Why businesses must move towards adjacency thinking

The current economic atmosphere is a very different environment than it was even a decade ago. It is much more highly scaled, especially at the point of customer interaction.

Yet it is also apparently open ended in that it can scale further and companies can move into adjacent areas with apparent ease. These are lessons the business world must learn if they are to survive this shifting of the way we all do business.

This kind of scale and adjacency is strangely doable; it is both affordable and valuable. The leaders of elastic enterprises who have the technical acumen to grasp that are the change makers. Apple, for example, has expanded from music into apps and is now moving into health, the home, autos, the enterprise, retail, and more.

Since Apple became a platform company its operating income has risen from £20.5m in fiscal 2004 to £32.4bn in fiscal 2014. Apple’s experience defines the term ‘platform.’ The platform is a combination of software, services, transactions, and relationships, bundled into a seamless identity.

Apple’s App Store is a platform that manages hundreds of thousands of relationships including millions of customer relationships, many through some form of regular transaction. Apple has achieved its extraordinary success by making serious horizontal moves into adjacent sectors on the back of its platform. That it succeeds wildly in these radical adjacencies crushes the idea that a company should stick to its core. Apple makes the idea of conservative management nearly obsolete.

Platforms (and their cousins, ecosystems) entice companies to make radical new moves in the market. These moves are radical adjacencies that I’ve discussed previously and that Nick and I introduced in The Elastic Enterprise. They differ in scope and scale from what companies have been advised to do for nearly thirty years: to stick closely to their core competencies. Core, we were told, is a way to excel in conditions of uncertainty by identifying what you are good at and uniquely qualified to offer to customers.

The idea of the core emerged in the early 1990s and was formulated first in a 1990 article by C. K. Prahalad and Gary Hamel, “The Core Competence of the Corporation,” published in the Harvard Business Review. There were very good reasons for emphasizing the idea of core competency in 1990. And, as I’ve previously, there are good reasons for saying that today it may inhibit change. From the early 1980s onward, companies experienced their first tribulations as they attempted to shift from largely production-oriented to service-oriented companies, and from monopolists to market competitors.

The beginning of this period was marked by unprecedented turbulence as governments, beginning with those in the United States and the United Kingdom, forced deregulation onto a succession of different industries, including telecommunications, transport, energy, defense, and finance. It came about because of a justified fear of stagnation. In these Reagan–Thatcher years, there was a sense that Western economies as a whole were stagnating, and these two politicians were very radical in forcing change onto business.

The process of deregulation and privatisation and the breakup of monopolies created a wave of disruption and expanding economic opportunity. It was in this environment that classic business works on competitive strategy and enterprise disruption first began to appear.

It is in the nature of transition, especially the kind of disruptive transition as we saw in the Reagan-Thatcher years, that order and predictability are inherently compromised, rendering a lot of economic theories unhelpful. However, theories that emphasized order out of chaos were very helpful in those days as we transitioned from monopoly-defined economies to more competitive ones. Ideas about investment valuations, which relied on the power of foresight, helped executives replace the conventional planning process of former monopolies. It is upon the power of foresight that we must learn to rely as we face this new transition.

Building Strategic Options

If we are to survive this new economic shift, we need to think in terms of a strategic options portfolio, which is to say, we must produce a broad portfolio of options knowing that many will not be used. In the past companies could succeed by raising the cost of innovation but in today’s business environment innovation will emerge from within the ecosystem and very likely change the cost base of an industry. Without options there is no defense against this.

Options thinking is a way of adapting techniques from the financial markets to these new needs.The great value in this focus lies in getting us to think downstream, and getting us to recognize a range of possibilities that exist (or could be created) there. The norm is to project ahead from where we are today—or if you are in business to look at a future total market and then guess what size of that market you are going to win.

Options thinking places far more emphasis on the contours in the rocky road ahead. It forces us to prepare for unexpected turns, to have options at the ready when the road forks. This kind of hedge-like thinking can help make the real risks and opportunities in a project much more obvious.

Options thinking can be observed in decision-making of companies like Google and Facebook. Both have become accomplished at creating options. Facebook’s strategic options are often bought in through major acquisitions of companies already succeeding in their field such as Instagram, WhatsApp, Oculus Rift.

Google manifests multiple options the whole time through its X labs initiative, often smaller scale acquisitions, and its venture fund. The corollary of its big options portfolio is that it also divests projects quickly.A short list of Google divestments would includes Wave, its e-reader product; Motorola Mobility, an aborted mobile initiative that was a $12-billion investment; Health, its e-health records project; and Orkut, a global social network. Many of its existing X-lab projects are high profile and high risk, particularly Project Loon (a high-altitude, balloon-type satellite). Google launches them and closes them. It exercises options.

Companies that currently build good options portfolios include Autodesk, from CAD/CAM to bioengineering design, 3-D printing, open engineering, building information modelling, and movie animation; Intel, from chips to consumer robotics and network information management; Samsung, which has options almost everywhere; and of course Apple and Google.

Samsung means to lead the next generation of mobile broadband infrastructure (5G). It has already announced 1-Gb transmission rates for its experimental 5G technology.It is installing WiFi on domestic devices like TV sets to make in-house communications easier (and to give everyone an opportunity for free broadband mobile). It is involved in the White Spaces consortium, an IT affiliation with designs on creating an alternative broadband infrastructure to what is now provided by telecoms companies like AT&T. Its experience of the silicon industry has allowed Samsung to become a leader in solar panel design and production. The company is currently using that know-how to create broadband enabled schools across rural Africa. And it has a substantial consumer electronics business with which it will build connected homes.

Someone once told me that managing a business in a transitioning economy is a little like surfing. If one plans to “ride the wave,” one must be constantly attentive to the swells and troughs of the water beneath the board. A successful surfer is always prepared to shift away from the most “core competencies – standing up on the board, for example – and implement other options if the wave he is riding shifts beneath him. The same is true of entrepreneurs who hope to ride the wave of this elastic economy.

Haydn is the author of two books on the changing economic landscape, Shift and The Elastic Enterprise. Haydn trained as an economic historian and a sociologist