Restlessness is one of the hallmarks of entrepreneurship. It is most often the seed that breeds the curiosity needed to innovate. Once the curiosity that drives a particular endeavour is sated, the entrepreneur is typically minded to look for the next gig. The question of diversification soon comes to mind. How can entrepreneurs approach the opportunities in business diversification?
There are 2 fundamental types of diversification; related and unrelated. The former involves transiting into a field of business that share similar value chain activities and opportunities as the existing one while unrelated diversification involves switching into a completely different line of business. Below are 3 critical questions to carefully consider in deciding when, how and where to diversify to;
- How attractive is the industry that a firm is considering to enter?
Is the barrier to entry high or low? Are there already big and recognized firms operating in this industry? What competencies and competitive advantage can be transferred from current industries? Can current value propositions create niche opportunities? This will help with an understanding of the risk profile of the diversification attempt to better channel resources.
- How much will it cost to enter the industry?
A realistic cost assessment of the diversification attempt is very important. As much as vision is a key element of entrepreneurship, vision without execution is almost worthless. Understanding the cost of execution makes success a more likely possibility. These costs include finances, time and other assets.
- What are the cross sell and up-sell opportunities?
In the business funding media franchise, Dragon’s Den, Dragons (funders) are typically attracted to businesses that are related to infrastructure, skills, and competencies they already have. This is always a critical aspect in deciding on an investing in an entrepreneurial opportunity. Investing in business opportunities with strong asset specificity disadvantages (businesses that are quite isolated from other endeavours the entrepreneur has) creates heightened risks.
There is no silver bullet around assessing entrepreneurial opportunities. Instinct plays a significant role, but we see instinct is optimized when the options are well understood. Finding realistic and credible answers to these brings about a realistic execution of a compelling vision.