Diversification: Making Successful Adjacency Market Moves
Business Leaders are tempted to diversify the company by moving into apparently similar adjacency markets, with varying degrees of success. What seemed familiar or easy to do turned out to be very different in hindsight and so what characteristics of adjacency moves should Business Leaders focus on to help ensure a successful outcome?
A prerequisite of successful adjacency moves is defining the core market – essentially where and how you compete and why you win. The boundaries of the core market are often associated with the most profitable customers, critical products, important channels, differentiating and strategic capabilities, enabling resources and key competitors. This is the core market. A market from which it is possible to move into adjacency space by leveraging your strengths i.e. the unique combination of factors enabling you to win in the core market.
An analysis of successful adjacency moves by companies reveals four key ingredients in making the right move:
Analysis – defining the adjacency market space in terms of customers, competitors, cost structure, channels and the key capabilities of market leaders. An important insight is company profitability through a Five Forces Analysis and having a real sense of where and how the target adjacency is being over or under-served by incumbents.
Strength – the ability to build-on and reinforce the company’s strongest and most profitable part of its operation i.e. the company chooses to leverage the key capabilities that make it successful. This is relevant because the ‘strategic distance’ between the core market and the target adjacency is often small in successful outcomes i.e. serving similar customers with similar needs, playing against similar competitors, operating a similar cost structure, using similar distribution channels, using the same forms of competitive advantage.
Profit Pool – target adjacency markets are often the most profitable part of an overall market, fast-growing and benefit from the momentum of macro industry trends e.g. changing buying characteristics.
Leadership – competitive response, in part, determines the success or failure in many adjacency market moves and so knowing how the market leader will respond to a new player, is important. The strength of the leader, how the leader controls the profit pool and the ability of the company to achieve economies equivalent to the leader to prevent being out-invested, are key considerations.
- Diversifying the business often involves redefining the core market in some way.
- Growing in new markets is often dependent on building and leveraging a unique competitive strength used in the core market
- Most management teams consider diversification too soon. Before mining growth via micro-segmentation, product extension, etc.
- The ‘strategic distance’ between the core and adjacency market should be understood and, preferably, small
- Growth requires change and so Senior Management need to prepare for change in a controlled and timely way