Can you afford to enter a new area?
The cost of entry test is important when diversifying because you actually need the finances and other resources for success. There may be substantial resources needed to can impact not only in the new area but also in other areas of the business. Unless you can afford the diversification, it risks bringing down the new operations and also the success of your existing operations.
Key costs to consdier
When considering the cost of entry test, finances are clearly important, but there are other costs to consider:
- Financial resources: Do you have the necessary resources to allow you to be successful in both your existing business and the new area
- Managerial time: Will management be spread too thin by the diversification
- Other resources that the diversification will rely on: Are there other limited resources that will now need sharing with the new business area.
Risk of not considering the cost of entry
Sine of the key risks associated with not considering the cost of entering a new business include:
Risk 1: Will the diversification bring down your existing area?
The first danger of not considering the costs associated with entering a new market is that too much financial or other limited resources are devoted to the new area that detracts from the main business area.
Risk 2: Will the diversification limit your growth?
Beyond sustaining the current the business area, it is important to consider whether entering the new business area will prevent the growth of your prior business lines. Are there expected changes to the industry down the road, that it would be important to have resources to allow you to adapt to, that the diversification may make it harder to change?
Risk 3: Will you be able to succeed in the new area?
The final risk is that you lack the resources to allow you to be successful in the new business area. Unless you have sufficient resources, then the new business area may not get the finances that it needs to allow you to be successful.