Unpacking the inertia in resource allocation adjustments of multi-business firms

Research Summary: Resource allocation inertia—firms’ insufficient responsiveness in adjusting resource allocation across business units—hinders adaptation and competitive advantage. Yet, it is unclear why some firms are more prone to this inertia. We develop and test theory suggesting that resource allocation inertia increases with unrelated diversification, which arises when firms operate in multiple, unrelated industries, because of greater information complexity and HQ detachment. This disadvantage, however, diminishes in dynamic environments. Likewise, both recent experience in entering new markets and organizational slack can help firms counteract resource allocation inertia. Our findings contribute to the resource allocation literature by clarifying how unrelated diversification drives resource allocation inertia and how managers can mitigate it. Managerial Summary: Research finds that many firms do not adjust resource allocation sufficiently over time, which undermines their competitiveness. Our paper shows that resource allocation inertia increases with unrelated diversification, which occurs when firms operate in multiple, unrelated industries. This inertia arises because the high complexity and cognitive demands of portfolios of unrelated businesses make it difficult for headquarters to comprehensively understand each unit’s unique needs and opportunities for adjustments. However, we show that corporate managers of firms with high unrelated diversification can mitigate resource allocation inertia by accumulating experience in entering new markets and maintaining organizational slack, both of which enhance their ability to process complex information.