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Table of contents
EAS, a leading sports supplement company, made minor changes in formulation, packaging, and celebrity sponsorship of its Myoplex sports bar and moved from a niche position in specialty nutrition stores to become the leader in its category, selling to Wal-Mart.
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Address new customer segments, often by modifying a proven product or technology. Charles Schwab expanded its advisory services for discount brokerage customers to target high-net-worth individuals. This is the rarest and most difficult adjacency move to pull off. American Airlines created the Sabre reservation system, a spin-off now worth more than the airline itself. Sabre, in turn, went on to create a new business adjacency of its own in the online travel agent Travelocity. Our second finding was that companies like Nike consistently, profitably outgrow their rivals by developing a formula for expanding those boundaries in predictable, repeatable ways.
Repeatability allows the company to systematize the growth and, by doing so, take advantage of learning-curve effects. Companies that master repeatability work within any number of adjacencies. Nike, as noted above, executed a series of different types of adjacency moves. It expanded into adjacent customer segments, introduced new products, developed new distribution channels, and then moved into adjacent geographic markets.
The first time Nike did this, it undoubtedly struggled with the inherent complexity of making so many moves, but as it repeated the process again and again, managers learned to execute consistently. The successful repeaters in our study had two common characteristics. This discipline paid off in the form of learning-curve benefits, increased speed, and lower complexity. These capabilities may seem basic and unglamorous, yet companies that excel at them set the stage for industry-leading growth.
We focused our study on 25 companies that achieved sustainable growth performance far in excess of their peer groups. This diverse set of companies ranged from retailers like PetSmart to banks like Lloyds to consumer electronics companies like Legend. Typically, these companies grew revenues three times faster than did the average company in their respective industries.
Together, they created more than half a trillion dollars of shareholder value that has largely persisted despite the market collapse of recent years. The majority of these standouts have one or two powerful, repeatable formulas that generate successive waves of new growth, allowing them to push beyond the boundaries of their core businesses.
Typically these formulas are applied by CEOs who approach growth strategy with a strong sense of discipline and restraint. Many of them have well-defined rules about which opportunities to pursue. And although they constantly scanned for opportunities, they pursued only one at a time. Olam was launched in as an intermediary between local Nigerian producers of cashews and shea nuts, an ingredient in chocolate, and big food processors like Mars and Planters.
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Large customers had previously been dealing with an array of poorly capitalized local exporters, who would sell forward contracts for commodities and simply default if the price turned unfavorable at delivery time. Olam created its own vehicles for hedging commodity price risks and foreign currency risks in currencies where there are no forward-exchange markets, offering a better security proposition to customers.
Solving this problem created a competitive advantage for Olam that became the kernel of its repeatable formula. The young company quickly became a reliable source of Nigerian cashews, establishing a strong presence in its core market. Verghese himself lived in rural Nigeria for three and a half years. Olam was able to make this adjacency move with little risk: It was simply changing a single variable—geography—but continuing to sell the same product to the same customers using the same formula.
Not long after the geographical expansion was under way, customers wanted Olam to move other commodities—coffee, cocoa, sesame, and shea nuts—through its infrastructure of buyers, quality laboratories, and warehouses.
Again, these adjacency moves varied a single step—the commodity product—but did not change customers, supply chain, geography, or channels. As Olam repeated the process with new products and new markets, other growth opportunities emerged. The company, once a middleman, now controls most of the supply chain for existing products in the countries where it operates.
From its core business of trading in raw cashews, for instance, the company moved into shelling and blanching cashews. Similarly, its strength as a trader of cocoa, coffee, cotton, and sesame enabled the company to build businesses in hulling, sorting, and processing those crops as well.
From its strong position in sourcing and processing, Olam moved into even higher-value adjacencies, including marketing, distribution, and risk management. Olam now operates in 35 countries and handles 12 agricultural commodities. When the company entered the black pepper and rubber markets, for example, both commodities seemed promising. But Olam quickly realized that differences in industry regulations and trading norms across Africa and Asia would make it difficult and expensive for the company to expand beyond one key producing country—Nigeria in the case of rubber and India for black pepper.
So Olam exited the markets. When evaluating a new opportunity, the management team whittles each potential move down to its essence and ensures that it meet three defining criteria. First, the team asks, will the opportunity allow Olam to function as supply chain manager, not simply as intermediary? Second, will the company be dealing in agricultural raw materials—the products it knows best?
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Third, will it be operating on the ground in emerging markets—the terrain it understands well? A company that develops a method for repeatable adjacency moves has many advantages in terms of speed and transparency, organizational efficiency, mastery of hidden detail, and reduced complexity. The result is often a breakthrough in performance; executives make relatively modest adjustments and improvements that drive significant increases in growth and valuation.
One might call it the new math of profitable growth. Using its repeatability formula, the firm:. That firm can grow revenue much faster—by 6. Companies that make such substantial improvements in the timing, quantity, and success rate of their adjacency moves see the benefits magnified by stock market valuations.
The company applies additional screens to assess whether it should repeat its formula in an adjacent market. The company must have a good shot at being in the top three in terms of global market share in that product, and it must have a physical presence in all the key processing countries. The adjacency move must also provide clear opportunities to expand into higher-value processing. And each new product must have strong end-market customers—big players willing to enter long-term contracts. These rules give Verghese and his team the game plan for repeating adjacency moves. Now based in Singapore, Olam is the leading global supplier of cashews and shea nuts, the original core business, and ranks among the top six suppliers worldwide in its other key products.
Olam and Nike have little in common. Yet both companies have been extremely disciplined at finding one formula for incremental growth and repeating it over and over again. That repetition appears to create real, interconnected strategic benefits, each of which contributes to competitive advantage. A repeatable model allows managers to refine skills and systematize processes that are developed mostly through guesswork the first time.
GE Capital, for example, built expertise in evaluating and executing deals on its way to becoming a serial acquirer. One reason: better organizational capability gained through experience. When we asked A. Two innovative products led the charge—Crest Whitestrips and the SpinBrush.
When a company has mastered a repeatable formula for adjacency moves, it can successfully start—and finish—a number of moves faster than a competitor would. Vodafone, for example, is able to collect high-potential properties in wireless communications, thanks to a rigorous formula for evaluating and acquiring regional cellular phone service companies. A well-honed process for rapidly teasing out key criteria, mapping market boundaries, and calculating the profit potential of future add-on services enabled Vodafone to snap up the number one or number two wireless players in quick succession in markets across Europe, North America, and parts of Asia, while competitors gave chase.
A surprising number of chief executives fail to communicate a clear growth strategy to the investment community—and they pay a high price. Companies savvy enough to identify and execute a repeatable formula for growth have the advantage of strategic clarity: Repeatable formulas are compelling, and they are easy to understand.
Even when competitors work in the same geographic markets, seek the same customers, and are affiliated with the same channels, the company with a repeatable formula will typically grow faster and more profitably than its rivals. The handicap for Reebok was its undisciplined approach to growth. Reebok veered from one adjacency to the next without a clear plan. The company sought to position itself as a sports and performance company, not a fashion and fitness company, for example—but undercut that approach with such brand additions as Ralph Lauren and Polo footwear.
Unrelated investments like the acquisition of the Boston Whaler boat company also sapped Reebok at the same time that its core shoe business was under severe attack. Nike, meanwhile, was refining its repeatable formula. Throughout the s, the company picked up speed as it moved into baseball, football, cycling, volleyball, hiking, soccer, and then golf.
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Shoes drove the business, but increasingly Nike replicated its success with adjacency moves into apparel and hard goods. The star power of its endorsers made international expansion a logical next step. Nike took a while to find its repeatable pattern. Second, a repeatable formula for adjacency expansion is practically imitation proof. Finally, repeatability is about strategic focus. Nike accomplished its expansion without displacing its core athletic shoe business.