The condition of the new business building

The condition of the new business building

Business leaders expect half of their companies’ revenue five years from now will come from products, services or businesses that don’t yet exist, according to McKinsey’s latest global survey

of a new business building.

Given the ambition to develop these new revenue streams, many of which meet sustainability goals and technological change, it is not surprising that the majority of respondents say business building is one of the most important strategic priorities in their organizations – a doubled share from recent years.

Unlike an M&A-only strategy (where corporations buy or merge with established companies) and corporate ventures (where they invest in outside startups), building a new business makes the most of your core’s existing assets and capabilities. organization to create separate but related businesses offering new products, services or business models. They often target new markets and geographies. Also, unlike mergers and acquisitions or corporate ventures, building new businesses generates organic growth that often creates greater excess returns for shareholders than closing deals. Examples of new business buildings include Telkomsel’s by.U, which provides prepaid cellular service aimed at Gen Zers, and the lab at RXR Realty, which is reimagining the tenant experience in residential, commercial and mixed-use properties.

Our annual survey shows that the more new businesses you create, the better you do at building them; there is an experience curve that may explain why only a small segment of companies capture most of the growth from building new business. Joining their ranks requires learning by doing. This year’s study examines the successful approaches of leading business builders, providing insights to help organizations navigate the learning curve faster. These include the critical role of the parent CEO, the difficult balance between autonomy and centralization, the rationale for strengthening new businesses through acquisitions, and the true depth of customer insight required for success. Leadership matters, of course, and not just at the parent company: our research found that new businesses led by women are more likely to succeed.

More than a fifth of the surveyed business leaders identify building new business as the top strategic priority of their companies.

In the charts and text that follow, we detail the study’s findings, starting with the urgent need companies feel to diversify their revenue sources to meet sustainability challenges, changing consumer demand and technological change.

Why building new businesses is becoming more urgent

A new urgency. Companies are more inclined now than in previous years to concentrate on building new businesses. More than one-fifth of business leaders surveyed cited building new business as their company’s top strategic priority, and 55 percent ranked it as a top three priority—almost double the share who said it was as high a priority for their companies between 2018 and 2020. CEOs are now twice as likely to say this is a top priority than in previous years.

New revenue. The urgency to build new businesses directly reflects respondents’ belief that today’s products and services will be insufficient to address disruptions and meet a sustainable future. More than 80 percent of respondents said building a new business would help them respond to disruptions and changes in demand, while 62 percent of respondents prioritized building a new business to generate one or more new revenue streams. Respondents predict that in five years half of their revenue will come from new products, services and business models. Some of this new revenue may be due to large-scale efforts to address sustainability issues, but the rapid pace of technological progress is certainly another factor. Regardless of the reason, respondents across industries consider building new business critical to their companies’ financial health: 24 percent say it will be the primary source of new revenue growth for their companies.

The sustainability imperative. Sustainability plays an important role in building new businesses: more than nine in ten respondents say they will build new businesses at least in part to meet demand for sustainable products and services. Additionally, 42 percent expect to put sustainability at the heart of their new business’s value proposition. But the survey also suggests it’s too early for companies looking to address their sustainability goals: Nearly 80 percent of respondents said their new businesses aren’t tracking sustainability goals related to carbon footprints or other environmental impacts .

Building a new business is hard. It may surprise few observers to hear that new businesses often fail to scale. Four or more years after launch, at least 80 percent of all new businesses have not reached more than $50 million in annual revenue, according to respondents. More than half of new businesses fall short of $1 million in annual revenue or have closed entirely.

How to build a successful new business

The role of the executive director. The CEOs of the major organizations play an active role to ensure the success of the new business. We identified four specific actions that respondents said were much more likely to be taken by CEOs of companies that have successfully built new businesses than leaders of organizations with underperforming businesses.

The right amount of autonomy. The study suggests that successful business builders give their new businesses significant autonomy in core IT, marketing and data and analytics. In these areas, the technical stack or operational processes of the core organization can often be too unwieldy for a fast-paced new business build. Successful business builders are also more likely to keep the HR function separate from the core business, which can help new businesses compete with startups for talent. Despite these degrees of autonomy, successful business builders are careful to keep their new businesses strategically aligned.

Acquisitions can accelerate success. Successful business builders report making a small number of targeted acquisitions early in scaling their new business. New businesses that made two acquisitions early in the scaling process were 25 percent more likely to significantly exceed expectations than those that either made no acquisitions or made three or more. This means looking at acquisition targets in the first few months of building a new business, but choosing them wisely. Some types of acquisitions deliver value immediately after the acquisition and thus help the business grow faster rather than requiring valuable time and effort to unlock value.

Deeper customer insights. The study suggests that developing a deep understanding of customers, both during concept generation and scaling, also helps new businesses succeed. While half of all respondents said their companies measured customer engagement (such as customer count and product usage metrics) through early scaling, successful business builders are also using more comprehensive customer-related metrics—such as customer surveys , feedback panels, diary studies, and ethnographic field studies—related to the customer experience throughout their decision journey. Additionally, when asked what they wish they had known before their organizations built their new business, respondents most often wished they had a better understanding of their customers’ needs, expectations and pain points.

Diverse leadership. The survey also found that businesses led by women were 12 percent more likely to meet or exceed growth expectations, but only 14 percent of respondents said the new business they were most familiar with was led by a woman in its early stages. Without board-level representation, new businesses may miss out on the benefits of diverse leadership. The study shows that new firms that have diverse boards of directors—either gender or racial and ethnic diversity—are more likely to be led by a woman.

Today’s companies aim to generate 50 percent of their revenue from new products, services or businesses by 2026. Building a new business is a critical way to get there. While it’s true that the more new businesses you create, the better you get at building them, it’s also true that less experienced business builders can improve their chances by learning from the leaders. As our new research shows, sustainable growth by building new business requires careful attention to the role of the parent CEO, the rationale for making acquisitions, the depth of your customer understanding, and the diversity of your leadership.

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