decisions, and the very top managers are one step further removed from the bottom of the firm. Especially if the very top managers do not have deep industry knowledge (as is common in heavily diversified firms, since the top managers are managing divisions in multiple different industries), this extra stage of approval likely brings little advantage and can slow the organization down.