Diversification is not a simple decision. It is a corporate choice that is intertwined with complexity and unforeseen risks. There are a variety of tools that a business can use when determining if diversification is the right fit. Below are three tests that are commonly known as “tests of corporate advantages.”
Better Off Test:
Diversifying into a new business must give much more than incremental growth. We define incremental growth as (1+1=2). This type of growth does not always justify the risks and potential consequences of a diversified entry. The key is to grow by having synergistic growth (1+1=3). Here the diversification of two businesses create additional value – value that is greater than the sum of its parts. When Blackberry acquired QNX, the total value created was not incremental (1+1=2). Rather it was more synergistic (1+1=3). QNX gave Blackberry entry into a new market: the automotive industry. Leveraging Blackberry’s brand as a leading provider in security, QNX and Blackberry were able to procure large contracts such as Ford. Ford and Blackberry are working together on autonomous cars, and in further developing Blackberry’s Certicom security technology. Blackberry’s reputation and expertise in software security combined with QNX’s secure OS, has enabled them to create strategic value offerings to the automotive sector.
Industry Attractiveness Test:
It is vital that the new industry that the firm will be entering is structurally attractive. In relevance to Porter’s Five Forces: Supplier Power, Buyer Power, Competitive Power, threat of substitution, and threat of new entrant – how well does your business venture stack? The key measures would for industry attractiveness are: profitability, growth opportunity, and return on investment.
Cost of Entry Test:
The cost of the firm entering a new market must be significantly lower than the potential profitability. Potential profitability needs to be examined thoroughly. There are some markets wherein, it is saturated and it has reached a period of commoditization. If your firm were to develop a product/service, and obtain market share – would it still even be profitable against competitor’s who have already achieved economies of scale?
When selecting a digital marketing agency, be sure to go through the nuts and bolts of your overall strategy. Often times we evaluate our client’s proposed business venture and we find potential shortfalls. The key is to address it early and always utilize the above tests to see if the reward is worth the risk.
What we recommend to a lot of our clients is to engage in a form of POF (proof of concept) Marketing. This means we would help market their product/service even before it’s built, or an MVP (minimum viable product) using digital advertising. Based on the responses and feedback, we would pivot the overall strategy. We would also be able to somewhat forecast certain marketing expenses: like what is the cost to engage a customer and potentially to make a sale.