Building new businesses—that is, new products, services, or business models—is one of the most effective ways for companies to grow and, according to a 2020 McKinsey survey of more than 850 global executives, an increasing priority for executives transitioning to the next normal. However, incumbents often lack the critical skills and talent needed to build successful new businesses. During a McKinsey Live webinar, partners Ari Libarikian and Belkis Vasquez-McCall explained why launching new businesses is now at the top of the corporate agenda and shared how winning companies position themselves for success.
New business giants emerged from the global disruptions of the Great Depression, the energy crisis in the 1970s, and the financial crisis of 2007–10; and the COVID-19 crisis has also put immense pressure on businesses to innovate in response to shifting customer behavior and market needs and a search for new revenue streams. Fifty-one percent of the survey respondents said that standing up new businesses was a top-three priority for growth, compared with 30 percent of respondents in 2017 and 2019. The survey data also show that, since the pandemic began, the urgency of building new businesses has escalated in every industry.
The likelihood of success is low, however: only 24 percent of the new businesses launched in the past decade are viable, large-scale enterprises today. Less successful business builders cite a lack of adaptability and an inadequate strategy for scaling the businesses as the most common stumbling blocks.
Successful business builders typically follow five best practices:
- Take a test-and-learn approach.
Successful new businesses are always testing, learning, and adapting. According to the survey, companies that have launched a series of at least four businesses in the past ten years are twice as likely as less frequent business builders to generate higher returns—returns of five or more times their investment. Many companies, for example, have found the power of online experiments to test customer response to be a game changer when it comes to marketing and innovation.
- Find tailwinds.
Finding the right product-to-market fit with thorough analyses of the market was the second-most-cited factor that most influenced the success of new business builders.
- Secure executive sponsorship.
Ownership by the CEO or head of the new business was cited most often as a factor for success. The senior team and the board must be aware of the launch, have aligned aspirations, provide clear expectations, and be able to periodically review performance markers during the first few years.
- Focus on top talent.
Executives also cited investment in talent and capabilities as a success factor. Common talent or capability gaps include design or user experience, data architecture, and marketing and sales.
- Have a structured process.
Top performers have a clear and rigorous view of the entire business-building process—from initial brainstorming; to determining governance, funding, and strategy; to hiring, adjusting, and pivoting; to scaling and defining what success looks like.
Questions and answers from the webinar
- Which industries seem to be generating the most new businesses?
Historically, we have seen new businesses launched predominantly in banking, fintech, and other B2C industries, but today new business building is a greater priority in every sector, and we see interest in both B2C industries and B2B industries such as advanced industries, healthcare, and energy and materials.
- When is it better to buy and build (acquire a new company) rather than just build?
Most new businesses deploy a combination of build and buy. To decide, successful business builders use a detailed design phase to identify the needed capabilities and the preferable way to obtain them. While some capabilities may be commoditized and easily accessed through existing providers, the business should own differentiating capabilities. For instance, a cloud infrastructure for a B2C e-commerce business can be sourced from providers, but a customized AI engine that helps a private wealth adviser automatically identify and market products may be worth developing in-house. Typically, when time constraints, strong entry barriers, or talent access make building a capability in-house difficult, buying is more feasible than building.
- How much do you see new-business prioritization being adopted by small enterprises?
It’s significant. All organizations, big and small, are trying to find new ways to grow and evolve—both by boosting their own business and by introducing new revenue streams through newly built businesses. We have found, for instance, that companies of all sizes can create a working e-commerce site in much less time than they think and launch completely new businesses in less than four months.
* * *
For more on this topic, please watch the webinar recording and read the McKinsey Quarterly article “Why business building is the new priority for growth.”