What is an Adjacent Business?
Adjacent markets can provide a great excess of revenue for a company if leaders are able to spot them and utilize their team’s skills to successfully expand into them. Often confused with the term ‘white space opportunity,’ adjacent markets are defined as markets that are near to what your business already does whereas white space opportunities are far away from your core business.
The most common misunderstanding about adjacent markets is that it is about exporting your existing products to new customers. However, this is not true – the secret to adjacent markets is to export your skills and capabilities, not products and services. When leaders focus on taking your core competencies and creating new value with new customers adjacent markets can be successful and generate additional revenue to the company’s core business operations.
Steps to Take to Expand into Adjacent Businesses
Step 1: List Resources to Leverage
When evaluating whether your business has an opportunity to expand into adjacent business you need to look at three pain pieces of your existing business. This includes:
- Tangibles: What is the equipment, technology, raw materials, etc. that you currently have access to?
- Intangibles: Who is your brand? Do you own any intellectual property? Are your customers loyal?
- Capabilities: Is your company able to recruit great talent? Do you have capacity to manufacture special products, deliver great customer service, etc.?
For example, Disney began as a company who produced films and television shows. Walt however saw an opportunity for the company to capture and take a portion of the amusement and theme park industry. Creating Disneyland, the company was able to expand into adjacent business by leveraging existing intellectual property and characters that people felt a sense of emotional connection to.
Step 2: Determine your Strategy
The next major step that you must take when looking to expand into adjacent business is to determine your strategy. The first portion of this requires you to list out your resources. This is a helpful exercise even when not expanding because it shows you portions of your business that you can leverage for success.
After listing your resources, it will become apparent what you can apply and experience success with. However, as you apply these resources, you will attract competition. In order to block out competition you must pass your resource ideas through a filter. For the resources to matter they must be:
- Rare
- Valuable
- Inimitable
- Non-substitutable
One example of an adjacent business venture that did this well was Amazon when they launched Amazon Dash. Online retailers recognized that customers often forget to order household items when they run out, which was resulting in loss of sales. Most deal with this problem using solutions that reside online: standing orders delivered on a periodic basis or checklists on the company website to jog customers’ memories. But Amazon bridged this gap by wholly transforming the order experience.
Amazon’s pivotal insight was that the moment when people want and are most inclined to reorder is when they’re using an item and realize they’re about to run out. This led to the creation of Amazon Dash, a small Wi-Fi-connected device decorated with the logo of a common household item such as laundry detergent, plastic wrap, or coffee. Customers place these “order buttons” around their home on appliances or cupboards and simply press them when they realize they are running low on an item. This was a valuable resource idea for the company because it solved a problem customers were having and was inimitable because of the market dominance already established by Amazon with their main line of business.
Step 3: Developing the Right Formula
Develop a formula on how to expand past rivals in predictable, repeatable ways. Repeatability allows the company to systematize the growth and, by doing so, take advantage of learning-curve effects. Companies that exceed in branching into adjacent businesses are extraordinarily disciplined and apply rigorous screens before they make an adjacent move. This discipline paid off in the form of learning-curve benefits, increased speed, and lower complexity. Second, in almost all cases, they developed their repeatable formulas by studying their customers and their customers’ economics very, very carefully.
Companies need to apply additional screenings when creating their strategies to assess whether it should repeat its formula in an adjacent market. The company must have a good shot at being in the top three in terms of global market share in that product, and it must have a physical presence in all the key processing countries. The adjacency move must also provide clear opportunities to expand into higher-value processing. And each new product must have strong end-market customers—big players willing to enter long-term contracts.
Step 4: Design A Breakthrough Experience
If you are building a base of your company’s unique resources, you should also build a unique customer experience with your adjacent offering. An example of a company that does this well is IKEA, the global home furnishings company. IKEA identifies itself with a mission to provide well-designed products at a lower price than anyone else can offer. After nailing the execution of that mission, the company has slowly expanded into the adjacent business of also selling televisions. The company decided to do this because it helps customers solve a furniture challenge that many of its customers complain about: how to fit the TV—and all the components, gadgets, and tangles of wires that come with it—more seamlessly into the living room. By also selling the television IKEA has developed a furniture solution. After listing their resources IKEA saw an opportunity that was rare – they could solve one of the problems their customer was facing and create further value by s enhancing the value proposition of its current business (functional home furnishings).
Conclusion
Even when competitors work in the same geographic markets, seek the same customers, and are affiliated with the same channels, the company with a repeatable formula will typically grow faster and more profitably than its rivals.
Repeatability doesn’t happen overnight, but when you get it right, a repeatable formula for adjacency expansion is practically imitation proof. Repeatability is about strategic focus, companies can increase the strength of the original business, then drive that market power into new adjacencies just a step or two away from the core. By definition, however, there is always an adjacency too far removed for successful repeaters. As companies get better at rapid adjacency expansion, opportunities will proliferate and create additional income to the company’s main business functions.
