Two years ago, Bain & Company director Chris Zook focused on developing the potential of the core business in his popular book Profit from the Core, coauthored with James Allen. As he writes in his new book, Beyond the Core, "The most successful growth companies used every trick in the book to realize the full potential of their strongest businesses before venturing into potentially greener pastures outside their core."

As he has learned since the publication of Profit from the Core, venturing into potentially greener pastures—what he calls adjacency moves—present a company with a whole new set of issues concerning investments, timing, competition, and strategy. In the following excerpt from a chapter of Beyond the Core, "The Growth Crisis," Zook explains how all kinds of companies stand to gain—or lose—by venturing beyond their core. -Ed.

A somewhat surprising finding in this study of the search for profitable growth is the extent to which pressure to make adjacency moves exists across the gamut of business situations. It is felt by strong leaders, gushing cash, with opportunities hurtling at them from all directions, as well as by companies whose industries are in decline, or are falling hopelessly far behind competitively, and who wonder if they should make one final shot to leap to a new lily pad.

Strong leaders in robust markets epitomize the epithet of Sun Tzu: "The more opportunities I seize, the more opportunities multiply before me." Strong core market growth can actually heighten anxiety about finding future sources of profitable growth to maintain such exceptional momentum. As the U.S. expansion program for The Home Depot approaches saturation, where does the company go? It has tried smaller formats, forays into services and installation, and even new retail concepts, with limited success. Will it take a major adjacency move to reignite growth, or does the current core still hold untapped growth prospects? As Dell, a $35 billion company with a $3.5 billion cash flow, looks at growth beyond the PC, it has begun a range of adjacency initiatives, including low-end switches, printers, and supplies; handheld devices; and even retail kiosks—and these are but a handful of the hundreds of choices that a company in Dell's commanding position has before it. But which to choose? How many? At what rate? How to maintain the remarkable momentum of the past?

Paradoxically, leadership businesses have the most to lose in adjacency expansions.
Strong leaders in weak core markets face a different dilemma. Organic expansion plus "close-in" adjacency moves (like the Dell example) might not be enough to satisfy their investors' aspirations—or their own. Hillenbrand Industries provides a classic example of this situation. Hillenbrand is in two businesses-mechanical hospital beds and caskets. Both markets are growing at less than 5 percent per year, and Hillenbrand has more than a 70 percent market share in each. Room to grow share is limited, as is the potential to grow the market (driven by hospital use and burials). As a result, Hillenbrand is forced to examine adjacencies that utilize its basic skills but that might be several steps away from its historic cores.

Another version of the Hillenbrand situation is the company with a strong niche position within a larger market. The company may feel that it needs to grow, but recognizes that, with insufficient growth opportunities in its historic subspecialty, it must venture out into the broader arena. One example of a company facing this situation is Enterprise Rent-A-Car, which has a commanding market share of replacement rentals from body shops and insurance companies but encounters entrenched competitors in every adjacent direction of business rentals (Hertz and Avis), leisure rentals (Alamo), fleet leasing (PHH and GE Capital), and so on. Truly one company's adjacency is another company's core, in a market with many related customer and product segments such as vehicle rental.

Paradoxically, leadership businesses have the most to lose in adjacency expansions. Their valuable core franchises would be put at risk by major forays into the wrong adjacency or by premature abandonment of the core as an investment vehicle. And this risk is compounded by the abundance of temptation: The strongest businesses with cash to invest have opportunities brought to them every day by a long line of investment banks and deal makers. During discussions of adjacency expansion, Sir Christopher Gent, CEO of Vodafone, remarked that CEOs should be judged by the opportunities that they decline as well as those they accept. Adjacency expansion for a strong leader is reminiscent of Napoleon's famous statement "The most dangerous moment comes with victory."

At the other end of the spectrum are businesses in weak competitive positions or collapsing core markets and whose management would like nothing better than to jump to a better position, even a different business. However, the data show that few weak followers—in fact, only about 5 percent—materially change their positions over time. The more typical example is Budget Rent a Car, once the number six car rental company in the United States. The business has had five different owners since 1986 and five different strategies. Some strategies have employed adjacency moves such as entering the travel business (a failure) or purchasing the Ryder truck rental business (number two to U-Haul). But salvation was not to be found. In 2001, Budget lost $597 million on sales of $2.2 billion. In 2002, the company declared bankruptcy and was purchased at a fire sale by Cendant to be absorbed into that company's Avis business. Nonetheless, it is hard not to sympathize with managers who run these businesses and feel a sense of frustration bordering on desperation.

Another situation in which adjacency expansion is on the minds of management teams is when an industry is in turbulence. During the 1970s, only about 10 to 15 percent of industries were encountering major shifts in the basis of competition. During the 1990s the number was approaching 50 percent, with tremendous turbu lence in major industrial sectors, from financial services to publishing to airlines to many retail sectors.

Turbulence can take a variety of forms. One form is when an entire sector that has been protected from the full pressure of corn petition suddenly has its protective shield removed. An example is the deregulation of public utilities in the United States in the 1990s when company after company rushed into adjacencies ranging from telecommunications to global expansion to financial hedging A second form of turbulence is the rare, but stressful, situation of the melting core. A core melts down when the industry or market itself is in rapid structural decline. What happened to the typewriter industry with the advent of word processors is an example. The magnetic tape industry's giving way to optical storage is another, and the photographic film industry's encounter with digital imaging is a third. In each of these situations, companies like Imation (in storage) or Polaroid and Kodak (in photography) have faced strong pressure to find adjacent moves to serve as stepping-stones to a more stable future.

Each of these business situations—from strong leadership to followership, from growing market to melting core—has its own internal and external pressures to push out from the boundaries of its core business into adjacent areas.

The exception is, of course, the company with leadership in a stable or growing market. We estimate that only 12 percent of businesses start with this set of fortunate circumstances as their platform in the search for sustained, profitable growth. Most companies—nearly 90 percent of them—exist in much-less-than-ideal conditions.

Excerpted with permission from Beyond the Core: Expand Your Market Without Abandoning Your Roots, Harvard Business School Press, 2004. 

Chris Zook is a director of Bain & Company, and leads the company's global strategy practice. He is the author of Profit from the Core: Growth Strategy in an Era of Turbulence.