On Growth

Microsoft Partners and the 'Adjacency Growth Strategy'

It's when your business expands more than one degree of separation from your core offering that things unravel.

• By Mike Harvath
• May 01, 2011

Those of you who regularly read this column know by now that the No. 1 growth mantra we espouse is specialization. What this means is to own a segment of the market positioned at the intersection of a technical and vertical market and drive your company to be the No. 1 or No. 2 player in the market in which you serve.

Having achieved that lofty position, then what? Where do you go from there? How, where and when do you expand? The answer lies in what's called the adjacency growth strategy. That is, taking what you do best and expanding into an adjacent opportunity that's one degree of separation from where you are, and no more than one degree of separation.

This idea gained currency a number of years ago in a book titled "Beyond the Core: Expand Your Market Without Abandoning Your Roots," by Chris Zook (Harvard Business Press, 2004).

The point of an adjacency growth strategy is to generate incremental growth, both organic and acquisitive, by staying close to your roots in terms of your customer base, your service lines, your value chain, your technology focus, your vertical focus and so on, and never, ever overreaching these competencies. It's when there's more than one degree of separation from your core offering that things unravel.

Sadly, the marketplace in all industries is littered with the debris of companies whose growth strategies reached too far, or stretched the roots of the company beyond the breaking point.

The author suggests three principles for adopting a successful adjacent growth strategy, to wit:

1. The adjacent market must be of a sufficient size, or have the potential to be large enough to warrant the investment you need to make.
2. This adjacency has to be attached to the hip of your current core competency; the one degree of separation rule.
3. The farther away you move from your core, the riskier your endeavor will be.

Let's take an example. Imagine you're a network security or an IT security firm and suddenly you have a brainstorm, for whatever reason, that you think there's gold to be found in ERP implementation. While ERP is a richly endowed market of considerable size, you're now dealing with two different businesses, two different buyers, two different competitive sets and skills sets -- and you're venturing too far beyond your roots.

One measure that we use to test an adjacency is to take a look at your top 10 customers and look at the economic buyer. Then ask yourself, is the adjacency service or market or offering you're contemplating going to help you get a greater share of wallet from that buyer? Are there efficiencies already built into your value chain that you can leverage without having to go beyond your knowledge base? If the answer is no, or we hope so, or maybe, then you've probably gone beyond the one degree of separation that defines an adjacency strategy and you're better off going back to the drawing board.

We offer this cautionary tale up because we see a collective giddiness, or undisciplined expansion fervor, playing out in up markets. Now that it appears the recessionary doldrums of the past few years are waning, executives find themselves tempted to make up for lost time by trying to do too much too fast. There's a tendency to get drunk on optimism and think that if they're a technology services provider, or a systems integrator, they can do anything along the technology continuum and be successful.

The task now is to take a less exuberant, more sober assessment of where you are on your growth plan and ask yourself:

1. Are we No. 1 or No. 2 in the market we serve?
2. What specifically is our corporate focus, our reason for being, that which we are absolutely great at doing?
3. What are the logical adjacency opportunities that we can most naturally and efficiently glue to our core that give us the knowledge base, the skill set and the efficiencies to appeal to the economic buyer with expertise and credibility?

Remember, it's all about one degree of separation.

Next topic: Managing Through the Curse of Growth