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Using an Adjacent Growth Strategy during Turbulent Times

Companies already derive revenues from their core business. It is no big step to look at opportunities adjacent to their core business – less risk through leveraging current strengths.

Author: Mike Vincent – Director & Pramesha Pillay – Senior Manager


The COVID-19 pandemic has been characterised by many business leaders treading cautiously, conserving cash and becoming internally focused. Companies locally and abroad are typically looking to efficiency improvements and austerity measures to manage their way through the crisis. However, in many cases, those sources of value have already been wrung dry.

It is completely natural for company executives to tread cautiously as markets emerge from the COVID-19 pandemic. However, company executives are expected to grow their businesses and the time is upon them to start considering a growth strategy.

One way in which companies can grow while managing risk, is through a targeted adjacency growth strategy.

Deciding to grow a business is the beginning, not the end, of a complex strategic planning process. One of the most important decisions to make during this process is where to look for growth: (i) in familiar areas that offer quick returns, or (ii) in products, services or markets that represent a departure from the norm and may take longer to cultivate. The answer can determine not only what your business does next, but also, what it becomes. Should you seek growth opportunities close to the core, or further afield?

This article describes the Deloitte point of view on growth through adjacent plays and how leadership teams can systematically drive this growth to create the “Business of Tomorrow” for achieving sustainable shareholder value growth.

Revenue growth is important

It is common cause that markets reward companies for sustainable growth but mercilessly punish those that don’t grow. Research indicates that well over 70% of Total Shareholder Returns (TSR) are contributed by revenue growth. Shareholders demand company growth even although growth expectations may have recently been dampened by the COVID-19 pandemic.

It is common cause that shareholders expect that management teams will diligently apply their minds to growing the business in which they are invested. Increased operational efficiencies, while important, will typically only deliver incremental improvements in margins. This raises a key question: What are the other potential sources of growth that could deliver ambitious growth targets and meet the insatiable appetite of shareholders?

A significant part of a company’s market capitalisation is driven by the market’s expectation of future growth to be achieved from investments which are yet to be made.

The Innovation Premium™ is a proprietary metric developed by Deloitte and based on a Cash-Flow Return on Investment (CFROI) calculation. It is used for measuring the percentage of a company’s market capitalisation that cannot be explained by cash flows from current operations – reflecting the market’s expectation and therefore the degree of confidence in management’s ability to successfully identify and launch businesses that will create profitable new revenue streams for the company. In other words, even though these revenue streams have not yet been realised, the market has already given management credit for its ability to deliver this future growth. While the market generally rewards growth, it punishes companies with higher Innovation Premiums™ for not meeting consensus analyst expectations.

Every day, investors place their bets on the future performance of companies. Figure 1 below sets out the Innovation Premium™ performances by sector in 2012 for SA Inc. This is an illustrative chart that depicts how various companies were performing at that time.

Figure 1: Innovation Premium™

Within each market sector, some companies continue to delight investors through growth, while for others, investors do not expect significant growth. The dilemma for companies that had high Innovation Premium™ ratings is that they need to work that much harder to continually find growth opportunities in order to sustain the premium. The opportunity for companies with low Innovation Premium™ ratings is that it does not take much to exceed the market’s growth expectation.

Management typically makes investment decisions to either sustain current operations (sustaining innovation) and/or to establish new businesses that will drive revenue growth over the medium to long term (breakthrough innovation).

Why an Adjacent Growth Strategy?

An adjacent growth strategy largely utilises existing assets and capabilities to stretch the boundaries of the existing business outward. The focus should be to protect and enhance the current business or stretch the boundaries of the business outward to ‘near’ adjacencies. In this way executives can manage risks by extending adjacent to current products and services and thereby leveraging those competencies that are inherent in the business of today. Primarily, this means that companies seek opportunities by doing what they do today better to get a larger slice of the pie. Opportunities are typically more predictable, leveraging current capabilities and thus reducing implementation risk.

The objective of an adjacent growth strategy is to extend the company’s advantage while capitalising on pockets of demand in near adjacencies.

Key questions that face executives when developing an adjacency strategy are how to win in related markets? And what to leverage from the core?

In our experience, it is important for companies to start with the “best” customers or solutions, make the solution or service good before making it cheap.

Start with an Adjacency Growth Target

Every journey must start with a destination in mind – so too the growth journey. Establishing the right growth target is difficult and requires bold leadership. The target should not be a thumb suck, but it should also not just be an extrapolation of historical achievements. Rather, it should emerge from the interplay between internal and external factors and expectations. The target is critical to galvanising the organisation and creating the momentum and excitement needed to start the growth journey.

Install a Scalable and Repeatable Process

Managing an adjacency growth strategy requires thoughtful governance and a clear understanding of key stakeholder requirements and expectations. It is important to set out a scalable, repeatable process that includes making opportunities compete against each other for investment, but that also allows for the use of stage gates to qualify opportunities and takes them from an initial idea through to bankable business case and implementation.

A key success factor is to establish appropriate governance processes upfront. Experience has shown that getting the governance right is the single greatest contributing factor to success for any growth strategy.

Focus on Core Assets and Competencies

Every organisation has a set of core assets, competencies or services and products that it is good at. These should be the starting point for developing an adjacency growth strategy. No need to reinvent the wheel – leverage what you already have, to become even better.

Use the Growth Levers that are at an Executive’s Disposal

Figure 2 below depicts the growth levers as they progress from greater certainty of the business of today to the greater uncertainty of the new businesses of tomorrow.

Figure 2: Primary Growth Levers

Developing an adjacent growth strategy will typically focus on the growth levers closer to the core.

Case Study

How a retailer used its “Business of Today” assets to identify meaningful opportunities to grow revenue streams in adjacent and non-core business areas

A large South African retailer had shown strong performance over an extended period. The market had recognised this growth trend and the company’s shares traded at a premium based on the expectation of continued growth. The retailer was therefore under pressure to sustainably meet and exceed market expectations.

Key on the executive agenda was to identify an opportunity to drive growth by leveraging existing assets and capabilities into adjacent and non-core businesses. The company’s executives assembled a team to confirm whether a growth opportunity did in fact exist and, if so, what the best opportunities for growth were.

The corporate venturing approach suggested by Deloitte achieved an executable growth strategy that provided the company with a de-risked market entry strategy that it could confidently pursue in its drive to deliver sustainable shareholder value.

Step 1

Identifying which gaps in the market offered the best opportunity for growth

An in-depth assessment of the market, both globally and within South Africa gave some initial clues regarding the market potential. A market sizing exercise indicated that significant opportunity existed, with low penetration compared to other benchmarked countries in most sub-sectors. When penetration levels were mapped to the company’s customer base it indicated that significant gaps existed where the business could leverage its “Business of Today” footprint to offer new products and services.

An analysis of the competitive environment indicated that while the market was dominated by a handful of key players, an opportunity existed for the retailer to enter via certain niche product offerings distributed through direct channels. Studies of international retail peers highlighted the success of this approach as it sought to counter the effects of a maturing core business by leveraging their brand strength and frequent contact with customers to diversify into adjacent opportunities.

Several key factors underpinned the success of those retailers that had developed profitable adjacent businesses:

  • Leveraging their brand to market and sell new products to an existing customer base that identified with the brand
  • Reducing costs by not initially investing in brick and mortar but instead using online and call centre channels
  • Leveraging its affinity programme to underpin offerings
  • Rewards programmes served to entice new customers and provided the company with key insights into customer purchasing behaviour relating to the new products
  • Entering the market using a phased approach whereby the retailer-built customer trust in a limited number of products before expanding and increasing the complexity of product offerings
  • Developing targeted and customised offerings for specific customers or customer segments based on deep insights into purchasing behaviour.

Step 2

Identifying the key assets to be leveraged for a growth play

An analysis of the key assets of the company highlighted that it was well aligned with the market opportunity and international peers and was well positioned for an adjacent play:

  • The company had been operating in the retail space for a number of years and had created a strong and trusted brand with which customers identified. When considering expansion, trust was a critical determinant of customer purchasing behaviour in the new industry
  • The large and growing geographical footprint of the company’s retail stores offered a low-cost, readily available marketing and distribution channel for the introduction of new products and services. The cost of acquiring a customer through existing stores was significantly lower than through other channels, such as media or call centres
  • Aside from retail stores, the existing marketing channels used by the company could be used to reach new and existing customers at nominal additional cost
  • An established call centre could also be leveraged for inbound queries and outbound calling related to the introduction of new products and services
  • The company’s large and loyal customer base could form the core target market for the launch of new products and services
  • The company had a strong and established customer affinity programme that touched customers regularly
  • This “touch point” could be leveraged to introduce and launch new products and services in an innovative manner
  • Its affinity programme also boasted a high rate of redemption. Research had demonstrated that once customers redeem “free offerings”, they tend to be more open to spending more with a particular company
  • The affinity programme was also considered a key asset in corporate venturing by virtue of the customer insights it provided. Customer purchasing behaviour could be used to identify specific growth opportunities, inform targeted marketing initiatives and define product ranges
  • Importantly, the company also had strong cash generation capabilities that could be used to fund market entry if required.

Step 3

Identifying specific opportunities to achieve value growth

Conclusions from the market analysis and assessment of the company’s key assets were used to generate ideas for growth opportunities within the adjacent industry. These ideas were put through a stage-gate process to sift out those that were not worth pursuing. The parameters used to define the first stage-gate were defined in conjunction with the company executives to ensure strategic alignment.

Step 4

Confirming the opportunities that would deliver the most growth value

The key ideas that emerged from the first stage-gate were developed into Value Propositions (VPs) to inform the next step of executive decision-making. Opportunity analysis maps and the stage-gate process were used to de-risk the company’s investment decisions. Ideas were excluded when measured against risk parameters, investment size and required return on investment hurdles. The result was a clear set of opportunities that represented the best prospects for growth in the adjacent market. Together these provided the company with a new market entry strategy that it could confidently pursue in its drive to deliver ongoing shareholder value.

Critical Success Factors

Following a structured corporate venturing approach, such as the one described above, systematically de-risks the business development process while providing maximum return on investment. There are, however, several key factors that are important in defining the success of a new business initiative:

  • Executive commitment to the corporate venturing process is critical. It ensures quicker and more informed strategic decision-making and typically ensures that the delivery team is held to account to ensure that the opportunity is implemented, and the benefits derived
  • The key decision-maker (CEO or MD) should always be involved. In the absence of the support of the key decision-maker, new venture projects tend to drift off the strategic course as “Business of Today” priorities and concerns relegate the new initiatives to a secondary position
  • A ring-fenced project team that is independent of the day-to-day running of the business should be appointed to focus on the research and implementation. If this is not the case, “Business of Today” issues take priority and new ventures never get off the ground
  • Corporate governance is perhaps the most important of all factors. Selecting the right participants in a steering committee is critical. Similarly, making sure that the “banker” is party to the decisions will save much heartache later in the process.


Companies have growth options in their core business just as they have growth options in adjacent plays. They should invest in both.

Focusing growth on core areas and short-term returns may feel more conservative because it involves familiarity and comfort. But in many cases, it may actually be the riskier strategy. Similarly, betting big on brand-new businesses and markets is also fraught with risk and uncertainty.

How then should management balance growth ambition and risk? The answer rests in the duality of growth: deliver and grow the “Business of Today” while simultaneously creating growth for the “Business of Tomorrow”. Creating growth in this duality requires you to recognise the different needs of the “Business of Today” and the “Business of Tomorrow”.

First, you must identify the capabilities you need and either build or obtain them. Exploring uncharted territory requires different skills, experiences and inclinations from driving growth in the core business. Different metrics are required to measure success. While traditional metrics such as growth rate or time-to-market may be appropriate for “Business of Today” initiatives, non-traditional metrics such as growth rate above market or percentage of revenue from first-to-market may be better predictors of success when entering new spaces.

1 Boston Consulting Group Research

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