Adjacent business activities leverage a company’s existing assets and capabilities to expand into new products, services or markets closely related to its core business. Adjacent business activities can help a company tap into new sources of revenue, create competitive advantages, and diversify its portfolio. However, adjacent business activities also involve risks and challenges, such as market uncertainty, resource allocation, and strategic alignment.
In this blog post, we will explore the concept of adjacent business activities, why they are important for growth, and how to identify and pursue them successfully.
What is an adjacent business activity?
An adjacent business activity is not part of a company’s core business but is related to it in some way. For example, a company that produces air compressors may enter the power tool market using its compressed air technology expertise. Or a company that offers online streaming services may decide to produce its own original content by leveraging its customer base and distribution platform.
An adjacent business activity can be defined along three dimensions: product adjacency, market adjacency, and value chain adjacency. Product adjacency refers to offering new or modified products or services that meet the needs of existing or new customers. Market adjacency refers to entering new geographic or customer segments that have similar characteristics or preferences as the existing ones. Value chain adjacency refers to expanding into upstream or downstream activities that are part of the same value chain as the core business.
Why are adjacent business activities important for growth?
Adjacent business activities can offer several benefits for a company that wants to grow its revenues and profits. Some of these benefits are:
- They can increase customer loyalty and retention by offering more value and solutions to existing customers.
- They can attract new customers who may not be interested in the core products or services but find value in the adjacent ones.
- They can create synergies and economies of scale by sharing resources, capabilities, and infrastructure with the core business.
- They can enhance the brand image and reputation of the company by demonstrating innovation and differentiation.
- They can reduce the dependence on the core business and mitigate the risks of market saturation, competition, or disruption.
How to identify and pursue adjacent business activities successfully?
Identifying and pursuing adjacent business activities requires a systematic and disciplined approach that involves the following steps:
- Start from market needs and work backwards. Rather than looking for opportunities based on what the company can do, focus on what the customers want and need. Understand their jobs to be done, pain points, and aspirations beyond what they are buying today.
- Evaluate the attractiveness and feasibility of potential adjacencies. Analyze the size, growth, profitability, competition, and barriers to entry of each potential adjacency. Assess the fit and alignment with the core business regarding capabilities, resources, culture, and strategy.
- Prioritize and select the most promising adjacencies. Based on the evaluation criteria, rank the adjacencies according to their expected value creation potential and risk profile. Choose the best balance between reward and risk, and align with the company’s vision and goals.
- Develop and execute a clear action plan. Define each adjacency initiative’s objectives, scope, timeline, budget, team, and metrics. Allocate sufficient resources and attention to ensure successful implementation. Monitor progress and performance regularly and make adjustments as needed.
Adjacent business activities are a powerful way to grow a business by leveraging existing strengths and exploring new opportunities. However, they also require careful planning and execution to avoid pitfalls and maximize returns. By following a structured process that starts from market needs and ends with clear actions, companies can identify and pursue adjacent business activities successfully and achieve sustainable growth.