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For ongoing success, old hands must become new-business entrepreneurs

Li-Kai Chen

Leads our office in Malaysia and advises companies and public sector institutions on major organizational and performance transformation programs

Serves telecommunications and public sector clients on strategy, marketing and sales, and digital transformation

Quite soon, more than 50% of a company’s revenue will likely come from new businesses, often products or services that aren’t even available yet. This will not just be from acquisitions or side investments in promising start-ups, but also from a company’s internal entrepreneurial efforts that effectively leverage trends in sustainability, technology, and other areas.

Malaysian companies with foresight will understand this pressing imperative.

A global McKinsey survey in 2021 underscored this necessity. Among 1,168 executives polled worldwide across industries, most predicted that about half their company’s revenues will come from new products, services, or businesses by 2026. More than half said creating new businesses was one of their company’s top three priorities.

Respondents noted that these in-house enterprises are responding to demands from customers that weren’t felt until recently, particularly for environmental protection / ESG themes. More than 90 percent of those polled said new products and services over the next five years will address consumer demand for sustainability in some fashion, while just under half said sustainability will be an integral part of their new product or service’s value proposition.

Already in Malaysia, there are examples of companies embarking on this path of creating new businesses. For example, telecommunications conglomerate Axiata launched an e-wallet service in 2017 that has since formed the backbone of its digital finance wing. By 2021, the e-wallet service had more than 9 million users and was in-use by more than 350,000 merchants.

Such efforts at building new businesses are most powerful when developed organically, pulling in partners at the right time. Empirically, organic growth delivers greater returns and takes greater advantage of a company’s core strengths than mergers and acquisitions. However, it needs to be done the right way to secure these returns. Outside capabilities, expertise and capital are then brought in strategically as needed to accelerate and scale the venture.

By building what are essentially internal start-ups, an established company can bring its own hard-won advantages to bear. Access to capital, market knowledge, brand reputation, in-house talent, data troves, and other assets can all improve the chances of success. In the words of an old adage, success breeds success. Looking at the past decade, companies that launched four or more new businesses were more than twice as likely to garner outsized returns (at least five times their investment) than less-frequent business builders.

That said, in building new businesses, failure is a real possibility. Corporate leaders must be committed to a long-term effort. Our survey showed that of the businesses launched between 2011 and 2017, less than a fifth reached annual revenues of $50 million or more, while more than half were either shut down or never reached annual revenues of $1 million.

Companies that embark on building new businesses with a clear understanding of what’s needed can improve their odds. Our research and experience suggest four crucial measures that can strengthen these efforts:

Ring fencing: CEO support is of course essential for developing new businesses. Beyond that, one of the more effective measures is ring-fencing, financially separating the initiative from the rest of the company. Companies with new businesses that exceeded expectations were more than twice as likely to have set up ring-fenced financing than those that fell short. Public support, realistic expectations, and a willingness to ride out growing pains were also differentiating factors.

Decision-making autonomy: New businesses often have to act fast, and having considerable autonomy is essential for these quick decisions, particularly in core IT, marketing, data and analytics, recruitment and spending (within guardrails). Our study showed that successful companies were about 30 to 50 percent more likely to have been granted autonomy in these and other areas to their new-business initiatives.

Customer understanding: Successful companies tend to know their customers intimately. Less successful companies were more likely to focus on relatively shallow engagement data, such as the number of customers and product-use metrics, while successful ones were about 60 percent more likely to seek deeper customer insights through surveys, feedback panels, field studies, ethnographic surveys and other methods. The effort to gain and use a holistic image of their customers ran from initial development through building scale.

Diverse leadership: A mixture of opinions and backgrounds at the highest levels also boosts the chances for success in creating new businesses. Most importantly, these are typically different businesses from the core, and as such having a diversity of talent coming from outside the organization is important (typically >50%). Beyond that, earlier studies by McKinsey and others had shown that companies with gender and ethnic diversity at the board and senior management levels tended toward greater success. The recent survey confirmed these findings.

Forward-looking Malaysian companies can join the global cohort of businesses that see the opportunities in technological advances and rapidly changing consumer desires – such as the focus on sustainability – to develop new offerings. They can use their core advantages to build businesses with the greatest return potential. There are no guarantees, of course, but those that understand what’s needed from the start will enhance their chances of success considerably.