The past several years have steeled executives to respond to disruption and change. Now, facing mixed indicators in the economy, CEOs might be tempted to play defense, with a focus on cost-cutting. That would be a mistake.
In our experience, new business building is the key to value creation and resilience. Design has an important role to play in helping identify, design, launch and scale the right business. This is even more true in this current era of market volatility and uncertainty. When CEOs can’t rely on past performance or data to inform decision making, design can offer new customer insights and perspectives.1
Executives who can successfully launch and scale new companies during this period of uncertainty will be better positioned to weather whatever lies ahead and emerge stronger. One important question is “How can executives employ the power of design to understand customer needs, wants and motivations to better ensure customer adoption and engagement of their products and services?”
New business building rises to the top of the agenda
Just a decade ago, few large incumbents saw building new businesses adjacent to their core offerings as the path to growth. How quickly things change. Over the past several years, Leap by McKinsey and McKinsey Design have conducted global surveys of business leaders to gauge their priorities.
In this year’s State of New Business Building, McKinsey surveyed more than 1,000 business leaders in 75 countries and found large, incumbent organizations overwhelmingly recognize the value of launching new businesses. The payoff has been clear: companies with new business building as one of their top three strategic priorities grow faster than their counterparts, even during times of economic shocks. One example is a European training and fitness chain faced with challenges during the COVID pandemic. The executive team had considered digital offerings and now needed to move quickly to maintain their business and serve customers at home. They rolled out a digital fitness offering with interactive home training to serve their members outside of the gym, to gain new members and, perhaps most important, to improve customer stickiness. Customers could now access trainings and classes –produced in a new studio built to create hundreds of hours of fitness content – and an e-commerce platform. Today, many customers are back in the gym and many new customers have joined to use the flexible, digital training options, giving the gym another, more resilient, source of revenue.
Further, companies that incorporate design into their strategy and operations can identify and develop the products and services customers want and better fill gaps in the marketplace – key capabilities in building successful new businesses. Bringing in design thinking early while identifying what a new business could be is crucial and should not be underestimated. Design will look at options and customers differently and bring in new information, such as ethnographic research, to uncover counterintuitive insights that can make all the difference in reaching your audiences whether that is how to drive customers to adopt a new technology or to buy your product the next time they are shopping.
In the McKinsey Design Index, we examine the impact of design in value creation. Our analysis found companies in the top quartile of the MDI achieved revenue growth 32 percentage points higher than their peers over a five-year period.2
Survey respondents indicated their company was set to invest about five percent of revenues in new businesses. These investments are accompanied by lofty goals: executives expect new businesses to account for 29 percent of total organizational revenues over the next half decade.
The proven value of design in business performance is increasingly important but it’s not new. The Design Management Institute studied companies over ten years and found that over 10 years design-led companies maintained significant stock market advantage, outperforming the S&P by an extraordinary 211% over that period.
While creating new businesses may seem risky, the numbers bear out how valuable they can be. In all, new businesses built in the past five years made up 12 percent of their parent company’s revenues and 21 percent of enterprise value. What’s more, the return on investments in new businesses is equally impressive: each dollar of revenue from new businesses generates twice the enterprise value as that of core businesses.
The challenge: companies will have to significantly ramp up their efforts to meet these targets. For example, respondents from companies with more than $1 billion in annual revenues would need to more than quadruple the number of new business launches over the next five years.
Adopting an entrepreneurial mindset
Executives at large incumbents must embrace an entrepreneurial mindset even when risk is part of the equation. When presented with a promising new business, management teams too often have scaled back aspirations to shield the organization from downside risk. In doing so, they can starve potential businesses of the necessary funds and resources to launch and scale.
One of the biggest challenges in new business building is that it requires companies to grow beyond their core business and often beyond what they thought their business would be. One indicator of success in new business building is an entrepreneurial culture. Companies can encourage this in several ways such as internal incubators, scale-up factories or clean slate startups. Bosch, for example, established grow, an internal incubation platform of dedicated intrapraneurs to focus on exploring disruptive new businesses and models.
Infusing business building efforts with design from the start is another way to encourage disruptive and innovation thinking. While corporate teams may expect what many call ‘day one answers,’ it is the design practioner who encourages divergent thinking by asking ‘day one questions’ and views their customers, not themselves or their organization, as the experts.
What to Build?
To create a new business, the incumbent must identify promising opportunities beyond core products and services. When design is part of the business building strategy, teams often uncover new approaches and can test them to better ensure customer fit. One example is a residential real estate company that planned to add a suite of premium services as part of their properties. The company initially was sure that a bundled package of services to help people rent out their units would be popular. After testing customer needs, however, they found that service was not wanted but services like dog walking and pet sitting and care was highly desired. Design is critical in challenging hypotheses and adding the customer voice to product and service development.
Emerging trends are fertile territory for new businesses. For instance, there is a surge of interest in green business building and sustainability. Despite uncertain economic times many companies are very committed to making progress on their ESG commitments. New solutions that track and analyze ESG data to enable reporting are just one potential angle. These trends are relevant for incumbents across most, if not all, sectors, including automotive, consumer, manufacturing, tech, banking, and energy. One example is a large agricultural company focused on combatting climate change that created and launched a carbon sequestration business and carbon credit product.
In the State of New Business Building survey, more than half of respondents expect to incorporate artificial intelligence – as evidenced by Microsoft Bing and ChatGPT – in their new businesses, and 35 percent feel the same about the Internet of Things.
A relentless focus on the customer helps companies determine the right businesses to build and the best experiences to design. These insights help drive engagement, adoption, and exponential growth. Design principles encourage companies to engage customers early and often to co-create the business model and iterate on the experience or service to gain insights that make a good idea into a blockbuster.
Flex the Business Building Muscle
Research shows the more companies build new businesses, the better their record. If a company has launched four new businesses in the past ten years, their odds of success on the next one increases dramatically. In our experience, launching new businesses is a muscle organizations can develop and strengthen over time. Serial business builders represent best practices: they establish a repeatable process of design and scaling by accumulating knowledge with each launch.
Large incumbents must become better at scaling new businesses—and building this critical muscle will support better valuation and longevity. With each launch, companies learn the pattern recognition of when to start the new business, how to operate it efficiently, and when to move to the next one.
Design is a powerful advantage in problem solving during uncertain times: it can uncover innovative ideas and identify new business opportunities. An economic downturn may be among the most daunting challenges CEOs face, but design-led and customer-focused business building offers a powerful path to growth and resilience. Leaders can start using design today to uncover new opportunities and quickly stand up a business to strengthen, and potentially reinvent, their future.