Which Growth Opportunities Are Most Likely to Succeed?

Expansion into adjacent markets is a risky proposition Bain & Company compiled a database of 181 adjacency moves by publicly traded US and UK based companies They then researched the results through press releases, analyst reports, press coverage and direct contact with these companies Across this sample only 27% of adjacency moves could be considered successful, 48% had neutral or ambiguous returns and 25% were clear failures And while it’s impossible to determine how much of this wide variation in results can be attributed to individual variables like initial market position, execution and luck, three critical factors coexisted in the overwhelming majority of Bain’s sample Beyond the Core, Chris Zook, HBS Press, 2004

1. Each company had a strong core business to build on Bain & Company analyzed 501 companies in 51 industries over a ten year period Companies with the strongest core businesses (those ranked #1 or 2) retained those positions more than 70% of the time Companies with weaker core businesses (those ranked #3-5) reached #1-2 positions just 12% of time Bain & Company analyzed 501 follower companies, that is companies ranked #3 or lower in their respective markets, in 51 different industries over a ten year period. These industries were chosen because consistent market share data was available for each. Beyond the Core, Chris Zook, HBS Press, 2004

2. These companies identified a repeatable formula for adjacency expansion 83% of top performing companies had clear formulas for defining where to play and how to win Have clear formula Source: Bain 200 Company Database of Repeatable Models

Repeatable formulas confer 4 major advantages Learning curve effects: Enable companies to refine and systematize complex and time consuming processes Speed: Companies can successfully start and finish competitive moves faster than the companies around them Reduced complexity: By holding other variables constant and changing one thing at a time, companies reduce risk Strategic clarity: Employees understand the company’s strategy and their role within it Beyond the Core, Chris Zook, HBS Press, 2004

The mathematics of repeatable formulas 3.5x Beyond the Core, Chris Zook, HBS Press, 2004

3. 80% of their formulas were built around specific insights generated by customers Uncovering new customer segments Growing your share of wallet with existing customers Mirroring customer adjacencies Third, these companies’ formulas were 80% of the time built around specific and deep insights about customer behavior that could be replicated in different Beyond the Core, Chris Zook, HBS Press, 2004

Uncovering new customer segments Product Customers PCs Home Large Enterprise PCs Business S/M Businesses PCs Government Education Second, these companies identified a repeatable formula for adjacency expansion that generated strong economic and competitive benefits Government Health care Law Enforcement Beyond the Core, Chris Zook, HBS Press, 2004

Uncovering new customer segments

Growing share of wallet with existing customers Product Customers Propane-fueled mini-refrigerators Hotels Interior systems Recreational Vehicles (RVs) Recreational Vehicles (RVs) Trucks Trucks Second, these companies identified a repeatable formula for adjacency expansion that generated strong economic and competitive benefits Boats Boats Beyond the Core, Chris Zook, HBS Press, 2004

Growing share of wallet with existing customers In 1994, the company launched its Optima card which was it’s first revolving credit card; In 1996 it launched its Delta SkyMiles Card and a family of special-purpose business cards for activities like Purchasing. Shortly after, it launched its Bluecard with special internet payment features and its Black card which requires $250,000 in annual expensditures and a $2,500 annual fee in order to get exclusive offers and white glove treatment

Mirroring customer adjacencies Product Customers Geography Power mgmt. technology Europe (Nokia) Europe (Nokia) US, Asia Mobile phone microprocessors Second, these companies identified a repeatable formula for adjacency expansion that generated strong economic and competitive benefits Beyond the Core, Chris Zook, HBS Press, 2004

Mirroring customer adjacencies Product Customers Geography Power mgmt. technology Europe (Nokia) Europe (Nokia) US, Asia Mobile phone microprocessors PC microprocessors Europe Europe USA, Asia Second, these companies identified a repeatable formula for adjacency expansion that generated strong economic and competitive benefits Microprocessors for peripherals Beyond the Core, Chris Zook, HBS Press, 2004

Mirroring customer adjacencies Originally known as "Chemcor" glass, the product was used until the early 1990s in various commercial and industrial applications, including automotive, aviation and pharmaceutical uses where minimizing the vehicle's weight is essential. Shortly before the launch of the first iPhone, Steve Jobs visited Corning CEO Wendell Weeks to ask him if he had a glass for his new smart phone that would not scratch if it rubbed against car keys in user’s pockets and purses. Weeks immediately dedicated an entire factory to producing the new glass and the first iPhone was sold in mid-2007. By 2012 sales of Gorilla glass exceeded $1 billion

The other 20% ~15% of successful adjacency formulas were based on economies of scale in the build-out of a network UPS’s global delivery network Vodaphone’s global mobile phone network Tesco’s European distribution network Fewer than 5% of successful adjacency formulas were based on the application of core capabilities in totally new markets Apple’s shift from PCs to music and entertainment retailing Nike’s expansion from running to basketball to golf Beyond the Core, Chris Zook, HBS Press, 2004

Summary Expansion into adjacent markets is a risky proposition that succeeds only about 25% of the time To increase their odds of success, leading companies follow three basic principles: Build around strong core businesses with the potential for leadership economics Leverage repeatable formulas that facilitated earlier adjacency expansion and then follow them with discipline Pursue adjacency opportunities that lie within their strongest customers Beyond the Core, Chris Zook, HBS Press, 2004

And what if you don’t have a strong core business to build on? Research shows that weak followers have three viable options: Integration into a leader Consolidation of weaker industry competitors Shrink to grow (building on narrower customer segment) Beyond the Core, Chris Zook, HBS Press, 2004