Beyond the core

Developing a repeatable business model is crucial for driving sustainable growth. As the passage discusses, companies like Nike have built their success around having a core set of capabilities that can be replicated across different product categories and markets. The key is identifying what makes your business uniquely successful and finding ways to apply that formula to new areas.

According to sources, the elements of a repeatable growth model involve leveraging deep consumer insights to pinpoint key purchasing triggers and behaviors. For Nike, this meant establishing their brand, athlete partnerships, product innovation, and retail presentation as core differentiators. They then rolled this out across multiple sports categories like running, basketball, tennis, golf etc. Nike’s expansion into golf with Tiger Woods exemplified this formula - signing him to a sponsorship deal, launching co-branded apparel and gear, developing golf balls and clubs, and ramping up global distribution. In the process, Nike still grew their original core running shoe business from 22% to 38% global market share.

Business growth is fundamental, yet deciding how and when to expand into new areas poses major challenges. Adjacency moves - pushing out the boundaries of the core business into related markets - offer opportunities but have high failure rates. Success requires rigorously evaluating options against key criteria.

The best companies have strict selection processes, willingly declining poor adjacency prospects that could waste resources or dilute focus. With so many possible moves at any time, setting priorities is essential. However, counterintuitively, setting the bar high improves results - the most successful growers pursue fewer, better opportunities. Viable adjacencies should meet three key tests:

Firstly, they must reinforce the existing business. Successful adjacencies serve the same customers, compete against the same rivals, use comparable cost structures and distribution channels. Close alignment creates synergies between old and new. Adjacencies exploiting current strengths and assets perform better, with each area boosting the other.

When considering an adjacency move, the strength of a company's core business is critical for success. Adjacency moves carry risk - they can draw resources away from the core business and shape the future course of the company. As such, the decision to pursue an adjacency should not be taken lightly.

There are three key factors that determine the strength of a core business: its competitive position and defensibility; its financial performance; and its growth trajectory. Before evaluating an adjacency opportunity, managers should thoroughly assess the true state of their core business across these dimensions. It is remarkably easy for judgments to become distorted when looking at one's own business.

In the majority of cases studied, adjacency moves failed when launched from a weak core business. Struggling, weak follower companies are often tempted to leap to a shiny new adjacency as a path to growth and renewed energy. However, about 88% of the time, these moves fail. Why? A fundamental reason is that a company with a poor competitive position is typically more focused on survival than on aggressively growing an adjacency.

Most organizations inherently resist change and prefer to protect existing business models rather than pursue risky growth initiatives. However, companies that do successfully expand into adjacent markets tend to follow certain best practices that enable growth while managing risk.

First, senior leadership must fully embrace adjacency growth, provide necessary resources, and establish processes to promote innovation across the organization. An aligned innovation strategy sets the direction, while a dedicated team pursues new opportunities outside core operations. Leaders must also foster a culture comfortable with calculated risk-taking and operating in "permanent beta" mode where experimentation and learning never stop.

When assessing potential adjacency moves, companies should apply a repeatable framework built around customer insights and leverage existing capabilities that can be expanded into a new space. Moves based on a competitive advantage have 3x higher success rates. Objective criteria help determine which few opportunities justify deeper evaluation out of many possibilities initially identified.

Expanding into adjacencies can help established companies adapt and redefine their core business to changing market conditions. However, this redefinition tends to happen gradually through a series of small, iterative steps rather than one massive, dramatic pivot. Historically, truly transformational adjacency moves are more the exception than the rule.

For an adjacency expansion to dramatically reshape a company's core business, four factors typically need to align:

First, there must be a strong, profitable core business to build from. Attempting an adjacency move from a weak position is risky and unlikely to succeed.

Second, the adjacency itself must be commercially viable, meeting three criteria: it must relate to and reinforce the core business in some way; it must target a market with sufficient profit potential; and it must offer the potential for the company to establish a leadership position.

Third, the process for identifying and executing adjacency moves should be repeatable, not just a one-off success. Companies need a formula they can replicate over time as new opportunities arise.

Finally, adaptable management processes are essential to ensure adjacency expansions are managed effectively across the organization. Companies must implement robust yet agile systems to select, fund, scale, and govern adjacency initiatives.

In any industry, some companies will be far more profitable than others. Studies indicate market factors account for only about 20% of this variation in profit levels. The remaining 80% stems from how well companies perform compared to rivals. Firms that adapt faster to market changes by pushing their core business into new areas can gain an edge. Their offerings become obsolete less often, enabling longer periods of added value creation.

Consider the example of Centex Corporation, a Texas homebuilder founded in 1947. By 1992, Centex had grown into a $2.2 billion revenue business earning $35 million annually. However, a new CEO felt Centex could grow faster by reinforcing its core homebuilding competency through adjacency expansions rather than unrelated diversification. Over the next decade, Centex: