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Adjacency moves are business journeys into the unknown. The average strong core business has typically 80 to 110 possible adjacent moves surrounding it at any one time. Deciding how to decide is crucial in order to avoid mere expediency or excessive complexity or even pure guesswork hidden in the cloak of executive decisiveness. The best companies have honed their criteria and processes for adjacency decisions to military precision.

Studying what these companies do can yield useful insights. From these companies, Bain identified three success factors for evaluating growth opportunities.

1. The best adjacencies build on and reinforce the strongest cores

Relatedness to a strong core is the most powerful and reliable engine of value creation. Many of the most successful growth companies were able to maintain strong, highly measurable and mutually reinforcing economics between the current business and the new adjacencies. Assessing the relative distance of different adjacencies is useful in comparing investments to each other as well as in evaluating them on an absolute basis.

2. Drive adjacencies toward the most robust profit pools

A profit pool evaluation embodies the size of the industry, its current and potential profit dollars, and the extent to which those earnings could cover the cost of capital for the leading players. In mapping out profit pools, be sure to define the relevant markets, their boundaries and what constitutes profits. 

3. Insist on the potential for leadership economics

The decision to make a major investment to push out the boundaries of a core business into an adjacent area requires a clear view of the reinvestment and cash requirements in the future. If you do not have the potential to ever achieve economics equivalent to the leader, then you may be constantly out-invested or put in a position of having to match the leader's investment to achieve lower returns.
Making the right adjacency choices
Common pitfalls of adjacency expansion
Mistaking a large market for a large profit pool
Failing to understand how tightly the profit pool is controlled by a competitor
Misunderstanding the root cause of market power, thereby defining market leadership in the wrong way
Underestimating how today's competitive dynamics will shift tomorrow's profit pool
Not doing adequate homework on relative cost position across competitors, thereby underestimating the true economic strength of the market leader
Falling prey to the tyranny of incremental economics and, in so doing, dismissing the importance of market leadership economics in reinvestment
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