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Creating a growth strategy through adjacencies in the building materials industry

Large public and private equity funded companies in building materials and other industries have a growth strategy through core business extensions, adjacencies, and M&A. However, even with strong financials of 20+% EBITDA, the traditional pathway by investing in their current business through core business extensions into new markets, new distribution channels and innovative products, will have a limited runway for growth. Almost all of them have strategized on evaluating market and product verticals that are adjacent to their current business line of sight, creating new revenue streams and utilizing excess manufacturing capacity or investing in new manufacturing assets, but with same or higher EBITDA% than their current businesses. It is a higher risk strategy as compared to investing in your existing business but a lower risk when compared to acquisitions, which have a lot of unknows in manufacturing assets, sales growth, and company culture. Organic growth through adjacencies is a strategy for every growth-oriented company.

Developing an adjacency strategy

There are 3 ways to enter adjacencies.

1. Core Market, New Product / Technology Expand product portfolio and leverage strength of current customer relationships to gain share of wallet in core markets. Moderate risk: Learning curve around new product (manufacturing, sales & marketing, etc.), but able to leverage market and customer understanding / experience.

2. New Market, Core Product / Technology Leverage current products to enter new markets offering potential for diversification, revenue growth, and margin expansion. Moderate-High risk: Significant unknowns associated with moving upstream / downstream, entering new geographies or new verticals.

3. New Market, New Product / Technology Expand product portfolio to enter new markets that offer potential for diversification, revenue growth, and margin expansion. High risk: Limited ability to leverage current business and create synergies to realize full value of adjacency.

Adjacencies program methodology

A cross functional leadership team is created to develop an adjacency strategy. There are 3 steps to this process:

a. An ideation brainstorming session is conducted to screen the market to arrive at an extensive listing of opportunities to evaluate. These are across all three adjacency plays - core market/new product, core product/new market, and new product/new market.

b. The business opportunities are ranked through a set of criteria for strategic fit and attractiveness, which are carefully selected by the leadership team. The prioritized ranking may have to go through a secondary screening if the list of business opportunities needs to be shortened to the top 4-6 opportunities.

c. The top opportunities go through a detailed assessment for rationale, market shaping forces, market opportunity, competition, financials, and strategic alignment with the company.

These business opportunities will funnel the innovation pipeline and follow a Stage-Gate process that takes it from ideation to commercialization.

A programmatic organic growth strategy through adjacencies is a proven way to generate EBITDA growth in well established companies and often recommended by the board of directors or investors to increase the economic value of an enterprise.

The author Ashwin Himat is the Founder and President of Endurance Growth Strategy Consulting LLC, that provides personalized advisory and consulting service on growth strategies and innovation to the building materials industry. He is a Business and Product Development Executive who has created organic growth through new products, markets and technologies, and inorganic growth through M&A, for 20+ years in the building materials industry at large global and public companies such as Louisiana Pacific (NYSE: LPX, $4B) and CertainTeed (CAC: SGO, €50B).


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