Here is an excerpt from an article written by Matt Banholzer, Markus Berger-de Leon, Ralf Dreischmeier, Ari Libarikian, and Erik Roth for the McKinsey Quarterly, published by McKinsey & Company. To read the complete article, check out others, learn more about the firm, and sign up for email alerts, please click here.
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With each passing day, established companies encounter valuable opportunities to grow and innovate—along with intense competition, which has made it harder than ever to stay on top. The companies listed on the S&P 500 index have an average age of 22 years, down from 61 years in 1958. One factor that sets winners apart is their ability to build successful new businesses repeatedly. According to our research, six of the world’s ten largest companies might be called serial business builders, having launched at least five new businesses during the past 20 years, and two more of the ten have built sizable new businesses.
This isn’t a coincidence. Established companies possess talent, funds, market insights, intellectual property, data, and other assets that can give their new businesses a decisive edge over stand-alone start-ups. Providing access to an existing customer base, for example, can lower the cost of acquiring customers and speed their uptake, thereby putting the new business on a faster growth trajectory. When established companies develop the ability to integrate their assets with tech-enabled business models, they can continually generate new businesses.
Doing so well requires four elements: strong CEO sponsorship, carefully structured relationships between the parent company and its ventures, the discipline to fund new businesses as they test and validate their ideas, and a skillful business-building team. In this article—based on our experience in leading more than 200 business builds in a range of sectors, including banking, insurance, oil and gas, retail, and telecommunications—we offer a look at how an incumbent can learn to build businesses that combine its strengths with a start-up’s flexibility and pace.
Creating a business-building capability
Business building is no longer a choice: it is an essential discipline that lets incumbents counter disruptive challengers and sustain organic growth. New businesses can also serve as proving grounds for agile and design thinking, so an incumbent’s executives can gain exposure to these practices before introducing them to core businesses. But for many incumbent companies, building new businesses—especially those with a business model substantially different from the parent organization’s—will be an unfamiliar endeavor. In our experience, large companies develop their business-building capabilities most effectively by emphasizing four activities.
[Here is the first activity.]
1. Voicing the business-building imperative: The crucial influence of the CEO
Many executives at long-standing companies have told us that building new businesses feels altogether unnatural and risky. They doubt that their organizations can progress beyond traditional operating models and ways of thinking. And the high failure rate for start-ups suggests to many executives that they would be wiser to seek less risky, more familiar places to invest in pursuit of growth.
Faced with arguments against building new businesses, CEOs at established companies must advocate strongly for business building. They bear the responsibility for articulating and reinforcing the need to create businesses that reach new customers in new ways and achieve high-margin growth. Investors constitute the most important audience for such messages. CEOs must convince them that the companies’ investments in new businesses will yield better returns than investments in alternative growth opportunities.
To make an effective case for business building, CEOs should be up front about new businesses’ capital requirements (which can approach or exceed $100 million per business) and time frames for achieving profitability (usually three to five years). As McKinsey research has shown, organic growth typically generates more value than acquisitions do but takes longer to lift revenues and profits. For that reason, a CEO will normally find it helpful to update investors regularly on how the company’s business-building efforts are progressing and to remind them that such efforts take time to pay off. Internal stakeholders matter, too. To ensure that new businesses gain advantages from the parent company’s assets, the CEO must keep business-unit and functional heads informed and involved.
For example, we know of one CEO who concluded that, to grow, his company should enter the burgeoning market for Internet of Things (IoT) products. He recognized that his company lacked the capacity to develop IoT products, so he resolved to build new businesses that could innovate quickly. The CEO made clear to business-unit and functional leaders that they should treat the business-building effort as a high priority. When the company launched the first of these IoT ventures, the CEO empowered its leadership team to call on executives in the core business for help—and promised to intervene if any executives were slow to accommodate the requests of the team. Backed by the CEO, the team quickly delivered a minimum viable product (MVP).
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Here is a direct link to the complete article.
Matt Banholzer is a partner in McKinsey’s Chicago office, Markus Berger-de Leon is a partner in the Berlin office, Ralf Dreischmeier is a senior partner in the London office, Ari Libarikian is a senior partner in the New York office, and Erik Roth is a senior partner in the Stamford office.