Coordination costs, which are incurred when pursuing a related-diversification strategy, are a function of the number, size, and types of businesses that are linked to one another.
Related diversification is a corporate-level strategy in which a company expands into businesses related to its core business. Although this strategy can provide advantages such as economies of scale and scope, it also incurs coordination costs. These costs arise from the need to coordinate and manage various interrelated businesses and activities. The more companies there are in the company, the more complex the coordination management and the higher the coordination costs. The size and type of business is also important, as larger or more diverse businesses may require more coordination and management.