If you’re like a lot of Americans, you upgrade your smart phone regularly. And if you have service with Sprint and order your new phone online, there’s a good chance you’ll get it dropped off by UPS.
However, that’s only part of the role UPS plays in the delivery of many Sprint smartphones.
Growth is critical to the long-term health of every business and moving into adjacent business areas is one of the best ways to achieve growth and maintain healthy profit margins. Growth hacking tools are great in the startup phase, but eventually they run their course. Incremental growth that stays strictly within the same business area tends to put a downward pressure on margins over time; to sell more of the same stuff you need to lower prices. Of course, eventually the market gets saturated.
The idea of adjacent growth is that it takes advantage of what you already do well and nudges it out into a new area. It’s far from a slam dunk in terms of success. More businesses fail than succeed at it, but when it works it can be exactly what is needed to maintain healthy growth. Let’s look at another example and then focus on some of the things you have to do to successfully branch out into an adjacent market.
Nike just did it
While other athletic shoe makers have seen their growth limited over the last decade or so, Nike has grown into a giant in the sports industry. It worked hard to gain a powerful reputation with its shoes and then it took that street cred and branched out into other kinds of athletic clothing. However, the real risk it took was jumping from being purely a clothing manufacturer to actually making athletic accessories and equipment.
It leveraged its relationship with Tiger Woods and other golfers to develop golf clubs and other assorted golfing gear that met their demanding specifications. Suddenly the brand that started out making running shoes for the jogging crowd was supplying golf balls and clubs to the best players in the world.
I don’t think I’m going out on a limb when I say that the margin in a set of golf clubs is much healthier than the margins in cross trainers and polo shirts, although the volume is certainly less.
It’s risky business
So if developing adjacent markets is such a good idea, why doesn’t everyone do it? Well, for it to be a good idea, you have to find a market where everyone can’t do it. In other words, to be successful you need to venture out into a market that has fairly significant barriers to entry. Let me give you a simple example of an adjacent market entry that has failed for many small business owners.
During the initial rise of ecommerce, local booksellers watched as Amazon.com proved that people loved to buy books over the Internet. Consequently all kinds of small booksellers made a move into the adjacent online market. However, making the move was so easy and it that resulted in cutthroat competition and it was too hard to make any money. No matter what kind of retailer you are today, you really need to understand what it takes to achieve success in ecommerce.
So here’s the first rule: If making the move is too easy, don’t do it. Of course, this also means that developing your adjacent market is likely to be more expensive than you would prefer it to be.
Let’s go back to UPS for a moment. You may have noticed how the company’s TV commercials stress its strength in logistics. That’s what we see demonstrated by the company’s relationship to Sprint. It’s doing the same thing for others. By storing product at UPS facilities, sellers can get shipments to customers much more quickly.
Extend your strengths
Logistics is UPS’ strength and it’s building on that. This brings us to the second guiding principle when you decide to move into an adjacent market: Your inherent strengths must give you a natural advantage when you enter.
Nike had a reputation as being the best sports shoe and clothing manufacturer. It took that reputation with it when it entered the athletic equipment arena. I should also note that it takes a company the size of Nike to break into a market like golf clubs, at least on such a huge scale, so the barrier of entry was sufficiently high.
If you believe that it’s time to find an adjacent business for expansion, you need to really understand your strengths. Why do people choose you over your competitors? Are these attributes that will translate into another area? Have you made some innovations that you can apply to a related business?
Modify your service
Also, while I’ve been discussing products here, that’s mostly because they are easier to describe and relate to. The same principles apply if you’re a service provider. 1-800-Got-Junk, for example, has branched out into the moving industry. It hopes to achieve success in the moving industry by leveraging its reputation as a company with clean trucks that arrive on time and are staffed by pleasant and efficient employees.
Finally, you need to fully understand the financial implications of developing an adjacent business and the impact that it will have on your current core business. Is the pricing and profit structure the same or are you entering into unfamiliar territory? If your new business area operates on thinner margins, how is that going to look in five years? And as you’re adding up the dollars and wondering if the project makes sense, go through a worst case scenario. Can you afford for the venture to fail?
When all the pieces fall into place, there’s a good chance you’ve discovered your “next big thing.” When they don’t, it’s time to look elsewhere.
Images: “ Personal development, personal and career growth, success, progress, motivation and potential concepts. Coach (human resources officer, supervisor) helps employee with his growth / Shutterstock.com“
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