Business diversification finds opportunities to grow new revenues by 20 percent.
One of the largest healthcare payors in the US saw that the Affordable Care Act presented substantial challenges to sustained growth in revenue and earnings. The client asked McKinsey for help finding concrete new business growth opportunities that would draw upon the company’s core competencies but in related industry areas. The goal of the effort was to diversify revenue growth and offset the impact of the changing landscape.
The team first developed a long list of potential business opportunities, drawing upon McKinsey’s expertise in the insurance industry and also on extensive interviews with experts from the provider, health IT, technology, insurance, venture capital, and private equity industries. Based on that initial market scan, the range of ideas was inherently interesting enough for the CEO to commit to a deeper evaluation.
In the second phase, the team screened each idea. They quickly developed and refined business cases to estimate the potential business size and evaluate the level of fit with the client’s capabilities and aspirations. Several ideas were considered large and exciting enough to proceed to full business planning.
For each of the three most promising ideas, the team worked closely with the client to develop full business cases, including preliminary financial projections and in-depth evaluations of organizational fit and feasibility. In this phase, the team also introduced the client to business leaders from analogous businesses in other industries to understand what they had done to build their businesses and to assemble best practices that could be adapted and applied.
The team also evaluated the full landscape of potential acquisition targets and competitors and developed a concrete set of steps and activities to begin building each business.
The client has created a new division charged with strategic diversification, headed by a newly appointed senior officer, who reports directly to a closely engaged CFO. The division is now assembling and building by acquisition the three new businesses that the project defined. The division is also considering a full pipeline of additional ideas. The client expects that this new group will deliver 20 percent of new revenue growth over the next 5 years.