adjacencies – Golden Egg

adjacencies – Golden Egg

adjacenciesGolden Egg


by Murali Namanna; Money Wise; January-2016

Sustained growth is the key to long term success in today’s uncertain market environment. But how to achieve it? For companies struggling to identify new opportunities and develop effective growth strategies, adjacent market expansion—the “Golden-Egg in basket” of the market or portfolio you currently hold — offers tremendous potential. As with any business expansion, there are significant risks if not done properly. In determining the markets in which it makes sense to expand, Organizations often overlook the critical step of leveraging research to identify and assess those opportunities that may be adjacent to an existing market.

In this article, we will focus on understanding adjacencies, Do & Don’ts with adjacencies & spotting potential adjacent market opportunities

 

Why adjacencies:

A research team at Bain & Company found that of the companies that made the Fortune 500 in 1994, a decade later, 153 of those companies either had gone bankrupt or had been acquired. Of the remaining 347, the team judged that 132 had engineered a fundamental shift in their core business strategy. In other words, 285 out of the 500 faced serious threats to their survival or independence during the ten-year period. Only about half of this group was able to meet the threats successfully by redefining their core business.

 

How to grow with adjacencies expansion

Further study on adjacency moves between 1995 and 1997 to determine drivers of profitable, sustainable growth found below six types of adjacencies that successful companies used to push their boundaries in outperforming their competitors.

  1. Product adjacencies: Selling a new product or new services to core customers is one of the most commonly pursued and highest- potential adjacencies.

IBM moved into global services, which now constitutes 50% of the company’s revenue and pretax profits.

 

  1. Geographic adjacencies: Moving into new geographic area is a type of adjacency move that companies consistently underestimate in complexity, hence the lower than average success rate.

Vodafone expanded from the UK to Europe, the United States, Germany, and Japan.

 

  1. Value Chain adjacencies: Going up or down the value chain into an entirely new set of activities is one of the most difficult forms of adjacency expansion

De Beers extended its diamond business from wholesaling into retailing.

 

  1. Channel adjacencies: if successful, the move into a new channel can produce an enormous source of new value. If not, it can turn into a true Waterloo.

EAS, a leading sports supplement company, made minor changes in formulation, packaging, and celebrity sponsorship of its Myoplex sports bar and moved from a niche position in specialty nutrition stores to become the leader in its category, selling to Wal-Mart.

 

  1. Customer adjacencies: modifying a proven product or technology to enter a totally new customer segment is a major adjacency move for many companies.

Charles Schwab expanded its advisory services for discount brokerage customers to target high-net-worth individuals.

 

  1. New Business adjacencies: Move into the “white space” with a new business built around a strong capability. This is the rarest and most difficult adjacency move to pull off

American Airlines created the Sabre reservation system, a spin-off now worth more than the airline itself. Sabre, in turn, went on to create a new business adjacency of its own in the online travel agent Travelocity.

 

How NOT to use adjacencies for growth

Definition of Adjacency can be attribute of being so near as to be touching but how far one can move beyond core also defines the success or failure of Adjacencies development

As the book, Billion-Dollar Lessons: What You Can Learn from the Most Inexcusable Business Failures of the Last 25 Years shows, there are numerous firms that have suffered from bad adjacency moves. These include cement maker Blue Circle Industries that diversified into far adjacent markets such as kitchen appliances and lawnmowers. These markets were too far away from its core cement business; Blue Circle unwound its diversification moves and was eventually acquired by Lafarge SA in 2001. Similarly, the U.S.’s largest school bus operator, Laidlaw Incorporated, diversified into ambulance services. The firm discovered that it did not have the right capabilities and, in 1998, wrote off more than $1.8 billion for its healthcare business. In 2007 it was acquired by the Scottish transport operator First Group.

In both cases the firms went too far, too fast. Adjacent market opportunities can provide exciting and lucrative new sources of growth but it is critical that firms step into those adjacencies with detailed knowledge of the market and with certainty that they have right capabilities in place (talent, capital, and any necessary fixed assets).

How to identify right adjacent market opportunities

  1.  First one has to identify the core expertise or capabilities and start looking adjacent to it

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Inside-out approach

 

  1. Next important thing is to look for opportunities for adjacencies and map them with core expertise or capabilities. The adjacencies too far to be removed or eliminated:

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Outside-in approach

 

  1. Last but not least opportunistically pursue adjacent markets when they turn up in your normal course of business. Keep constant touch with market also your mind and ears open to spotting a good idea when it comes along, whether it’s a suggestion from an existing customer, an unsolicited inquiry from a prospect, a new venture by a competitor, etc.

If you are looking at adjacent markets as a vehicle to provide long term, sustained growth for your business, then adopting one of the first two options with systematic approaches is essential

All of these approaches require that clearly define what your core expertise or strengths are as a company. This is inclusive of your technologies, products, services, channels, brands, geographies, customers, and market segments. It is essential to effectively evaluate new adjacent opportunities against these core strengths; if you are not leveraging an area of core strength or expertise, then you’re not really making an adjacent move or maximizing your chances of success and minimizing the risks.

To conclude adjacent means – lying near, neighboring, having a common border, touchable.  Although chasing adjacencies can be distracting, it is a much easier to sell internally.  Adjacencies seem more achievable than far out, ethereal white space opportunities. Adjacent markets are even more appealing when you apply a systematic & structured approach to it.  The trick is finding the right adjacencies. It’s very important to make proper move with adjacencies for achieving sustainable & profitable growth, can convert many eggs into golden eggs too.

2 Comments

  1. Compliments,
    Suggest more India specific study. ✌

  2. Murali you are a live good example of adjacent, using your core expertise have started of well with small articles, expecting budding author of your own philosophical thoughts & books in future. Expect some thing on Startups for Indian market needs.

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