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
This new urgency is a global phenomenon: a majority of leaders in every region say the topic is among their top three priorities.
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
These CEOs limit investment in new businesses and are willing to invest in growth, even at the expense of short-term profitability. They also set realistic expectations with both internal and external stakeholders about the business’s investment needs and time to payback, and publicly express support for new businesses. The study found that when CEOs took all four of these actions, their new businesses were 1.9 times more likely to be successful than new businesses overseen by other CEOs.
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.
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.