Strategy & Corporate Finance PracticeHow to reignite growth through adjacenciesAdvanced-industries companies that enter adjacent markets with the right approach can outgrow and outperform their peers.This article is a collaborative effort by Matt Banholzer, Rebecca Doherty, Dorothee Herring, Alex Liu, Erik Sparre, and Tatu Suontausta, representing views from McKinsey’s Strategy & Corporate Finance and Industrials & Electronics Practices.December 2023Manufacturers across the advanced-industries spectrum, from electronics and automotive products to industrials, continue to reel from the supply-and-demand shocks caused by economic and geopolitical turbulence. As some of these conditions appear to be here to stay, numerous leadership teams are responding by cutting investments and costs. But while defensive moves matter, long-term resilience starts with growth and the courage to make bold moves to pursue that profitable growth.In earlier downturns, companies that stayed focused on growing through the cycle—by expanding into adjacencies or new geographies during a recession, then stepping on the gas early in the recovery—emerged stronger than their peers and maintained that edge for years afterward. The current period of volatility is a similar opportunity to chart a new course by seeking growth in adjacent markets as part of activating pathways in a company’s holistic growth blueprint. The net-zero transition, in particular, may give advanced-industries companies attractive opportunities in 11 areas of growth.We define adjacencies as segments beyond a company’s core business where it has a “right to win”—a long-term competitive advantage stemming from better abilities to address customers’ needs, play across the value chain, deploy a unique capability in a new area, or introduce a disruptive business model or technology. A typical large company generates 20 percent of revenue outside its core business. And our research shows that organizations that expand into natural adjacencies generate, on average, 1.5 percentage points of annual shareholder returns above their industry peers.Adjacency expansion has not been a common strategy in advanced industries, with only 11 percent of major companies moving into adjacent markets over the past 15 years. To see whether that’s a missed opportunity, we analyzed the growth initiatives pursued by the 770 largest companies in the sector between 2004 and 2019 and identified players that had expanded into new industries or segments. We then reviewed annual reports, expert commentaries, and analyst statements to understand whether the new segments were true adjacencies.We found that, indeed, moves into adjacencies that build on a competitive advantage deliver significantly more value than purely organic growth or “step-outs” that companies may pursue without a clear right to win. (Note that companies stepping out in hopes...
