Coherence and Adjacency and how they determine success.

The article ‘The Coherence Premium’ talks about companies who focus on what they do best is the key to sustenance and usually get superior returns. Products and services that require different capabilities than what they have should be ‘surgically removed from the mix.’ GE successfully rode the after effects of the global recession under CEO Jeff Immelt by exiting from business which they did not consider to be aligned with their core competencies. Most companies fail because they prioritize top-line growth and chase business in markets where they don’t have the capabilities to sustain success.

In ‘Seven Ways to Fail Big’ the authors build on the previous article. They describe ways businesses rack up losses and how half of these failures could have been avoided if their strategies were not flawed. One of the reasons was ‘Psuedo-Adjacencies’ where companies expand into related businesses. This is done to enable them to offer new services or products to existing customers. This strategy may seem sensible but turns out to be ill conceived on many occasions as even though it seems like an adjacent market, the way the business is run is totally different from the core business of a company.

I experienced this first hand when I was working for Beestudio, an automotive and product design consultancy, in India and Italy. Beestudio specialized in automotive and product design for over 25 years and had companies like Lamborghini, Mazda, Suzuki and Alfa Romeo as their clients. Beestudio provided end to end design concept generation from ideation and sketches to 3D CAD models. The general process was as follows – Major automotive firms would come to them with a design brief and Beestudio would submit their concepts and proposals, which these major companies then took back to their in-house design studios where the design was modified to take engineering and production processes into consideration as required. A major part of this process is building a 1:1 physical model of a car before the design is finally approved by the management. Beestudio sensed this as an opportunity to expand. They felt that if they could provide a truly end to end design service. i.e. from sketches to 1:1 physical model they would be at a competitive advantage. They believed a one stop solution for the entire design process of a car would attract more companies and assignments and result in increased revenue and profits. But this assumption was wrong. They did not consider the fact that there is a lot of to and fro communication with various teams like design, engineering and production in the company when finalizing a design for a car. It was near impossible for these companies, located in different parts of the world to come to India regularly to follow up. Even if they had a representative permanently situated in India for the duration of the project, communication with head offices was needed on a near continuous basis. Also, one of the most important parts of the physical modelling process is constant iteration and changes everyday which required lot of impromptu meetings between designers and management in person which was not possible in this case. This meant Beestudio acted as a design hub for only companies located in the same city which amounted to very few contracts over a year which was way below what was projected to even sustain the business. Thus, Beestudio had to shut down the modelling workshop and sell all machinery and equipment at a loss.