Business Growth - Exploring Growth Outside The Core

Golf ranks as one of the most brutal and demanding markets in the sports business. So, despite its fabled swoosh, Nike was regarded as an amateur when it decided in 1995 to branch out from shoes to golf apparel, balls, and equipment. Four years later, however, Nike had scored priceless marketing victories - not once, but three times running.

First, the British Open champ wore Nike's golf shoes in 1999. Next, Tiger Woods switched from Titliest golf balls, the leading brand, to Nike golf balls in 2000. And, finally, David Duval won his first major tournament just after switching to Nike golf clubs in 2001.

Nike's entry into the golf market appeared to be the business equivalent of sinking three successive holes in one. But those who had followed the company closely over the previous decade were not surprised. They recognized the formula that Nike has applied and adapted successfully in a series of entries into sports markets - from jogging to volleyball to tennis to basketball to soccer. Nike begins by establishing a leading position in athletic shoes in the target market.

Next, Nike launches a clothing line endorsed by the sport's top athletes - like Tiger Woods, whose $100 million deal in 1996 gave Nike the visibility it needed to get traction in golf apparel and accessories. Expanding into new categories allows the company to forge new distribution channels and lock in suppliers. Then it starts to feed higher-margin equipment into the market - irons first, in the case of golf clubs, and subsequently drivers. In the final step, Nike moves beyond the U.S. market to global distribution.

This formula, we would argue, is the reason that Nike pulled away from Reebok as leader in the sporting goods industry. In 1987, Nike's operating profits were $164 million to Reebok's $309 million, and Nike's market valuation was half the size of Reebok's. By 2002, Nike had grown its profits to $1.1 billion, while Reebok's had declined to $247 million.

Both companies had started out in the same business with the same manufacturing technology and comparable brand names. Yet Nike found a formula for growth that is used successfully again and again, while Reebok seemed to pursue a different source of growth every year with uneven results.

To learn more about how to sustain profitable growth, we recently conducted a five-year study of corporate growth involving 1,850 companies. We tracked specific growth moves and linked them back to individual company performance. Our research yielded two major conclusions. One was that most sustained, profitable growth comes when a company pushes out the boundaries of its core business into an adjacent space. We identified six types of adjacencies, ranging from adjacent links in the value chain to adjacent customers to adjacent geographies.

"Growth Outside the Core", Chris Zook, James Allen, Harvard Business Review, December 2003.