Advantages and disadvantages of unrelated diversification:

Advantages:

  • The unrelated diversification which is carefully developed and undertaken only after thorough analysis of the environment and the company´s own resources usually brings very good financial results. However, in all cases it should be a low risk investment with a potential for high returns.
  • In some cases of company acquisition, this diversification can secure funds on hand during a seasonal slowdown, adding to the cash flow for the main business activity.
  • Spreading the risk through different sectors of the economy. It is very important to identify industries in which the business activity slowdown does not coincide with the slowdowns in the main business of the company.

Disadvantages:

  • Achieving successful unrelated diversification requires good management skills, closely following each of the business activities and timely identifying and solving even the smallest problems. The greater the number of business activities, the more difficult is the total management task.
  • In many instances the overall performance of the unrelated business activities does not exceed the individual ones. Sometimes it is even worse, unless the managers are exceptionally talented and focused.
  • As a rule, the implementation of unrelated diversification strategy requires allocation of significant financial and human resources and there is always the risk of harming the main company business.