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A new Bain & Company study shows that among 25 top-performing companies, four out of five suffered periods of stagnation or near collapse.
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| Consulting-Times E-zine
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But they later recovered and flourished by systematically expanding beyond their core businesses into related or “adjacent” areas using distinctive, repeatable formulas for success.
According to the Bain findings of more than 180 global companies, the typical business succeeds only 25 percent of the time when launching new initiatives. However, companies can more than double their odds for success by developing repeatable formulas for growth in “adjacencies.”
In his new book, Beyond the Core: Expand Your Market Without Abandoning Your Roots (Harvard Business School Press, January 2004), Chris Zook, leader of Bain's global strategy practice, analyzes the moves that companies make to achieve consistent, sustained and profitable growth – in good times and bad. He describes how companies can expand using structured approaches, including: developing new products and services, using new distribution channels and targeting new customer segments.
“Firms are facing a growth crisis. They must develop a relentless repeatable formula for growth, or find themselves on the list of soon-to-go,” says Zook. “Long-term, sustainable profitability requires an on-going drumbeat of expansion. But companies are doomed if they aren't starting with a solid core that they continually fine tune.”
The Bain study includes comprehensive growth analysis of more than 100 companies, including successful transformations at Dell, RE/MAX, Olam, Biogen, Carter's, Centex Homes, AmBev and STMicroelectronics. CEOs at these companies achieved significant results by cutting the number of product lines, eliminating complexity and pulling out of misconceived businesses.
The findings identified six types of “adjacency moves”:
1. Looking For Value In Different Places – creating adjacencies in new geographic markets (Vodafone's Mannesmann acquisition to enter the German cellular phone market),
2. Taking A Different Path To Market – creating adjacencies in new channels (Carter's movement into the mass channel with a new brand and logistics system for baby sleepers),
3. Extending The Concept Cycle (Not immediately obvious) – creating adjacencies from the core product (IBM's movement from hardware to services),
4. Let Me Introduce Myself – creating adjacencies with new customers (Schwab's decision to pursue higher wealth customers),
5. Taking On New Life Forms – creating adjacencies in new value chain segments (Nike's decision to open its own retail stores),
6. What's Old Is Sometimes New – creating new “white space” adjacencies by leveraging established core competencies in new ways (American Airlines creation of Sabre).
The book also evaluates the 25 major non-dot.com business disasters of the past l0 years including Kmart, Worldcom, Tyco and Mattel and finds that nearly four out of five of these situations were triggered or worsened by a series of growth-into-adjacency moves that went horribly wrong. The total value lost in the stock market from just these 25 companies totaled $1.3 trillion. Additionally, the study also looked at non-retirement CEO departures and found that controversial or failed adjacency moves caused 40 percent of these.
Bain analysis identifies five most common adjacency mistakes:
1. Mis-defining your core
2. Exaggerating Your Capability to Extend a Competence
3. Allowing Adjacency to Distract You From Competency in the Core
4. Pre-maturely Abandoning Your Core
5. The Pursuit of Big Untested Strategies That Undermine Discipline
“CEOs need to balance their desire for growth with repeatable formulas and solid data,” says Zook. “Approving projects can be easy, but true leadership means knowing when to say 'no' or pull the plug on projects that are failing.”
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