Nelophobia fear of breaking glass, may be the cause of an idea that evolved into a business idea that grew from nothing to $60 million in just three years. We had a strong core business and a good idea. Within three years, we experienced an expansion of $60 million without making an acquisition, without the construction of a factory. We had practically no capital investment and a staff addition to… three.
This series, Double-Digit Growth in a slow Economy examines the strategies that have been successfully used to drive growth when you aren’t able to depend on a growing economy. We discuss actual instances and businesses that have been transformed into growth engines, extending the natural buoyancy of economic growth. This article discusses the growth-driven process through the creation of new categories of goods , as part of the general strategy for growth.
The growth of near adjacencies
After you have built up your core business and are able to utilize your strengths, then you’ll likely discover that markets are open to expansion via near adjacencies. There are many opportunities to benefit from certain or all components of your core business. A move away from your primary business may work for certain people, but it’s more challenging, takes greater resources and most importantly it doesn’t make use of the strengths of the core business. Making use of the strengths and resources of your core business is less of a hindrance when the project is a close adjacency. Beginning a.com business could be strategic, but may not be a near adjacency. If it is strategically critical you should consider making the possibility of launching a business with its own independent resources. This can also prevent to incorporate more of your existing business model into what should be an entirely new company. It’s tempting to utilize your current resources, but the differences in the business lead to distraction within your team and dilution of resources. For expansion that does not meet the definition of a near adjacency, establishing a start up is the best method. When the business is established and has it’s own operational stable, you may consider strategic options to expand, integrate, spin off and so on. To make this decision, it’s essential to identify a near adjacency.
Near adjacency can be an expansion opportunity that leverages broad range of your core competencies. The more that can be used, the more straightforward it will be to implement and achieve financial success from expansion projects. An adjacency near to the other is typically more financially profitable, as is evident in the analysis of margins for products alone. Because this expansion leverages so many of the existing business’s strengths, the impact to that EBITDA line is substantial. If an expansion needs significant capital and staffing to handle it, it may not have the returns of the expansion that fits within the parameters of the present business. Those that fit more neatly within the existing structure are usually less risky due to this reason. The process of defining a near adjacency begins by defining the key skills you are able to leverage. They have to be relevant competencies to your customers to provide a value proposition for expansion.
Potentially, there are certain competencies that can be leveraged include:
- Key channel strengths and relationships
- Supply chain and sourcing
- Patents, IP or IP
- Efficiency of service and logistics
- Brands that are relevant and have equity in broad categories
- Capacity – Physical space processes, and individuals
The first step is to identify good channel relationships that could be leveraged, or a solid product position that can be extended to a different geography. It is also helpful to be able to use an objective scoring technique to consider the benefits in terms of investment and the risks that come with expanding a category.
Customer requirement is an important point of entry
Expansion through near adjacencies may be an opportunity. It is vital to listen carefully to the needs of the client. In more than one instance I’ve been asked to add into a new category by the customer. They had a concern over the supply chain of their company and saw us as a solid supplier that could expand into something different. These opportunities for expansion are particularly interesting because there is already an opportunity to break the current supply arrangement. It is much easier to find an audience for your proposition when there is a demand on the part of the customer. If it’s not an opportunity It is crucial to come up with a value proposition which is a hit with the client or better yet, the end user as well. One of the most basic is an advantage in the cost of acquisition for the customer. The old-fashioned lower cost is usually not a good deal to pass up. Do you have an advantage in cost? If you do then it might work however if not, only decreasing your competition’s margin. They might respond to an proposal with a price reduction. If that’s the sole focus of your value proposition it will likely fail to secure new business for you , or worse, end up providing the new business with lower margins.
The expansion by near adjacency can result in a more compelling offer to the customer. It could be a collection of advantages that may not be significant, but when taken in total they are meaningful. In the event that you sell to a channel partner such as dealer, distributor, or retailer, the value-proposition is based on driving the margins of their business. If you’re selling direct to a consumer or end customer, your value proposition should offer benefits to the consumer. In most cases we are better off not using costs of acquisition as a way for entry, unless there is the ability to sustainably increase the cost of the goods.
Enhancing the products that result in better revenue for channel partners can be a great opportunity to create. Packaging, merchandising, easier to use or maintain or a brand new design or features can make a compelling case for customers to switch. Offering a variety of benefits is the most compelling position. An item that is selling better than the predecessor is a fantastic beginning. The customer has to believe they’ll have more successful business outcomes after taking on the extension. If the incumbent is having issues, the bar is higher, however, a list of clearly stated benefits demonstrating how the customer’s business results are enhanced is the starting point. “New” isn’t enough. “New and improved”, you’re warming.
from zero up to… One million
The company which had turned into a rapid growth with 19% growth rate driven by growth in share, not the economic benefits. We had reached 100percent of the biggest customers’ shelves in our primary category, 60% for our second largest, and 100% with our third. We were closing in on our growth opportunities. We had created a more efficient business that was created for growth and had been performing so well, we were in danger of running out of shares to gain.The Sales team was tasked to cultivate new accounts to sell our core products, and expansion with smaller customers in areas where there were growth opportunities. We quantified our available targets to grow with both existing and new customers and it was quickly apparent that we had a need for a new line of goods to offer. We initiated a program to explore categories we could develop that leverage our solid relationships with our customers, our supply chain and facilities. I created a director of new category development. He will concentrate on the creation of new product categories to allow us to grow at a much faster rate than the expansion of the economy. (Shout out to Pat Boehnen)
We were looking for a new market that we could leverage with our biggest “core” customers. They had the most trust in us and they trusted us with their trust and competency in serving them. Our new category team created a solid list of opportunities and conducted research on current suppliers, their level of innovation, estimations of the size of markets and used our scoring system to determine which categories offer the greatest opportunity. It wasn’t a cakewalk, but we did begin work on the three most important areas to see if we could come up with a business idea. This is , in essence, long-term when compared to the increasing sales of the current product that is in the process of being shipped, versus products that will take at least 1 year to develop or even longer. This is a good example of having simultaneous effort to control the performance of the company curve. We had been experiencing growth of 19%. did not want to see growth slow down to the level of 5%. In the near future, our sales team would be able to fill the gap by selling our existing products more effectively to a greater number of customers. We also established a sales presence in our most immediate international target, Canada. Canada was the most accessible area of geographical growth considering our presence. Our growth was sustained throughout the period of category development until our new categories could be able to begin bearing fruit.
We needed a new category that could provide a significant advantage over current suppliers, who by the way were likely years ahead in their core market we wanted to join and surpass them in. It’s quite a task to consider it that way. It is necessary to have some kind of entry point. A stale category perhaps. A sleepy competitor. Innovation or technology that you can introduce into an industry first. A cost benefit you can utilize to create benefit for the customer. Improved services that are in line with your product. These are just some of the forms of advantage you can offer a competitor. As a start-up it is essential to offer more than one or two tweaks. If you are unable to provide the most significant benefit on your own, you’ll need an invitation from the client. They must be looking for an improvement in their supplier and see you as a company with certain advantages. Perhaps the incumbent is experiencing issues with quality, fill rates, or, if they have a reason for a change… they’ve implemented a price increase.
The new department was doing a a good job in identifying opportunities and started to design products and programs to test our supply chain, as well as with our key customers. In all three opportunities that were ranked the highest, there were challenges. The industry you’d like to get into isn’t necessarily quickly growing. Often times companies feel they need to chase the fast growing sector or geographic area in order to grow. This is nice, of course, but you neglect the existing mature revenues that are available to be taken by larger categories. Additionally, rapid growth categories are a great way to attract new players. As the new entrant is a newcomer, we want to grow much more by share gains, not through the normal category growth rate. We don’t want to duke it out as we get familiar alongside other companies that are entering the category simultaneously.