The new priority for organic growth

Even before the pandemic, our own experience indicated that business building had become more important for incumbent companies looking to use innovative business models, products, and services to meet the threats and opportunities of a digitizing world. The COVID-19 crisis has accelerated and intensified that trend. In many industries, the pandemic has rewritten rules and upended assumptions, all while diminishing—or threatening to diminish—existing revenue streams. Replacing lost revenues, of course, requires finding new forms of growth. And while M&A remains an essential part of the growth playbook, P/E multiples remain high, and acquisitions can be expensive. Moreover, organic growth often creates greater excess returns to shareholders than dealmaking does, even during more normal times.

We studied four different approaches to organic growth and found that business building was the most effective among them.³ Some 74 percent of companies that chose business building as their main strategy grew at rates above the average of their industries. Only 58 percent of the companies that prioritized different strategies did. No wonder so many executives ranked business building as a top-three priority for 2020 (Exhibit 1). And these companies are putting their money where their priorities are, allocating, on average, one-third of their organic-growth capital to business building—more than twice as much as the laggards do. The shift to business building isn’t confined to a few sectors or regions. In all those we surveyed, companies give business building pride of place on the corporate agenda (Exhibits 2 and 3).

Downturns are often times of innovation, of course—companies such as Airbnb and Uber were launched during the Great Recession. But the rise of business building as a priority for executives could suggest that incumbents are muscling into the start-up space at an unprecedented scale. A resulting surge of innovation may already be visible in the greater resilience that business builders have shown during the COVID-19 crisis. Thirty-four percent of the companies that prioritized business building experienced no change or an improvement in growth as a result of COVID-19. Only 26 percent of companies that prioritized other organic-growth strategies did.

Companies that prioritize business building tend to grow faster than their peers, respond with greater resilience to volatility and economic shocks, and, as they gain experience building businesses, to see more success from them. But not all companies succeed: only 24 percent of new businesses launched in the past ten years are viable large-scale enterprises today.

Where business builders stumble

Only a small segment of companies capture most of the growth from business building: of the viable large-scale businesses built in the past ten years, respondents report that 66 percent of them were created by only 20 percent of incumbent companies. These leaders say that this approach to growth helps them meet shifting customer expectations, protects them against industry disruptions and economic shocks, and increases their organizational agility (Exhibit 4).

Meanwhile, most companies have yet to see their business-building efforts bear fruit: only 24 percent of the new businesses in big corporations become viable large-scale enterprises, even as respondents say they expect the success rate to rise in the future. Businesses that cannot scale up their operations encounter a range of barriers to success, from insufficient time and resources to a lack of operational freedom from the core business. But the following two reasons were cited most frequently by the less successful business builders:

A lack of adaptability

Commenting on the business building they were most familiar with, 30 percent of failing businesses cited unexpected disruptions in the market and business environment as the biggest reason these news businesses fell short of expectations. This might seem intuitively obvious. In business, after all, just about the only certainty is that the future is uncertain and will bring unforeseen challenges that are difficult to plan for.

But disruption isn’t the real problem, which is the inability of so many new businesses to adapt and pivot effectively when circumstances change or they get information that challenges their previous assumptions. Although executives cannot necessarily predict which challenges their companies will face, they can prepare for them. We have found, for example, that successful business builders put in place “learning buffers”—a budget cushion permitting an effective response to the uncertainties of launching any new business. This approach avoids bringing activity to a halt amid endless rounds of approvals.

Just as important, successful business builders understand how markets and customers might be changing. They constantly test their new businesses’ products, services, and business models to spot problems early, while there’s still time to make midcourse corrections. Keeping a close eye on the right kinds of data also reduces the possibility of encountering a catastrophic surprise. And successful business builders, we have observed, pull the plug quickly if they find that the value expected simply isn’t there—and they have a process for pulling it.