Diversifying from your core business to an adjacent category or industry is a sustainable and profitable way to grow. Finding areas close enough to your core business to build on your existing capabilities is a great way to maximize your competitive advantages.
Companies that succeed in entering adjacent industries adhere to one practice: they develop a formula on which they can iterate in each expansion, so they can grow in a predictable and repeatable way. This helps them handily overcome their rivals. The average company is successful in expanding to new industries only 25% of the time; but companies that have resorted to a repeatable formula have double the success rate, and some reach 80% or more (pdf).
That is because growing a business is usually a complex, experimental and somewhat chaotic process. Repeatability allows you to systematize your growth. This way of approaching an expansion to adjacent industries takes advantage of each previous experience. If you are strategic and understand clearly how to separate good ideas from distractions, you can increase your chances of success.
For this, consider three important steps:
Resources you can take advantage of come in three types:
Tangible: equipment, technology, raw materials, etc.
Intangible: brand, intellectual property, customer loyalty, etc.
Capabilities: the ability to recruit great talent, manufacture unique products, offer excellent customer service, etc.
Look at your organization and ask yourself: how many unique resources can I use to launch an adjacent business?
Not all resources you list will matter in the long run. Although they are exploitable, any success you have will attract competitors and erode your advantage. To leave your competition behind, identify your key resources using a Resource-Based View filter. For resources to make a difference, they must be:
Think about the resources you have and ask yourself: Which of my resources are really rare, valuable, inimitable and irreplaceable? What resources can my business exploit that nobody else can?
As you are creating a unique resource base, you must also create a unique customer experience. Think of innovative ways to differentiate your offer, and think about what the brand would represent. For example, if your existing processes are highly effective, you can focus your efforts on providing exceptional customer service. Competitors will often sacrifice this type of attention to be more efficient, but thanks to your core business, your company has a competitive advantage in that area.
These are the steps taken by CEOs who approach growth strategy with a strong sense of discipline and moderation. Many of them have clear rules about what opportunities to look for. They keep saying not to risk your core business. These leaders wouldn’t make a move unless they had a good chance of being a top three player in a new industry or category. And even though they constantly scan for opportunities, they pursue only one at a time.
Identifying your resources, finding your repeatable formula and refining it with each expansion to a new industry or category, will give you the techniques and experience to diversify your business successfully.