Wednesday, November 18, 2015

The risk of adjacent-market strategies

The article "Seven Ways to Fail Big" presents several situations that cause companies or products to not deliver their expected value. It is particularly interesting that often times these failures originate from attempts to replicate successful strategies, as in the case of General Electric's adjacent-market strategies under Jack Welch.

There are several examples of companies that attempted to make their way into new markets and failed to reap enough benefits to survive. In many cases, companies fail to recognize that an existing customer will not necessarily buy different products from the same company. We can analyze the following cases:

  • McDonald's Arch Deluxe: In 1996, McDonald's decided to offer a hamburger for sophisticated customers. It was marketed as "The Burger with the Grown-Up Taste". Sales for this product ended up being very low and it was eventually taken out of the restaurants. This product was evidently a tactical move aimed at reaching a broader market; however, McDonald's failed to see that people who go to their restaurants don't go for sophistication or taste, but rather for convenience and price. This move was driven by a change in the company's core business, which represents the first pattern of failed adjacency moves in the article.
  • Coors Rocky Mountain Sparkling Water: In 1990, Coors decided to enter the bottled water market. After great marketing efforts, sales for this product performed poorly as Coors failed to understand its current costumers and brand recognition. As it turns out, customers associate Coors with beer instead of bottled water, which made this move quite confusing. This situation fits in the fourth pattern of failed adjacency moves, in which a company overestimates its hold on customers.
  • Leona beer: Following from my previous blog post, Leona was a beer produced by a very large company specialized in producing and distributing soft drinks. This move was in part motivated by the efficient logistics and distribution channels that the company had developed from its soft drinks business. However, it eventually failed to compete with the largest brewery at the time. This is a very good example of the third pattern, in which a company overestimates the strength of its capabilities.
These three examples show companies that executed misguided moves into adjacent markets and failed for different reasons and under different circumstances. It is important to recognize that moving into new markets is always risky, regardless of a company's previous success. The four patterns introduced in the article present a very good framework to analyze adjacent-market strategies and whether they make sense in a specific situation.

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