Many companies pursue new growth by expanding into adjacent markets: by bringing current products to new buyers or geographies, or by developing new products that complement existing ones.
And no surprise—research has revealed that most companies that enjoy sustained long-term, profitable growth have invested in adjacent markets.
Why, then, do so many market adjacency strategies fail? According to a Bain & Company study on adjacency growth, only one in four adjacency moves is successful. That’s right—just 25%.
What makes it so hard to drive profitable adjacent growth? And how can you create a winning adjacency strategy?
Start by avoiding these common traps.
1. Always going after the big, bold idea
The trap: Huge, transformational adjacency stories are memorable—just think about your favorite Apple product, from personal computers to the iPod, iPad, and iPhone. But these stories of transformational changes can be very misleading.
Most successful adjacency moves start close. They stick to known customer needs and often complement your best products. They might eventually end up at a bold, new place, but they do so in small, discrete steps. (Most people don’t remember Apple’s failure with the Newton, a handheld PDA that preceded the iPad.)
In fact, decades of research have confirmed that the empirical odds of success decline as companies move farther away from their core business:
If you’re entering a new market, you’ll have to build new capabilities, contend with new competitors, and reconceive your strategic positioning. If you enter an area that’s close to the core of your business, on the other hand, you’ll have an advantage: a better-established brand, a clearer understanding of the market, and a better sense of where the most profitable opportunities are.
The takeaway: Bold, huge adjacency moves are not your friend in adjacency strategies—they are risky. Favoring adjacencies close to your core will greatly improve success rates.
2. Assuming grass is greener in a neighboring market
The trap: Retailer Target thought they saw an easy geographic adjacency move in Canada. A misjudged acquisition, underestimated competitors, and supply chain execution issues doomed what strategically appeared to be an attractive opportunity.
Adjacent markets frequently appear more attractive than they are. We overestimate our ability to win by underestimating several key areas:
- The competition. It’s easy to misjudge the strength of a competitor you’ve not directly faced. But when you move into a new market, you’re moving into someone else’s playground, and you should not underrate the ability of your new competitors to defend their markets—sometimes aggressively.
- Market growth and profitability. Is the growth widespread, or are key segments locked up by the competition? As a new entrant and possibly a less recognized brand, you may not be able to sustain a premium profit or even an average industry profitability.
- Customer needs and behaviors. Even the most innocent assumptions can fall flat in a new market. Will your new customers perceive the value of your offerings? Will your current customers change their buying habits?
With hindsight, it’s clear that Target should have assessed and prepared better. Too often, though, we are lulled into a false sense of security by assuming the adjacent market will be easier than our own.
The takeaway: Even close, easy appearing, adjacent moves should have a thorough assessment of requirements to win.
3. Chasing the ‘hot’ market
The trap: For the last 20 years, China has been viewed as a huge opportunity: a billion people, a growing middle class. Almost every global multinational company developed a “China growth strategy.”
This wasn’t always a particularly well-reasoned decision. Many companies simply decided that China was simply too ‘hot’ of a market not to play big in. But while high growth is one of the elements in an adjacency assessment, it is only one of many and should not overwhelm the decision.
The result? Too many companies started from a disadvantaged position, scrambling to figure out how to win in China. These moves came with huge investment risks and a high chance of failure.
While some companies have succeeded, far more have continued to struggle. For instance, Tyco Electronics, a leading global telecom provider, re-invested in new product lines and manufacturing facilities FOUR times since 1999—and it still has less market share than several newer local competitors.
Too much investment has been lost on so-called hot growth markets, often from a disadvantaged position. While high growth is attractive, it also tends to drive other new entrants and increase competition. Don’t be that company who learns to compete in a new adjacency through the school of hard knocks.
The takeaway: Select adjacent markets that show attractive profitable growth AND where your company has a strong ability to win.
4. Succumbing to market leader’s pride
The trap: In 2012, Honeywell thermostats, a market leader for nearly a century, was blindsided by a start-up, Nest—now also a market leader. In one sense, it was a classic case of the disruption of an incumbent by a new, nimble company.
But Honeywell had, in fact, anticipated the trends that hit the company. Years prior to Nest, it created a “Connected Products” strategy and invested in building an Internet-enabled thermostat. Executives were lulled into a false sense of security because, as the market leader, they felt they were really good at making thermostat software. However, smart software was not truly part of the company’s core competencies, and this cost them huge market share.
Identifying your company’s true core competencies can be difficult, but it’s also critical to adjacency success. Too often, especially when you’re a market leader, it is easy to fall into the trap of assuming all your capabilities are core competencies. However, in an adjacent market, these capabilities may not translate to a competitive advantage.
The takeaway: Deeply assess what you think your core competencies are. Will they truly create a competitive advantage in the adjacent market? Don’t just assume they will.
Where to next?
Adjacency strategies can be highly effective in driving major new strategic growth. Despite what may seem fairly obvious traps, these are the areas where frequently the least fact based evaluations are made. So watch out for these common ‘traps’ of adjacency growth:
- Beware of the big, bold & exciting ideas. They are usually full of risk.
- The grass is not always greener in adjacent markets. Even familiar markets can be challenging.
- Hot markets are easy to sell since everyone is talking about them… but can you win profitability in those markets?
- Being a Market Leader does not necessarily mean that your capabilities can win in new adjacencies. Be honest about your core competencies and how they translate into new markets.
Maximize your company’s chances for success and don’t be part of the 75% adjacency failure. Be aware of these traps and find that path to a smooth and successful growth strategy.
About the AuthorMore Content by Richard Kaung