New-business building: A winning strategy in uncertain times

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In today’s uncertain economic and geopolitical climate, playing offense—in combination with playing defense—is competitively advantageous and critical for long-term success. Taking an entrepreneurial approach and focusing on business building is an effective offensive strategy.1Business building: The path to resilience in uncertain times,” McKinsey, December 19, 2022. Through business building, incumbents can diversify, shore up, protect, and expand. In the wake of crises, business builders tend to outperform their peers in terms of earnings and revenue growth. For example, following the 2008–09 financial crisis, companies with a business-building focus grew revenues at three times the rate of their peers (exhibit),2 and many start-ups that are decacorns (start-ups with a valuation of $10 billion or more) today emerged in times of crisis. Overall, according to McKinsey research, organizations that prioritize new-business building demonstrate greater revenue resilience than organizations that don’t.3New-business building in 2022: Driving growth in volatile times,” McKinsey, November 15, 2022.

Incumbents that play offense during downturns have historically outperformed on earnings and revenue.

However, many companies are now retrenching instead—avoiding bold moves, delaying strategic investments, hoarding cash, and taking steps to increase efficiency only in core business operations. Yet boldly navigating continual turbulence is an imperative skill for today’s business leaders, given the growing likelihood of ongoing disruptions. Those that remain on the sidelines until conditions stabilize might find themselves in a never-ending period of waiting. A 2020 McKinsey survey of more than 1,000 business leaders highlights that 50 percent of revenues in five years are projected to come from products and services that don’t exist today.42021 global report: The state of new-business building,” McKinsey, December 6, 2021. In other words, strategies that rely solely on existing revenue streams will miss out on significant potential.

Broad challenges do exist, of course. We are more than two and a half years into the highest global inflation since the 1970s, with correspondingly high interest rates. Board and stakeholder attention to environmental, social, and governance risks and opportunities continues to rise. Companies that spent years lengthening their supply chains are now reining them in to reduce the risk of disruptions. Prices of essential commodities remain elevated and volatile. And ongoing geopolitical instability and protectionist policies continue to exacerbate the challenges leaders face. But companies whose leaders understand the importance of maintaining an offense-oriented posture, can manage the risk, and have the skills and focus to execute should prioritize business building (see sidebar, “How Nordvik used business building to increase revenues and profits”).

Five emerging archetypes for business building … and their benefits

With this mix of disruptive forces, five business-building approaches are gaining traction. They allow companies to create business models and supply chains that are less vulnerable to supply shocks and to build new, resource-light ventures and products. Although companies can respond to disruptive forces in other ways, business building stands out in terms of speed and impact. Companies can capture opportunities in response to these trends by adopting the following five approaches:

Fully embracing AI and automation

Tight labor markets are creating workforce shortages that could be alleviated through the adoption of AI and automation technologies. Recent advancements, such as AI chatbots that use natural language processing, support use cases aimed at reducing costs and increasing efficiency across many industries.

Automation could also lead to more secure and reliable supply chains by reducing dependency on potentially scarce local labor and increasing flexibility in supply chain design. Moreover, businesses could use automation and AI as the foundation for new, resource-light services and ventures. For example, software developers can complete coding tasks up to twice as fast with generative AI.5Unleashing developer productivity with generative AI,” McKinsey, June 27, 2023.

Reimagining the business model to embrace ‘everything as a service’

In today’s business environment, reducing up-front costs and capital outlays for customers is crucial to lowering barriers to purchase. Everything-as-a-service (EaaS) products—with low up-front costs and recurring payments—are more affordable and accessible to a broader range of customers because they reduce the financial burden of making an outright purchase. Companies could increase market share and profitability by adopting EaaS models.

In addition, companies can gather more data on product usage from EaaS offerings and glean valuable insights into customer behavior and preferences. With a deeper understanding of what customers want and need, companies can tailor their offerings accordingly, thereby increasing the value they capture from each customer through more stable, recurring revenues and higher customer lifetime value. Customers are more likely to stay with a company that consistently delivers the experiences and convenience they desire.

Taking control of the value chain

In challenging times, controlling the value chain can enable companies to respond flexibly to disruptions. Companies can reshape businesses processes and value chains to better withstand supply chain disruptions and reduce vulnerability to external shocks, thus decreasing exposure to increasingly common risks and volatility. For instance, businesses can increase the resilience of their supply chains by moving production facilities closer to consumers, thus reducing their dependence on other companies and other factors outside their control.

They can also redefine their ecosystems to simplify distribution channels and reduce costs. A direct-to-consumer (D2C) model, for example, allows businesses to cut out third-party retailers. The D2C model has several benefits for companies. First and foremost, it leads to increased product margins because there is no sharing of profits. Second, the D2C model gives companies control of more customer data along the value chain—data they can use to get to know customers better and tailor products to meet their demands. Third, cutting out third parties gives companies control over the full customer experience, which they can parlay into increased profits by increasing customer satisfaction and lifetime value.

Transforming the business into a green leader

Some businesses are already prioritizing sustainability and leaning into the energy transition to gain a competitive edge and even reinvent themselves. Rising prices, consumer expectations, tightening regulations, and vulnerable supply chains are propelling the shift to circular business models that prioritize sustainability and are less vulnerable to global supply shocks. Companies that mitigate energy risk by implementing green technologies and practices are also benefiting from current tailwinds in the green economy (for example, ESG regulations). Ultimately, businesses that prioritize environmental responsibility are more likely to succeed in the long run.

Leveraging superior information to access new ‘embedded’ revenue streams

Companies can use their transferable incumbent advantages (for example, data about customers) to embed adjacent products or services into their offerings as a source of new revenue. This allows them to diversify into new ventures—alone or in partnership with other companies—with low customer acquisition costs and in a resource-light way. It also builds resilience by supporting the shift into new businesses that are less affected by geopolitical instability, economic volatility, and other prevailing headwinds.

Leaders can start building businesses by taking a comprehensive view across their entire portfolios and capabilities to identify the most promising opportunities. They can then proceed with vigor and conviction to capture these opportunities and surpass competitors in challenging market conditions. In the end, business building is a mindset, not a one-off activity, and needs to be institutionalized to ensure continued development and performance.

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