Expansion into adjacent markets can be an effective method for achieving growth, but it is often a pathway full of hazards and cautionary tales. In Discovering Your Next Growth Opportunity: Adjacent Markets and Adjacent Markets; Choose Your Battles Wisely we share the methodology for identifying and prioritizing adjacent market opportunities. Through the application of this methodology across a range of industries and companies, Blue Canyon has identified common challenges experienced when entering an adjacent market. These challenges are why you should tread carefully before embarking on the journey.

What is an Adjacent Market?

The goal behind expanding into an adjacent market is to leverage a business’s existing capabilities and apply them to a distinctly new market. When you think about your business’s current market, you look at the intersection of Product, Customer, and Application. By going into an adjacent market, you leverage the competencies and strengths you have from serving a market with these dimensions and applying it to a new market [Figure 1].

Figure 1. Current Served Market Definition

When selecting a new adjacent market, there are two dimensions to assess: (1) Value Creation Potential, and (2) Market Accessibility. In our January 12^th post, Using Strategic Fit to Identify Adjacent Market Opportunities: A Case Study we apply these two concepts to assess the strategic fit of Salesforce.com entering an adjacent market–healthcare. These same dimensions can be used to highlight problematic situations by asking the key question, “What can go wrong?” before you pursue an adjacent market.

A couple of obvious answers spring to mind, such as, “We didn’t invest enough,” or, “Our timing was off,” that prove the Market Accessibility dimension was not completely understood. The Value Creation Potential dimension could also have been overestimated, resulting in lower success in the market due to lack of differentiation. However, the problematic situations we come across involve unpredicted organizational effects, channel partner conflict, or changes to the adjacent market itself. These situations are often caused by overlooked questions, such as the following, in the Market Accessibility analysis.

What Organizational Change is Required to Effectively Enter the Adjacent Market?

Business leaders understand the hard costs that come with adjacent market strategy (e.g., product development, new FTE’s, etc.) but they miss some of the soft costs (e.g., developing new competencies, reworking processes, etc.) Leaders may not realize the extent of organizational change needed for successful adjacent market entry beyond these hard costs. For example, a manufacturing company wanted to introduce a new product to its current customer base. They were excited about the growth it would bring, and the advantages that its direct customers would realize once they were a “one-stop-shop.” However, the company learned that its current salesforce didn’t have the right skill set to sell this new product. Not only was the product more technologically complex, it also required direct selling activity to the end customer in addition to selling to distributors. The end customers had a lot of pull-through demand for brands they wanted, and the sales organization didn’t know how to sell to the new audience. In addition to hiring a team of experts for this new product, an organizational-wide training program would have to be set up to effectively retrain sales representatives.

Would Entering This New Market Create Conflict With Current Channel Partners?

When deciding to go after an adjacent market, companies cannot put blinders on and ignore the effects on their current business and relationships. If, for example, new customer chains are needed for the adjacent market and they are at odds with current customer chains, the increased revenue could be offset by losses in other areas. One supplier that worked with both OEMs and distributors was considering expanding its distribution product line to complement its current offering. They didn’t consider at first the potential reactions from several of their OEM customers who offered similar products. They risked losing business to those customers if they expanded into this new market. Before moving forward, we suggested an additional cost-benefit analysis be conducted before entering the adjacent market.

How Will the Adjacent Market Change After Entrance?

Any analysis of an adjacent market typically includes the projected size, growth, price and profitability. These are standard measurements to decide if the opportunity is worth the investment and risk. What we have seen left out of this analysis is how a company, as a new entrant, would change those dynamics. Would you create increased price competition if you have to “buy” your way into the market to gain share? Would you be paving the way for a new onslaught of competitors to follow? If you are offering a new and improved solution, would a technological arms race follow? Consider Amazon’s recent announcement of plans to move into an adjacent market: the on-demand economy of home services.[1] The company wants to become the platform to help customers find handyman and similar services, a service that sounds fairly similar to Angie’s List. If Amazon, a giant in the Internet shopping world, enters this marketplace, how will the market change? Will that encourage its international competition, Alibaba, to react in kind? Maybe Angie’s List will run extensive specials and loyalty programs to hold on to its relationships and customers.

All three of these situations should make businesses pause and think before jumping head first into an adjacent market. Adjacent market strategy can be a highly effective way to grow a company, but the pre-work, thought, and analysis should not be treated lightly. These three situations–need for organizational change, competing channel dynamics, and post-entrance effects–are difficult to identify and fully understand solely based on data. A thorough, deep-dive analysis is crucial to understand how market players and channel players view the adjacent market. These additional perspectives, along with the numbers analysis, will help develop a concrete adjacent market strategy.

Learn more about identifying adjacent markets and determining strategic fit:

Discovering Your Next Growth Opportunity: Adjacent Markets

Adjacent Markets: Choose Your Battles Wisely.

[1] (2015, March 30). General format. Retrieved from http://www.economist.com/news/business-and-finance/21647529-americas-biggest-online-retailer-attempts-take-another-slice-demand-economy-books