The challenging times for CEOs show no sign of easing, as the promise and peril of generative AI, geopolitical fractures, and persistently high inflation continue to sow uncertainty. With little clarity on the horizon, is now really the time for companies to move into an adjacent or breakout business? For CEOs who want to deliver superior revenue growth and profitability, the answer is a resounding yes—so long as they pursue new businesses that build on a competitive advantage.
Some 20 percent of total reported growth from companies we track is driven by adjacent and breakout businesses. As part of our ongoing research series for C-suite executives who choose growth and master the ten rules to achieve it, we examined the performance of 274 companies in the advanced industries sector from 2016 to 2022. Among our key findings: companies that successfully utilized two or more “right to win” strategies to move into adjacent and breakout businesses delivered 12 percentage points higher excess TSR versus their subindustry peers (exhibit).
“Supply chain shocks and changing value pools are opening new opportunities in adjacent markets,” said McKinsey senior partner Kenji Nonaka. “Companies can improve their growth prospects and shareholder returns by pursuing adjacent and breakout businesses where they have a right to win.”
Right-to-win strategies fall into one of four categories: customer-driven, capability-driven, value-chain-based, and those that build on a disruptive business model or technology. Of the four, the most utilized is the opportunity to fulfill a need for existing customers that the core business currently does not meet. The strategy that delivers the biggest revenue gains involves leveraging a core business capability such as patents, technological know-how, or brand equity, to expand into a new business.
Having a long-term competitive advantage is one thing. Making the most of it is another. Over the past 15 years, only 11 percent of companies in the advanced industries sector unleashed their right-to-win potential with a successful adjacency move. But it’s not too late and the time is ripe for bold action. Our analysis of previous downturns reveals that companies that expand into adjacent and breakout businesses during a recession and accelerate those efforts early in the recovery not only emerge stronger than their peers, they hold their lead for years.