Winning Profitable Growth from New Markets

 The ultimate objective of marketing is to drive revenue growth, and marketers understandably focus most of their efforts on increasing revenues from their company's current business.

Some companies have a vibrant core business that provides plenty of growth. However, sooner or later, most companies will likely see growth from their core business slow. When that happens, company leaders will probably start to think about some kind of business expansion.

I believe marketing leaders should play a prominent role in identifying business expansion options. They have (or should have) the knowledge and skills needed to evaluate the growth potential presented by expansion moves.

In fact, marketing leaders should always be scanning the environment to identify expansion moves that might be attractive. This is one of the behaviors that distinguishes a "chief marketing communications officer" from a true growth leader.

What Are Adjacent Market Expansions?

One attractive growth option for many companies is an adjacent market expansion, which can be defined as a move by a company into a separate market that is related to the company's core business. The diagram at the beginning of this post shows four common ways to move into an adjacent market.

• Sell existing products or services to new types of customers

• Introduce new types of products or services

• Open new selling channels

• Move into new geographic market areas

In the real world, an adjacent market expansion can span more than one of these four actions. For example, a company may simultaneously add new products or services and target new types of customers.

A successful adjacent market expansion can drive superior financial performance. Recent research by McKinsey & Company found that large manufacturing companies entering an adjacent market generated a median total shareholder return that was three percentage points higher than peer companies not making such a move.

Evaluating Adjacent Market Expansions

Adjacent market expansions can produce significant growth, but like all business expansions, they also carry substantial risks. Therefore, you should view adjacent market expansions as strategic moves that must be thoroughly evaluated. This evaluation requires you to answer two critical questions:

• Does the adjacent market offer significant potential for profitable growth?

• What are our odds of winning in that market?

To answer the first question, you'll need to perform market research to pin down three attributes of the adjacent market - its overall size, its growth rate, and the profitability of companies already operating in the market.

The second question is more complex because it requires you to answer several other questions. For example:

• Do the similarities between the adjacent market and our core business provide us a competitive advantage in the adjacent market?

• What products and/or services must we provide to have an offering that will be attractive to customers in the adjacent market?

• How strong are the primary competitors in the adjacent market, and how will they react to our entry?

• What new capabilities must we acquire or develop to compete effectively in the adjacent market?

All these questions are important, but none is more important than the first. By definition, an adjacent market expansion is a move by a company into a related business that seeks to leverage the company's competitive strengths in its core business. As the "distance from the core" increases, so does the risk associated with an adjacent market expansion.

Determining the "Distance from the Core"

"Distance from the core" refers to how similar a proposed adjacent market is to your company's core business. The less similar they are, the greater the distance from the core.

B2B markets can be described in terms of six basic characteristics.

• Customers - What kinds of businesses purchase the products and/or services the market offers?

• Products/Services - What products and/or services do the companies in the market provide to customers?

• Capabilities - What capabilities must companies possess to operate successfully in the market?

• Selling Channels - What channels do companies operating in the market use to market and sell their products and/or services?

• Geography - What is the geographic "footprint" of the market?

• Competitors - What companies sell in the market?

These six attributes define the boundaries of a market, and they also play a critical role in defining the core business of an individual company. Your company's core business consists of the particular combination of customers, products/services, capabilities, selling channels, and geographies that contribute the bulk of your company's revenues and profits.

Measuring the distance from the core is a three-step process. The first step is to describe your company's core business in terms of the six attributes just discussed. Step 2 is to describe the proposed adjacent market in terms of the same six attributes.

The final step is to rate the strength of the similarities between your core business and the potential adjacent market on an attribute-by-attribute basis. When I work with clients on this kind of project, I have them rate the similarity of each pair of attributes using a 5-point scale, with 1 meaning almost identical, and 5 meaning very dissimilar.

After you rate each pair of attributes, you add the individual ratings to create a single measure of the overall "distance" between your core business and the adjacent market. Your total score will range from 6, meaning that your core business and the adjacent market are nearly identical, to 30, indicating that all the characteristics of your core business and the adjacent market are very different.

This rating process isn't completely objective, but it does require business leaders to make a conscious judgment about the similarity or lack of similarity between their core business and a prospective adjacent market. That similarity is important, because the greater the similarity, the more likely it is that the competitive strengths you have in your core business will "translate" to the adjacent market.