Growing Beyond The Core: 3 Steps To Successfully Exploiting Market Adjacencies

Focusing on the core business 'revenue engine' is critical as ever


As companies worldwide seek acceleration of their growth rates, focusing on the core business 'revenue engine' is critical as ever. However, many companies want growth beyond that, which can be achieved by strategies like overhauling pricing, sales/marketing capabilities or go-to-market approaches. Where organizations are already leading their industries in revenue growth rates or where company size, competitive positioning or declining market conditions require more than sales and marketing related improvements to achieve growth aspirations, expansion into new markets is the most direct route for growth.

Successful expansion into new markets - including new products, services, customer segments, geographies, or entirely new businesses - requires sound strategic and financial rationale such as a common customer base, sales and marketing synergies, manufacturing consolidation, and ability to leverage technical capabilities. Because there are one or more points of commonality between the current business and areas of expansion, these new markets are often called adjacencies.

Determining which adjacencies make the most sense and developing a strategy for entering them is a complicated and risky undertaking. Through our work helping dozens of companies chart paths to growth through new market entries, we have developed a three-step approach to adjacency assessment and prioritization that allows for a large number of potentially attractive adjacencies to be quickly identified, prioritized and narrowed down to one or more that a company should pursue. Before going after any growth initiative outside your core, take the following steps to maximize the chance of success and realize the full potential of the new market.

Step 1: Develop a foundation for adjacency prioritization

At the beginning of any adjacency assessment, it is important to do three things:

  1. Define the objectives for any ultimate expansion
  2. Document the company’s truly unique assets and capabilities
  3. Develop a list of strategic and financial criteria that will be used to assess adjacent markets

This 'foundation building' should include all key constituents in the company, including line executives of existing core businesses. By aligning key stakeholders on the reasons for, and urgency of, an expansion into new markets, a company mitigates the risk that a sound strategy is not accepted by the leaders who need to execute it. In addition, a common vision of what qualifies as an acceptable adjacency will make the organization much more efficient with the resources it uses to conduct the scanning effort.

Failure to gain consensus early creates confusion and decision paralysis later on. In one case, the CEO of a multinational manufactured products company charged an internal team with scanning adjacent markets and determining which ones to pursue. However, she did not create a clear 'case for change' in the eyes of her lieutenants. Consequently, each time the internal team presented a recommendation about a particular adjacency, senior leaders could not agree on whether the expansion would be a wise or unwise move for the company.

In contrast, a medical device company with which we recently worked took a much more methodical approach that resulted in up-front consensus. The management team began with a working session during which senior stakeholders documented key issues facing the core business, developed a set of objectives regarding what they wanted to accomplish with the expansion effort and assessed what capabilities they had that were unique and could be leveraged to create a competitive advantage. With a common agreement about capabilities and the objective of the adjacency exercise, they successfully established boundaries around which each member of senior management could rally.

Along with gaining alignment on expansion objectives and the company’s unique capabilities, defining a set of financial and strategic criteria is essential. These criteria should be clear, specific and as objective as possible. For example, financial criteria might include minimum market growth rates and gross margins. Strategic criteria might include competitive concentration and relative commoditization or differentiation of products or services sold by incumbents. While there is a qualitative nature to assessing strategic criteria, companies should still choose criteria that are straightforward to assess.

The final foundational element for the adjacency scan is the generation of hypotheses about attractive adjacencies. Agreeing on a list of industry sectors that are candidates for evaluation provides focus and direction for the effort. We find that 7-10 adjacencies is a good number to begin this effort with as it allows companies to cast a wide net and still complete the scanning effort in a reasonable amount of time.

Step 2: Prioritize adjacencies for further review

With a list of potentially attractive adjacencies in hand, the next step is to develop a fact base that can be used to screen each adjacency. The fact base collected during Step 2 should not be comprehensive. Rather, it just needs to provide enough information to rank and prioritize each adjacency relative to others based on the key screening criteria. This is an important mindset. Without it, companies will spend far too much time and money analyzing adjacencies that don’t warrant the investment.

In our experience, much of the fact base necessary to do this filtering is available in the public domain and via secondary research through sources, such as professional research reports, news articles, trade magazines, trade association websites, SEC filings, earnings call transcripts, internet forums, job postings/resume boards, and more.

In addition to secondary research, we find it helpful to augment the fact base through selected primary research such as phone interviews of market participants. While there isn’t time to conduct extensive primary research in Step 2, a handful of well-placed calls will provide additional helpful perspectives.

Once the fact base is complete, a company can filter each adjacency through the screening criteria developed during Step 1. Scoring of adjacencies on each criterion can be done using any convention the user prefers - 1 through 10, green/yellow/red, etc. - as long as it enables prioritization of the adjacencies. The objective here is to reduce the number of potential adjacencies to a manageable number of market sectors for a 'deep-dive' assessment. As such, the scoring needs to result in enough differentiation between the adjacencies to allow for an informed decision about which sectors warrant this additional work.

Successfully completing Step 2 requires a comfort with ambiguity, and a willingness 'to rule in or rule out' adjacencies based on imperfect information. Failure to do so in a timely manner can result in 'analysis paralysis' and a great deal of expanded resources with no impact.

Step 3: Perform in-depth adjacency assessments and determine a course of action

At this point, companies are ready to conduct in-depth assessments of each of the top-priority adjacencies, developing insightful perspectives about market attractiveness and strategic fit. As part of the assessments, it is important to address the following questions:

  1. Market attractiveness: How big is the market and how fast is it growing? What factors influence the expected growth rate? What are pricing trends in the market? What are currently projected profitability levels for market participants? What do the customer and competitive landscapes look like?
  2. What it takes to win: What is the basis of competition in the marketplace? What customer segments are the most attractive and what go-to-market strategies and tactics are required to succeed with them? Who influences and who makes purchase decisions, and on what basis? What is the nature and frequency of customer purchasing decisions and what is the selling cycle?
  3. Strategic fit/ability to succeed: How well do company and capabilities overlap with required capabilities? If knowledge, skills, and relationships need to be developed, what are the options for doing so? What synergies exist for the company in pursuing this new market?
  4. How to enter: Are there any realistic organic options to enter the market? What acquisition targets are available and which are the most attractive? What acquisition targets are available, and which are the most attractive?

While secondary research continues to be an important part of an in-depth adjacency assessment, the information needed to answer these questions won’t be found online or in a purchased research report. Instead, a concerted primary research effort is required. At Blue Ridge Partners, we use a methodology we call Nine Voices of the MarketTM. Everyone has heard of 'the voice of the customer', but eight other voices can be valuable in generating insightful perspectives about the market and its participants. Industry executives, marketing and sales representatives of companies competing in a given adjacency and other experts provide important inputs to the adjacency assessment, augmenting what can be gained through customer conversations alone.

At the conclusion of this effort, leaders will have well-informed perspectives about which adjacencies make the most sense to pursue and how to pursue them. From there, it should be a fairly straightforward exercise to determine which course of action to take and when. Sometimes, the findings that come out of this three-step process will inform a company’s longer-term business development and/or product development roadmap. In other cases, the findings will strongly make the case for quick pursuit of a specific acquisition target. Regardless, by following these steps, an organization’s leaders should have a clear direction on how to make a meaningful impact on growth through expansion beyond their core business.


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