Why new business building is a CEO’s choice for growth

| Podcast

In this episode of the Future of Asia Podcast, two of McKinsey’s senior partners discuss new business building and the patterns that they see emerging in the field. Markus Berger-de León and Nimal Manuel talk about the opportunities arising for new business building. They highlight how companies that adopt the best methodologies and practices and forge partnerships can build and scale successful new businesses. An edited version of their conversation follows.

Debbi Cheong: Welcome to a new episode of McKinsey’s Future of Asia Podcast. My name is Debbi and I am your host for today. In this episode, we will be speaking about new business building and why it is fast becoming a CEO’s choice for growth in the 21st century. My guests are Markus Berger-de León and Nimal Manuel. Before we delve into the interview, could you tell us a bit about yourselves and what you’re currently doing at the firm?

Markus Berger-de León: I’ve been in the firm for nine years and work with Leap to help clients build and scale new businesses. Prior to joining McKinsey, I spent 20 years building start-ups and I’ve been the CEO of several predominantly B2C businesses. I’ve been an entrepreneur all my life and am continuing that journey at McKinsey.

Nimal Manuel: I’m based in Kuala Lumpur in Malaysia. I lead Leap for new business building in Asia and do most of my work in Southeast Asia across the different markets. Increasingly, I’m finding real opportunities in India and Japan and am spending more time in both countries. The nature of the business building I do is more B2C, but, as a firm, we are spread across both B2B and B2C.

Debbi Cheong: I’d like to ask a fundamental question: What is new business building?

Markus Berger-de León: Due to new technologies and disruptions in this fast-changing world, customer needs are always changing. The question for a business is, “How do I address them?” Rather than just making incremental changes, there is the possibility of building new businesses around customer needs. This typically takes a new technology and uses it to either create a new business model and serve the same customer group, or to take an existing business model and serve new customer groups. Or the two methods can be combined. That is what we define as new business building.

The idea is to help companies build the capabilities that allow them to come up with ideas for new businesses, but also to assist them in building and scaling these businesses. This is inherently different from running the normal course of a business, which is much more focused on efficiency. In new business building, the focus is on the innovation needed to build and scale.

Debbi Cheong: Markus, as one of the authors of the latest McKinsey global survey on new business building, “CEOs’ choice for growth: Building new businesses,” what are some of the major new business building trends that came up in this survey, and was there anything that surprised you?1CEOs’ choice for growth: Building new businesses,” McKinsey, November 9, 2023.

Markus Berger-de León: We’ve been doing surveys for several years now and what I’ve been most surprised by is that, over the years, the importance of business building has increased—almost independently of the overall macroeconomic climate. Nearly 60 percent of CEOs surveyed say that this is a top priority.

The other issue we’ve looked at over time—in fact, one of the key questions we always ask—is how much revenue a company is seeing from the new products and businesses it has built over the past five years, and what the company predicts for the coming five years. We have seen that this number is slowly increasing. You could say that the CEOs and leaders who have high expectations for business building are starting to deliver on those expectations. The delivery numbers are still not in line with expectations yet, but slowly the gap is closing. I find this encouraging because it means that all the companies that responded to the survey are very much investing in growth and innovation.

Debbi Cheong: What does the new business building landscape look like in Asia, Nimal? Are these global trends that Markus talked about applicable to the region or are there some nuances?

Nimal Manuel: At an aggregate level, I think the trends hold. We are seeing equal levels of excitement and intent to get into new businesses. The global imperative around branching into new business models to preserve growth applies equally to Asia. That didn’t used to be the case in many industries in the region because there was so much growth left in the core business. However, in most sectors, that’s plateauing. Many of our clients now want to seek out opportunities to pick up new businesses to build. The nature of the new businesses can vary given the local market context, but the imperative to start new business building is there.

Debbi Cheong: Markus, what does successful new business building look like to you?

Markus Berger-de León: Business building is becoming a science with clear best practices and methodologies—if you follow them, you can drive great success. It is similar to most business activities, in that business building is a portfolio game. There is clear evidence that companies that develop a portfolio through building new businesses multiple times drive greater success and capture the benefits gained from spreading risk and taking advantage of the opportunities in the market.

Another interesting point is that successful companies don’t do it alone. They invite partners to join them and they bring investors, often venture capitalists, on board to invest alongside the businesses. They invite the experience and rigor available in the start-up world into building new businesses. But there’s also a clear notion of being very deliberate about what the company does for itself versus the situation where others are invited to build an ecosystem and successful business together so that the overall opportunity can be addressed in the fastest and the leanest way.

Debbi Cheong: Nimal, do you have anything to add?

Nimal Manuel: A couple of things. First, implicit within what Markus said is—and let me just call it out because I think it’s important—the tension between the culture you need in the new businesses you’re building and the incumbent culture. Culture is a function of people and the way they work versus the challenges faced. Often, the culture of the new business is quite different from that of the mothership. The reason for building a business in the first place, and what gives the entity the ability to succeed, is typically some form of advantage that it has—for example, access to customers, data, markets, and so forth. It’s not a straightforward task to bring the various elements together.

That’s why, historically, there have been more failures than successes in new business building. It is hard to create the culture needed within the new business entity as the mothership’s culture often “drowns it out.” You want, then, to build the new business outside the main entity—yet, if it’s done outside, it’s harder to access some of the mothership’s assets, both tangible and intangible. Bridging that challenge, in our view, is the essence of what differentiates successful versus unsuccessful new businesses.

The second important aspect points to partnerships, which have become increasingly important. I’ve noticed a change over the past five years: that the expectation in terms of the time within which to scale is very short. The markets, management teams, and boards don’t have patience. Gone are the days when you could do this organically by yourself. Competitors aren’t waiting around either; they are nipping at your heels. So, that’s an imperative in most of the businesses we build—to move fast. And the quickest way of achieving this is by doing it with partners and piggybacking on others’ starting points.

3D objects coming together inside two shifting squares.

CEOs’ choice for growth: Building new businesses

Debbi Cheong: What examples have you seen that bring this to life, either in Asia or globally?

Markus Berger-de León: Let me talk about the category of businesses that I’m seeing. There are various industries in which clients and I are building businesses that you could categorize as Software as a Service analytics businesses. What’s the basic idea there? With modern technology, particularly sensors and the Internet of Things’ devices, you can track a lot more in business processes. What we see in many industries, particularly among medium- and smaller-sized players, is that they are struggling to use their available data—which can be used across the company’s entire value creation—to make better decisions in their businesses.

The business opportunity here is that you can build a software solution for these smaller players that takes their data and generates best practices, unique insights, and recommendations. You can then package it and sell it as a Software as a Subscription service. Many larger players have built up their expertise into software and can provide that to smaller- and medium-sized players in their industries to make them more professional. This, of course, has significant implications for these companies’ margins but also, for instance, helps with sustainability because it tends to lead to savings in materials and energy. And, if you have better insights on how to drive your business, it also drives up your efficiency.

Nimal Manuel: Perhaps here I can take an Asia-centric lens to complement that. We see three broad themes. The first one is around organizations with large consumer bases that are finding adjacent means to monetize those bases. This could be banks getting into digital banks and finding a different proposition for different segments—primarily retail banks getting into wealth management and trading platforms. Or telcos that are setting up alternative credit scores as a means of offering access to capital to segments that were previously unbanked.

The second theme is around traditional industrial players that are finding ways to reinvent themselves—for example, oil and gas players getting into education or retail platforms, figuring out how to encourage loyalty and the like.

Third, and the one I find the most interesting, is green business building. There are multiple flavors of this. The two areas within green business building with the most traction are renewables and associated businesses—solar and wind, for example, including rooftop and distributed wind-generation businesses. The next area is electric mobility. In an Asian context, two-wheeler electric mobility is taking off fast. This is not just charging stations and the like, but also battery swap stations. For example, if I’m on a motorbike or a tubular motorbike, I can go into the shop, swap my battery, and ride off within a couple of minutes. In Southeast Asia, where I spend a lot of time, there’s also a lot of excitement around nature-based solutions and how they can be monetized by means of carbon credits, and around platforms that are coming up with solutions in this field.

Debbi Cheong: Nimal, why do you think that green business building—out of the many different areas that a business could diversify into—is gaining traction in this part of the world?

Nimal Manuel: It comes down to the technology—it has gotten to the point where it’s in the money in most cases. For example, solar in most parts of Asia is as competitive as gas and coal. Once the technology is in the money and, given that renewable power is the right thing to do, there is a strong tailwind behind it and consumer demand for it. The supply side is coming together nicely. Electric mobility, I would argue, is not yet in the money for four-wheeler vehicles, but is for two-wheelers. It is exciting that it also doesn’t require too much government facilitation as the private sectors are getting involved.

Carbon trading platforms are more European focused, so there is a supply-side demand in Asia. Circularity is a big trend—used cooking oil, for example. In Asian countries, there traditionally have been hundreds of “old uncles” coming around in their trucks to collect used oil. That process is now becoming professionalized as, with consumer maturity growing, the demand has increased. The supply side is getting to the point where it’s finally proving to be tenable and sustainably economic.

Let me also add another point on circularity—the idea isn’t just driven by saving the planet from the climate crisis. Companies are thinking about how they can make their supply chains more secure and less dependent on particular geographies. It is about being resilient to interventions such as the COVID-19 pandemic and the ongoing geopolitical conflict.

Markus Berger-de León: These factors are forcing companies to rethink their value chains, consider what the alternatives are, and how these can be achieved. Over and above that, a lot of R&D is coming from universities and great innovations from start-ups and other companies—all of it transforms into a perfect melting pot that creates new business opportunities.

Debbi Cheong: What is your key takeaway for CEOs listening to this podcast?

Nimal Manuel: My one key takeaway is this: done right, new business building by established organizations doesn’t have to achieve the 10 percent to 12 percent success rate that venture capitalists (VCs) do—the expectation should be more in the range of 50 percent to 65 percent. It is never going to be 100 percent, but I would aspire toward a 65 percent success rate in my portfolio of new business skills. That has a few implications. The first is that it is a portfolio game; putting all your eggs into one basket is dangerous. But at the same time, it’s not a portfolio game to the extent of a VC that has tens or 100s of them. It’s typically four or five, because that’s the capacity that any organization has the bandwidth to absorb. Second, there is a playbook in terms of how to shift your odds from 12 percent to 65 percent. It’s worthwhile immersing yourself in this and ensuring that you are set up in the right way before embarking on a new business build. It makes a huge difference to the chance of success. A final point I’d make is trading off the tension between the unfair advantage that the organization has versus doing it sufficiently separately from the organization such that you can create the nimble culture that is needed.

Markus Berger-de León: What I see in organizations that successfully build new businesses is that they are ambitious, they dream big, and then deliver on it. Be very rigorous in your testing; don’t fool yourself with hypotheses or assumptions that you haven’t proven. And when you learn that something doesn’t work, stop investing in the idea and redeploy the people and capital to other areas. If there is one thing that can be learned from VCs, it is that they stop much faster when something doesn’t work than large incumbent organizations that tend to drag on because the decision to stop might be hard on some people. Stopping, in fact, does everybody a favor because it gives them the opportunity to work on something new and exciting.

Debbi Cheong: Thank you, Markus and Nimal, for your time today. And thank you all for listening to our latest episode of The Future of Asia Podcast. I hope you’ve taken something away from this. And if you would like to know more about new business building, or any of our new business building service lines, please go to McKinsey.com/FutureofAsia for more information. Thank you.

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