"Adjacencies" have merit too: once you know your firm's core strengths, it is time to explore adjacent means to expand your business.

For this month's column, Phil Phillips is revisiting the topic of adjacencies--CCE.

In the February 2004 installment, we discussed the importance of being realistic in valuing your core competencies lest you become deceived with your perception of relative competitive muscle. We mention the "acid test" being the marketplace differentiating your offering in a manner the sets you apart from competition for the same segment of coatings business.

Once the "acid test" assessment is completed and verification of your core strengths has been made, you then have another set of opportunities to explore: adjacencies to your core.

There are six primary forces along which the boundaries of a business can be "pushed out" and expanded (see chart below).

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These forces are considerations which are extremely basic methods of shifting along a single dimension not unlike the growth of atoms to elements to molecules, combining into much more complex organisms.

1. Product adjacencies: Marketing a new product or service to core customers is one of the most commonly pursued and highest potential adjacencies. Creating a new self-adhering coating system to those end-user customers who want to use TPO--normally a difficult substrate to bond without special pretreatment, is an example of this type of adjacency.

2. Geographic adjacencies: Moving into a new geographic area is a type of adjacency move that companies consistently underestimate in complexity, therefore, experience lower than average success rate. An example would be the expansion by Akzo-Nobel and Valspar into China with their wood furniture coatings systems offerings in the mid-90s, a successful move thus far.

3. Value chain adjacencies: Moving up or down the value chain into an entirely new set of activities is one of the most difficult forms of adjacency expansion tactics. However, it can be done. Consider Dow Chemicals' acquisition of Essex Specialty Chemicals, a strong market leader formulator in automotive with their adhesive and sealants offerings. Dow, a large competent raw material supplier to the adhesives, coatings, sealants, inks and specialty chemicals industries, acquired Essex, a forward integration and risked losing business from those Essex competitors to whom Dow sold millions of dollars of raw materials. It was successful. Rohm & Haas' acquisition of Morton, is another successful example.

4. Channel adjacencies: When successful, the move into a new channel can produce enormous new value. An example would be a traditional metal coating formulator moving into the plastic substrate market segments an entirely different channel consideration.

5. Customer adjacencies: Modifying a proven product or technology to enter a totally new market segment is a major adjacency move for most companies. An example would be the movement of electrocoat by several medium and large coatings suppliers from strict auto and appliance use to other end-uses such as farm implement, electrical transformers, etc.

6. New business adjacencies: Building a new business around a strong capability, essentially repositioning it, is the rarest form of adjacency move, and the most difficult to achieve success. Lord Corporation has historically been the market leader in supplying rubber-to-metal bonding structural adhesives to the engine compartment segment of the automotive marketplace. In the past three years Lord has extended its basic core strength in rubber-to-metal bonding to a coating system, which can finish a composite rubber, and metal bonded unit without heat distorting the rubber and bond in the process.

There is a 32 state matrix showing different core relationship positions. We cannot examine these relationships here but there are a few universal principle of business which emerge:

* Major adjacency moves are virtually never the salvation for a very weak core in a distant market follower competitive position.

* For market followers, the most viable paths to the creation of value involve partnering with a competitor or finding, through first divesting weak businesses, a profitable core where the principles of full potential and adjacency expansion can be applied. "Shrink to grow"

* Adjacency tactics are critical to the survival of businesses with a melting core.

* Businesses that have a strong core but are underperforming should almost always work on attaining full potential of the core first.

* Businesses that have a strong core and/or dominate a niche but are close to full potential are entering a phase in which the quality of their adjacency tactics will shape their future.

* Companies with a portfolio of core businesses should self-examine--Are we defining our boundaries of those cores correctly, are we really understanding the competitive position of each business, and where each fits in the position matrix?

MEASURE CORE, THEN EXPLORE

Our message, in these two core competency articles, was simply to return to basics and assure yourself that you are measuring your core strengths accurately. If you are not, then first, shore up your understanding through unbiased assessments of your core positions, then you are in a viable position to examine adjacency opportunities that can magnify your entire business proposition.

Phil Phillips heads the CHEMARK Consulting Group, a consulting firm focusing on the coatings, adhesives and sealants industries. This column originally appeared in our April 2004 issue.

PHIL PHILLIPS

CONTRIBUTING EDITOR 

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