The Drawbacks of Unrelated Diversification


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1.   Unrelated diversification strategies have two important negatives that undercut the positives:

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a.   Very demanding managerial requirements

b.   Limited competitive advantage potential

CORE CONCEPT: The two biggest drawbacks to unrelated diversification are the difficulties of competently managing many different businesses and being without the added source of competitive advantage that cross-business strategic fit provides.

2.   Demanding Managerial Requirements: Successfully managing a set of fundamentally different businesses operating in fundamentally different industry and competitive environments is a very challenging and exceptionally difficult proposition for corporate level managers.

3.   The greater the number of businesses a company is in and the more diverse those businesses are, the harder it is for corporate managers to:

a.   Stay abreast of what is happening in each industry and each subsidiary and thus judge whether a particular business has bright prospects or is headed for trouble

b.   Know enough about the issues and problems facing each subsidiary to pick business-unit heads having the requisite combination of managerial skills and know-how

c.   Be able to tell the difference between those strategic proposals of business-unit managers that are prudent and those that are risky or unlikely to succeed

d.   Know what to do if a business unit stumbles and its results suddenly head downhill

4.   As a rule, the more unrelated businesses that a company has diversified into, the more corporate executives are reduced to “managing by the numbers.”

5.   Overseeing a set of widely diverse businesses may turn out to be much harder than it sounds. In practice, comparatively few companies have proved that they have top management capabilities that are up to the task. Far more companies have failed at unrelated diversification than have succeeded.

CORE CONCEPT: Relying solely on the expertise of corporate executives to wisely manage a set of unrelated businesses is a much weaker foundation for enhancing shareholder value than is a strategy of related diversification where corporate performance can be boosted by expert corporate level management.

6.   Limited Competitive Advantage: Unrelated diversification offers no potential for competitive advantage beyond that of what each individual business can generate on its own.

7.   Without the competitive advantage potential of strategic fits, consolidated performance of an unrelated group of businesses stands to be little or no better than the sum of what the individual business units could achieve if they were independent.

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We, at BMS.co.in, believe in sharing knowledge and giving quality information to our BMS students. We are here to provide and update you with every details required by you BMSites! If you want to join us, please mail to contact@bms.co.in.

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