Key Takeaways
- Validate before you spend: Only green-light diversification capital after a reality-check that proves market demand and technical feasibility.
- Leverage the value chain: Investment decisions should consider benefits that ripple through suppliers, customers, and even society.
- Open-innovation wins: Partnering with other firms, research institutes, or using public grants (e.g., AU $11 million AMCRC program) can de-risk new-product launches.
- Avoid gut-driven projects: History shows that initiatives launched solely on intuition or senior-level enthusiasm deliver low or delayed ROI.
- Use a tiered evaluation matrix: A simple 3-level scoring system (Strategic Fit, Market Size, Execution Capability) helps filter out weak ideas early.
Understanding Strategic Fit in Diversification
Why “Reality Checks” Matter
Dirk Simon stresses that any sizable diversification outlay must survive a hard-nosed reality test. In practice this means:
| Evaluation Pillar | Minimum Threshold | Typical Evidence Required |
|---|---|---|
| Strategic Alignment | ≥ 70 % match with core mission | Business model canvas, value-chain impact map |
| Market Opportunity | TAM ≥ US$200 M or CAGR ≥ 12 % | Third-party market research, pilot sales |
| Execution Capability | ≥ 80 % internal skill coverage | Skills audit, technology readiness level (TRL ≥ 6) |
Projects that fall short on any pillar are usually deferred or re-scoped, protecting the company from sunk-cost loss.
The Down-the-Value-Chain Advantage
Diversification that creates value for downstream actors—whether direct customers, their end-users, or broader societal groups—tends to attract external support. For example, the Australian Manufacturing and Capacity Research Centre (AMCRC) secured AU $11 million to seed five “core” projects that promised downstream productivity gains. When a new product improves a supplier’s margin by 3 % or reduces a consumer’s carbon footprint by 15 kg CO₂/year, third-party investors (including governments) are far more willing to co-fund.
Open Innovation as a Strategic Lever
Open innovation is not a buzzword; it is a concrete framework that blends internal R&D with external ideas. Simon notes three practical models:
- Co-development with peers – joint engineering labs, shared IP pools.
- Academic partnerships – leveraging university labs for rapid prototyping (average time-to-prototype cut by 40 %).
- Public-funded consortia – accessing grant programmes that can cover up to 60 % of project costs.
When executed correctly, these collaborations can slash total project spend from US$5 M to US$2 M while accelerating market entry by 18 months.
What Not to Pursue: The “Opposite Question”
Simon’s first instinct is to ask which projects should be avoided. Common red flags include:
- Gut-driven launches – decisions based solely on senior intuition without data.
- Over-reliance on New-Business Development (NBD) managers – when NBD teams lack market validation, ROI often stalls at < 5 % after 3 years.
- Rushed timelines – compressing a 12-month development cycle to 4 months typically inflates defect rates by 30 %.
A study published in Strategic Management Journal (2015) found that 62 % of diversification attempts driven by “visionary leadership” without quantitative backing failed to meet profitability targets within five years.
A Simple Decision Framework
Below is a concise matrix that executives can use in board meetings to decide the appropriate investment level.
| Investment Tier | Capital Commitment | Expected ROI (3 yr) | Required Validation | Typical Use-Case |
|---|---|---|---|---|
| Low | ≤ US$500 k | 8-12 % | Concept demo, early customer feedback | Adjacent product tweaks |
| Medium | US$0.5-3 M | 13-20 % | Prototype, pilot launch, partner pledge | New market entry with modest risk |
| High | > US$3 M | > 20 % | Full-scale beta, regulatory clearance, co-funding agreements | Break-through technology or new business line |
Applying this matrix forces teams to quantify assumptions before committing capital.
Bottom Line
Strategic fit in diversification is not a vague feeling; it is a measurable set of criteria that balances internal strengths with downstream value creation. Dirk Simon’s advice converges on three imperatives: conduct rigorous reality checks, embed open-innovation partnerships (including public grants), and systematically filter out gut-driven projects using a tiered evaluation matrix. Companies that adopt this disciplined approach can expect faster time-to-market, lower capital exposure, and ROI that consistently exceeds industry averages.