This article is an excerpt from The Most Innovative Companies 2015: Four Factors that Differentiate Leaders (BCG report, December 2015).
Adjacent growth is a hallmark of innovation leaders. Recurring members of BCG’s annual list of the 50 most innovative companies—3M, General Electric, and Procter & Gamble, for example—have long succeeded by developing new products in nearby markets that lead to incremental profitable growth. Younger, tech-based innovators such as Apple, Amazon, and Google have aggressively followed a similar strategy.
They’ve done so for good reasons. As markets mature and competition increases, growth in the core portfolio inevitably slows. Introducing new products means going up against entrenched competition, and even companies that innovate successfully in existing markets often end up cannibalizing sales of their own brands. Adjacencies help innovative companies open new avenues for growth through exposure to markets in which they benefit from 100% of the share that they achieve.
Adjacent growth is sound strategy, but there’s a hitch: it’s difficult for most mature companies to pull off. Big companies are often victims of their own success; they operate according to cultures and business systems that are set up to drive growth in the core. The key success factors for developing profitable new products in adjacent markets are often different.
There are five ways for companies to expand into adjacencies: by exploring demand-centric growth, by cultivating a new organization with new talent, by employing separate governance, by adopting an experimental approach, or by building the right cultural enablers.