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Profitable growth is the wellspring of most value creation in business. The prospect of achieving profitable growth provides the air under the wings of most companies' stock prices. The rewards of profitable growth offer a source of oxygen for employees at all levels. When profitable growth dies, these same forces of positive energy can begin to run in reverse, creating a downdraft, a reinforcing cycle that can build a value-destroying momentum of their own.

Analysis by Bain & Company shows that profitable growth is becoming increasingly elusive and more fleeting for most companies, and that this is likely to be even more true during the coming decade. It is no wonder why Bain surveys of CEO priorities indicate that finding new sources of profitable growth beyond their core is the number one concern.

Despite this challenging environment, the average company today plans to grow revenues at two times the growth of its core markets and earnings at four times the growth rate of its core markets. Bain surveys of CEOs indicate the number one way CEOs intend to do this is by pushing their business out into new territories, which we call adjacencies. More than half of targeted growth will come from adjacency expansion. (View chart)

Pushing out the boundaries of a core business is among the most difficult management challenges. The typical odds of success are low; only one out of four adjacency initiatives prove to be successful. An examination of the top twenty-five business calamities (other than Internet companies) of the period of 1997 to 2002 showed that a failed strategy to grow into a new adjacency around a once successful core business was a critical factor in 75 percent of these disasters.

The promise of growth lies in methods that allow you to decide correctly, to tilt the odds in your favor, and to control the cost of failures when they inevitably occur. Small improvements in performance along these dimensions can increase the overall growth rate of a business considerably. If a company in a 3 percent growth market achieved the potential from its adjacency moves 30 percent faster, handled three—not two—adjacency initiatives per year, and had a success rate of 60 percent instead of 30 percent, then the company would nearly double its growth rate to 7.1 percent from 3.9 percent.
UPS
Expanding the core through adjacencies
Li Fung
Redefining the core through adjacencies
Lloyds
Revitalizing the core through adjacencies

   
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