Avoiding the Adjacency Trap

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March 3, 2016

by Kim Greenwood, PwC, Director, Strategy and Gerald Adolph, PwC, Senior Partner, Strategy

Every business seeks sustainable growth, yet very few are able to achieve it. According to PwC’s 2016 US CEO Survey, CEOs foresee pressure on the top line in 2016. Only 33% are ‘very confident’ in revenue growth during the next 12 months, compared with 46% last year.

In this business environment, it’s critical to avoid the all-too-tempting “adjacency trap”–that is, pursuing adjacent new markets or products that offer growth potential that’s illusory at best. Companies that fall into this trap jump quickly into opportunities based on trendy new technologies or seemingly attractive new markets without considering whether the move makes strategic sense. Businesses that tout one-stop shopping, for example, may think that offering apparently related services, e.g., car rentals and hotels, will attract more customers and help create a new source of sustainable growth. But unless the move leverages the core strengths of the business, this approach can do more harm than good.

Leading companies, like IKEA and The Danaher Corporation, assiduously avoid the adjacency trap. They recognize that in certain and uncertain times alike, winners focus on what they do best and only play where they have the right to win.

Three Tests

To avoid the adjacency trap, it’s important to identify and pursue the opportunities where you can best leverage your distinctive capabilities systemthe set of three to six things that your business does better than any competitor. This is important whether you are seeking new customers for existing products or services, or thinking about new offerings altogether.

When considering adjacencies, three tests can help guide the way:

Test #1: Do we have a right to win-i.e., do our capabilities support these new opportunities? Many businesses look at adjacency opportunities purely from an external market perspective. Instead, look at new opportunities by asking, “How can our differentiating capabilities create an advantage—both for the customer and for the business?”

Take Haier, for example. Founded as a refrigerator manufacturer, the company became the largest provider of refrigerators for the Chinese market. Focusing next on expanding globally, Haier evolved its capabilities in quality manufacturing, customer insight, and design. Today, it is the world’s largest white goods manufacturer.

Conversely, some major airlines invested in low-cost brand extensions in an attempt to compete with low cost carriers. While the capabilities needed for a successful full-service airline and a low-end brand may seem similar on the surface, they are different in important ways. Further, unless a company is willing to commit completely to a different business model, success is by no means a sure thing.

Tests #2 and #3: Will our capabilities usher in true advantages? The second and third tests pose interrelated questions: First, will our capabilities result in economic advantages? Second, will deploying our capabilities in these adjacencies help us acquire more customers? If you can answer ‘yes’ to either question, the opportunity may be worth pursuing. You may not have all of the capabilities that you will ultimately need, but your core capabilities will provide a strong starting point.

Danaher’s adjacency strategy, for instance, consistently utilizes its core operations capabilities. At first glance, the company seems to comprise many unrelated businesses. Each one, however, thrives in the Danaher business system, a set of cost-cutting and quality improvement processes that Danaher applies to companies it acquires. Danaher always selects its acquisition targets with this system in mind. This approach helps ensure that each new addition supports the company’s growth goals.

Looking at opportunities from the inside-out—through the lens of your differentiated capabilities—can help identify new ways to achieve sustainable growth. In today’s fast-paced business climate, these three adjacency tests can help companies play where they have the right to win.

Related articles:

How Emerging Markets Companies Can Avoid Growth Traps

The Dangers of Adjacencies Strategy

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