The introduction of OnStar does highlight a chief difficulty of growing into an adjacency: How much flexibility do you give the new unit to do things its own way? The OnStar unit more closely resembles a consumer-electronics business than a division of an automaker. “We knew that we had to do some things differently,” says Huber. “But we didn’t have a ‘Get out of Jail Free’ card. We couldn’t run away from every business process and policy.” At the same time, OnStar brought in talent from outside the auto industry and used different metrics such as subscription and renewal rates to measure growth and provide employee incentives.
Although OnStar is a wholly owned subsidiary and doesn’t disclose financial-performance information, GM CFO John Devine announced in the second half of 2002 that OnStar was making a profit. To be sure, the unit is too small to have an appreciable effect on the giant automaker’s revenue growth, which is currently about 5 percent. Still, the crossover value is undeniable. And the system creates a way for GM to communicate with its customers every day, instead of every few years or so. Who knows what kind of growth could ultimately result from that?
Joseph McCafferty is news editor of CFO.
Attempting to produce new growth via adjacency moves, demand innovation, or other strategies is not without risk. In 1998, Ford Motor Co. tried to reinvent the sales wheel by launching a Website where customers could comparison-shop for used and off-lease Ford vehicles. The move infuriated dealers, and the Texas Department of Transportation sued Ford on the grounds that it was violating a law that prohibits automakers from selling directly to the public. Ford lost the case and was forced to shut down the service. It had succeeded only in damaging its relationship with dealers.
Xerox is another demand-innovation casualty. Despite the company’s attempt to move from the declining copier business into the document-management business, revenues grew at just under 2 percent from 1996 to 2000, and have declined ever since. Mercer Management Consulting Inc.’s Richard Wise says that Xerox thought about its customers too narrowly, while its position in the copier business didn’t give it the authority to be in the document-management business. “I’m not sure they had the right mix of skills to play in that space,” he says.
Chris Zook, director of the global strategy practice at Bain & Co., estimates that 75 percent of history’s biggest business blunders were either caused or made worse by growth strategies gone awry. One of the most common mistakes has been that companies look too far afield for adjacencies. They assemble a patchwork of businesses that seem related but don’t provide real synergies, then are forced to sell off their new purchases, usually at a steep discount.
“During the euphoria of the late 1990s, a lot of companies got caught up in all the dealmaking,” says Zook. “Their risk profile was extended beyond their comfort level.” Mattel, for example, acquired The Learning Co., only to sell off the business later on. Bausch & Lomb diversified into hearing aids and other medical equipment, even as its position in its core market, contact lenses, slipped from first to fourth. “The farther you get from the core, the greater the chances are for failure,” says Zook.
Indeed, new sources of growth can’t be simply bolted on to a weak business. Says Mercer’s Adrian Slywotzky: “The tricky thing about creating new growth is that you don’t get to do it unless you get an A or an A+ in what you already do.”