Market adjacency

Market adjacency – have you asked the two key questions?

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The model for achieving ambitious growth is well documented: a combination of organic and inorganic growth that sees companies looking to gain market share at the expense of their competitors in markets they already occupy, as well as looking for inorganic growth through an adjacent market strategy and/or prospecting for high-return greenfields markets beyond that. However, the market adjacency model is not an automatic win as we shall see. It requires careful thought and planning.

Organic growth often stems from increasing brand likeability within the industry that your consumers already associate you with. In today’s economy, in most sectors, it’s a zero-gain scenario. In order for you to win market share, someone else has to forfeit.

There are at least two other options for organic growth that we should discuss. You can look to specialise within a market – selecting niches and tapping them for profit. It’s not always the easiest way to find above-market margin, but it’s certainly an option in sectors where specific skill adds value and the field is swamped with middle-market generalists. Or you can look to pincer your middle market competitors by having offerings on either side of them – below them, to compete on price, and, above them, to compete on prestige, with an “upgrade” strategy between those two stations to pull consumers through from high volume to high profit. In most cases, the zero-gain dynamics still apply, at least for now. To win, you need to take market share off an incumbent, and keep it away from them.

At the other end of the growth opportunity spectrum, the high-risk, high-return innovation of green field industries takes capital, faith and patience, and lots of each.

The opportunities of adjacency

As convergence brings us closer to what Charles Prabakar refers to as the “boundary-less industry structure” inherent in the social media/digital technology driven global business environments of today, what opportunities for growth exist there?

Adjacency is all about finding business beyond your core. It’s about identifying new markets that intersect with what you do well. It’s about new geographies, new audiences and redefining the value that customers receive based on what you know/can do. It’s the space between where you are and disruptive innovation. As such, it seems like the pragmatic middle ground, ripe with untapped revenue, ready for those looking to step beyond what they already do and looking to use brand extensions to maximise the return from their current brand equity.

Adjacency may look attractive because it’s close enough to the core business to feel familiar but not so close that it hems you in, but according to Bain, just 25% of market adjacency strategies succeed. That’s often because diversification is a sign of a brand losing focus rather than gaining footprint.

The critical judgment is to move far enough away to give yourself room to expand whilst remaining recognisable and credible to your consumers and being able to capitalise on the market presence and knowledge that you already have.

Market research is also important – if you don’t understand the competency and nature of your competition and how customers in that particular part of the market behave or if you assume that the leadership you have where you are will easily and effortlessly translate to adjacent success, then you may find yourself in difficult places very quickly.

In his book Unstoppable Growth, Christopher Zook argues that adjacency expansion starts not with looking sideways at what else is out there, but rather assessing all the choices available to your business in a market and making conscious choices about which ones to support and fund because they enable you to work from your strengths and they offer growth opportunities that will make the time and the resourcing worth it. Indeed, adjacency is just one of a range of initiatives (that choice set also includes diversification and intensification)  you might choose to expand.

The real issue for many companies, says Ken Favaro, is that they have “adjacency addiction”.  Faced with slowing growth in their core sector, companies look to expand their horizons instead of dealing with the pragmatic issues that are causing them headaches. Citing Delta, United, steel manufacturer Nucor and pharmaceutical companies, he says each pursued adjacency as a way to logically counter what they saw as the limitations of their current markets. But what actually happened was that the businesses inflicted damage on themselves in four ways:

  • They lost sight of the chances they had to regain control of their core business;
  • They missed chances to show the business they had (which in turn confirmed to them that the areas they were in were too slow);
  • They compromised their integrity and integration as a business and a brand because they loosened the boundaries that held things together;
  • They confused customers as to what their brands stood for in this new trading environment.

In each case, he says, the companies ended up reverse-engineering their way out of the adjacency model they had created. None of this is to suggest that adjacencies can’t work – in fact, he cites Apple, Berkshire Hathaway and Roche as examples of companies that have used the strategy successfully – but success is not automatic and so should not be assumed.

Why is market adjacency so hard?

Most companies, it seems to me, tend to judge “adjacent growth opportunities” on competitor strength, synergy of skills, market attractiveness, application of technology and availability of partners. Those are the technical requirements.

What they don’t necessarily factor in are the two questions that a strategic marketer would ask:

1. Are we fundamentally believable, and ultimately are we more desirable to consumers in that new space than our competitors?

2. Why? (In other words, what are we bringing to this new market from the market we know that the incumbents don’t have because they haven’t been there?)

As Apple have proven, adjacency can work very well

There are two key factors that make adjacencies work, says Favoro. The first is when the adjacency significantly improves the value proposition of the business. The second is when the adjacency leverages enough of the company’s distinctive capabilities and characteristics to give them the right to win in the new market.

When Ikea chose to address the cluttering issue of components, gadgets and wires in our living rooms by building furniture that accommodated all the TV componentry, they weren’t moving into the television sector or even into retail electronics. Instead they had found a way to enhance the value proposition they were already famous for: functional home furnishings.

The key question that every marketer should be asking themselves, Favoro says, if they are considering an adjacency strategy is “What adjacency moves would best enable you to bolster the value proposition of your current business or exploit and scale the distinctive capabilities you already have?” In the article he gives the great example of how the iPod worked hard to bring Macs closer to people’s lives. “But not only was the iPod a wild success in its own right, it dramatically enhanced the value proposition of owning other Apple products. The Macintosh business benefited enormously because the iPod increased the computer’s utility and made it even more hip to buy.”

It’s not the only example of Apple astutely pursuing an adjacency strategy to find new ways to bring them closer to their fans. In The Business Model Innovation Factory, Saul Kaplan discusses how the Apple Store broke with the tradition of Apple working with retail partners even though the decision was a huge threat to the brand’s successful retail distribution business model. By creating a real-world retail prototype, Kaplan says Apple was able to move towards a winning customer experience model that would ultimately become the hallmark of its business model. “The Apple Store really didn’t invent anything new other than an entirely new way to deliver value through a compelling customer experience.”

Apple chose to pursue an adjacency strategy with a very clear agenda

The shift worked because Apple chose to pursue an adjacency strategy with a very clear agenda – to disrupt the business in order to get even closer to the customer and to have a level of control over the relationships that did not – could not – exist under the historic distribution model. Indeed, as the iPod and the Apple Store examples as well as many other Apple initiatives show, Apple has consistently pursued an adjacency strategy (alongside product development, building an ecosystem and acquisition) to fulfil that same agenda of customer affinity, and has been so successful with market adjacency precisely because it has been undertaken to achieve such specific goals. The problem with an adjacency strategy is when there is no clear, confident and competitive strategy driving the shift. Instead, companies are on the defensive, looking to get out of where they are by trying to take themselves somewhere else.

What are you changing?

If you’re not entering a market or even a different part of your current market to change it, you’re simply entering it to fill it. A market that’s untapped by you is not, by presumption, an untapped market overall. Most markets are full enough already with companies that have a home-ground advantage. And if indeed it is a totally empty market, then there’s probably a very good reason for that. No-one wants to buy.

You may see an alignment between your current brand positioning and another sector, but the fact is that the world doesn’t need another coffee brand, another shoe brand, another brand of beans. Unless of course you’re going to do things with coffee, shoes or beans that revolutionise what consumers experience or that noticeably add to what they already experience with your brand, what are you bringing to the market that’s extraordinary? And by extraordinary, I mean – more than what they get already.

If you can’t answer that, the “growth” you see is probably a mirage. It may look like expansive return, but really it’s just presence based on hope. Don’t go there. Unless perhaps you are a super-platform.

How super-platforms successfully break the rules

One of the most interesting developments to come out of the boom in data is that some companies can now pursue ‘radical adjacency’. They can use what they now know about customer patterns and priorities to prosper in what have historically been separated and divergent markets purely because they understand their customers that well.

Updated: This article was originally published in July 2012 and has been updated in April 2018 to include more detail and discussion points. A shorter version of this article was posted on Branding Strategy Insider under the title Growing Brands Beyond the Core Business.

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