In 1942, the U.S. Navy faced a daunting and confusing task. It had to create, from whole cloth, a strategy to battle the Japanese empire amid the vastness of the Pacific Ocean. Today, company executives often feel like those perplexed military strategists who first stared at a map of the Pacific, dotted with thousands of islands, and wondered what to do and where to go. The options for reaching their goals now, as then, seem endless. What's the best strategy to pursue?

For the Navy, the answer was its famous "island-hopping" campaign, which focused on securing islands vital to waging a successful air war. So the Navy stormed islands that had airbases, such as Guadalcanal and Saipan, while bypassing nearby islands like Truk and Rabaul.

In other words, the Navy put in place a repeatable formula that consistently identified the most promising islands of opportunity. That lesson shouldn't be lost on business executives, who, aided by their CIOs, can benefit from the example of that long-ago military strategy.

Though not actually at war, senior executives often feel embattled. Their companies must continually grow, a goal harder to achieve now than it was five years ago, according to chief executives interviewed in a recent Bain & Co. study. And the pressure keeps building. Stock analysts expect companies in the S&P 500 index to post annual earnings growth of more than 12% on average. Yet, fewer than 13% grow earnings and revenue at 5.5% or higher and earn back their cost of capital over 10 years, according to the Bain research. In this tough environment, where can CEOs find sorely needed expansion opportunities?

Many companies will decide to push out from their core businesses into adjacent territory. But, first, they must choose where to go-a difficult, risk-laden decision. After all, a company with a strong core business has roughly 100 possible adjacency moves at any one time. It may evaluate 15 to 20 of these opportunities annually and, in the end, select just a small fraction of those—if any.

In 1942, the U.S. Navy faced a daunting and confusing task. It had to create, from whole cloth, a strategy to battle the Japanese empire amid the vastness of the Pacific Ocean. Today, company executives often feel like those perplexed military strategists who first stared at a map of the Pacific, dotted with thousands of islands, and wondered what to do and where to go. The options for reaching their goals now, as then, seem endless. What's the best strategy to pursue?

For the Navy, the answer was its famous "island-hopping" campaign, which focused on securing islands vital to waging a successful air war. So the Navy stormed islands that had airbases, such as Guadalcanal and Saipan, while bypassing nearby islands like Truk and Rabaul.

In other words, the Navy put in place a repeatable formula that consistently identified the most promising islands of opportunity. That lesson shouldn't be lost on business executives, who, aided by their CIOs, can benefit from the example of that long-ago military strategy.

Though not actually at war, senior executives often feel embattled. Their companies must continually grow, a goal harder to achieve now than it was five years ago, according to chief executives interviewed in a recent Bain & Co. study. And the pressure keeps building. Stock analysts expect companies in the S&P 500 index to post annual earnings growth of more than 12% on average. Yet, fewer than 13% grow earnings and revenue at 5.5% or higher and earn back their cost of capital over 10 years, according to the Bain research. In this tough environment, where can CEOs find sorely needed expansion opportunities?

Many companies will decide to push out from their core businesses into adjacent territory. But, first, they must choose where to go-a difficult, risk-laden decision. After all, a company with a strong core business has roughly 100 possible adjacency moves at any one time. It may evaluate 15 to 20 of these opportunities annually and, in the end, select just a small fraction of those—if any.

Repetition pays
For these companies, the most effective approach lies in developing a repeatable formula for adjacency expansion. Repeatability lets a company build an organization around its growth program. A repeatable formula creates the confidence to invest quickly, provides a method for finding the next opportunity, and makes it possible to pursue more adjacencies faster and more effectively.

CIOs can play a vital role in the process of expansion and growth. In three major ways they're perfectly positioned to help senior managers identify, validate, and sustain adjacency moves.

First, they can help line managers recognize their best customers, usually the strongest base for establishing successful adjacency moves. Second, they can expand IT strengths, for example, in marketing or logistics, to reach more customers or to serve current ones with new offerings. And third, CIOs can identify core IT capabilities that companies can turn inside out to form the core of a new business.

Moving Beyond The Core

The five disciplines of adjacency expansion:

Relentless repeatability: A repeatable formula for adjacency expansion is at the heart of most sustained, profitable growth strategies.

Customer-centric: The best adjacency strategies usually start from insights about the core customer, not from the big idea or the search for the next hot-market success.

Strong core: A strong core business is essential for adjacency success. Adjacency moves seldom solve the problems of a weak core.

Simple, clear criteria: The best, most innovative growth companies are also the most rigorous in their decision making.

Organizational fit: Failure to confront organizational issues in advance is the quickest way to derail a growth initiative. Detailed, up-front homework is the best way to increase the odds for success.

DATA: Bain & Co.

These three strategic skills—polishing customer lenses, expanding IT-based links to customers, and recasting IT competencies as new adjacent businesses—can improve a company's odds for success when it moves beyond its core business. Our analysis of hundreds of companies shows that more than 75% of adjacency attempts fail. Therefore, CIOs who master these skills can make a critical contribution to their companies.

Skill 1: Polishing customer lenses. CRM systems drive this skill. They identify a company's most profitable customers, thereby establishing a base from which to expand into new market segments. Some CEOs dismiss conventional segmentation techniques as mere grist for ad campaigns. But structured along pragmatic lines, segmentation data can solidly link customer needs to purchasing decisions and provide a springboard for adjacency expansion. By identifying the lifetime value of each segment and determining a company's market share within each, executives can rank new adjacency opportunities. The same IT-intensive tools can also help executives spot patterns of success, unearthing repeatable formulas for sustainable growth.

American Express has based its successful expansion into adjacencies on the detailed microeconomic data on buying behavior reflected in the millions of card transactions that pour into the company each day. The data it collects and sifts contains patterns of opportunities—on markets ranging from individual consumers to corporate cardholders. With such customer information, AmEx managers have created a family of cards with varied interest rates, terms, services, and reward programs. In the process, they uncovered a repeatable formula for adjacency moves. They found new customer segments; created new, more precisely targeted credit-card products, including rewards programs; expanded the types of merchants where cardholders can use their cards; and sold additional services to card customers.

Before AmEx launches a new product, its IT teams gather detailed market data to see whether existing buying behavior supports the move. "We're often serving the same customers," says Alfred Kelly, Jr., group president of consumer and small-business services. "They just might be in different segments, depending on whether they are at work, on vacation, or shopping on the weekend."

Once CIOs have helped define the customer territory, senior managers can determine better ways to serve the audience. While customer analytics are usually outside IT's bailiwick, IT executives should be concerned about the type and quality of the data captured. Their sophistication about what to measure will have direct bearing on targeting untapped adjacencies. Data should reveal such key points as real profitability, share of customer wallet, customer market share, and customer retention.

Dell uses a data-driven strategy to enter one adjacency after another. With its direct-to-customer model, Dell communicates regularly with users and feeds that information into deep and detailed categories. Dell then subdivides customer segments, making slight adjustments to its direct model to tap sources of new growth cost-effectively.

For instance, Dell first divided its public-sector business into education and government segments. As it grew in those markets, the company split education into primary and secondary schools. Higher education was further divided into colleges and universities. For each segment, Dell changed its product focus, retrained the sales force, and modified the sales and marketing cost structure, primarily by varying the mix of direct and indirect salespeople. This approach enabled Dell to lock onto high-priority segments and control its margins with remarkable precision. With the help of such segmentation data, the company has developed a competitive advantage based not only on volume, but also on knowledge of its customers and its ability to serve them efficiently.

Skill 2: Expanding IT-based links to customers. The second way IT can help companies enter adjacencies goes beyond merely developing more touch points. With the right capabilities, IT can become a tool for building out beachheads for new products and services or improving existing offerings. Wal-Mart, for example, has made IT a fundamental element of its expansion strategy. The retailer's IT architecture underlies its sales analysis, inventory, and logistics systems, a key competitive advantage that executives use to sell more and more products to customers at ever-decreasing prices.

Indeed, in 2002, Wal-Mart became the largest company in the Fortune 500, while Kmart, its major rival, landed in bankruptcy; both opened their doors in 1962. One by one, Wal-Mart executed a series of well-orchestrated moves into adjacencies, such as new store formats (Sam's Clubs), new products (electronics), and new geographies (starting with Mexico in 1991, followed by eight other countries, including Brazil, China, Germany, and the United Kingdom).

Kmart's history, on the other hand, is strewn with adjacency expansions gone awry, from books (Walden), to sporting goods (Sports Authority), and even to a chain of department stores in Czechoslovakia. These adjacency blunders drained Kmart while its core was under attack from one of the toughest competitors on earth.

In large part, Wal-Mart's success during this period derived from its vaunted logistics, inventory, sales-analysis, and customer-segmentation systems—all of which are IT-driven. To remain price-competitive, Wal-Mart hired StrongNumbers to monitor Internet prices all over the world. Even the prices of cast-offs sold at online auctions are run through Wal-Mart's dynamic pricing algorithms. With IT helping to point the way, Wal-Mart has managed to remain the low-price leader as it continues to expand.

Skill 3: Recasting IT competencies as new adjacent businesses. This strategy involves moving into "white space" with a new business built around a strong IT capability. It's the rarest and most difficult adjacency move to pull off. American Airlines managed to do it with the creation of the Sabre reservation system, a spin-off now worth more than the airline itself. Sabre, in turn, went on to create a new business adjacency of its own in online travel agent Travelocity.

Amazon.com has embarked on this path with a strategy to build its book-selling service into a broad-based online platform for retailers. Indeed, in a couple of years, more than half of the merchandise Amazon sells could come from other providers—each paying a 15% royalty for the privilege. Already, 22% of the unit volume moved on Amazon's site is sold by outside vendors, according to company reports.

Amazon's approach demonstrates the importance of having a strong, well-functioning core IT process that clearly contributes to a company's profitability before attempting to use it as a base from which to launch an adjacency. The features of Amazon Web Services, such as one-click buying, have succeeded because customers value the simplicity and ease of use. Only after Amazon refined its own customer interface did the company consider offering its Web services to other merchants and programmers gratis, as part of a larger expansion strategy to turn the company's site into a sort of worldwide E-mall.

When entering adjacencies, CIOs would be smart to follow three winning strategies. First, CIOs can help develop the kind of strategic data that lets line managers target their best customers, usually the strongest base for launching successful adjacency moves. Second, by expanding technology links to current and new customers, CIOs can help companies tap new adjacent markets. And third, CIOs can use IT strengths to create entirely new entities.

Many CEOs think of themselves as generals and liken their efforts to waging battles. In a way, the metaphor is appropriate, since a business, like an army, can't advance everywhere at once, but must rely on informed, savvy strategy. In any successful campaign, intelligence is key, and that's where the CIO steps in. The CIO has the tools to help executives identify and carry forward logical opportunities for expansion and revenue growth—and to do it again and again.

Steve Berez is a VP and Chris Zook is a director at Bain & Co., a global management consulting firm. Zook's latest book is Beyond The Core: Expand Your Market Without Abandoning Your Roots (Harvard Business Press, 2004).

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