Leading Off: How established companies can build new businesses: A leader’s guide

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ESSENTIALS FOR LEADERS AND THOSE THEY LEAD

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Brought to you by Liz Hilton Segel, chief client officer and managing partner, global industry practices, & Homayoun Hatami, managing partner, global client capabilities

Despite the economic uncertainty of the past three years—and the lingering aftereffects of the pandemic—building new businesses remains a reliable way to boost organizational growth. Our latest McKinsey Global Survey of business leaders shows that companies that prioritize new-business building—even during turbulent economic conditions—grow faster than those that don’t. We estimate that new businesses built by large incumbent organizations currently generate $5 trillion in revenues, which could grow to $30 trillion in five years. But hatching a unicorn isn’t always easy for traditional organizations: the most successful ones combine the stability and scale of an established business with the freewheeling autonomy of a start-up. This week, we explore some ways to achieve that balance.

AN IDEA

An image linking to the web page “A practical guide to new-business building for incumbents” on McKinsey.com.

Don’t act like a start-up

That’s one of five lessons that established companies may want to keep in mind when launching new businesses. “Leaders often underestimate the difficulty of starting a new venture within the existing landscape of processes, culture, and behaviors,” note McKinsey senior partners Ralf Dreischmeier and Nimal Manuel and colleagues. Rather than trying to imitate the speed and adventurousness of start-ups, incumbents may be better off playing to their own strengths, such as the parent company’s brand recognition, strong supplier base, loyal customers, or existing logistics infrastructure. To up the odds of a new venture’s success, it helps to build for scale from the start, striking “a healthy balance between developing new capabilities, building long-term solutions, and optimizing existing features,” according to the McKinsey experts.

A BIG NUMBER

That’s the number of technology approaches that can be combined to launch new businesses faster and more effectively. McKinsey senior partner Stéphane Bout and partners Philipp Hillenbrand and Henning Soller suggest the use of software as a service (SaaS), serverless architecture, and open-source code to maximize existing technologies and reduce development and maintenance tasks. For example, by using serverless architecture across a series of spin-off products, an energy company reduced the time and staff needed to support the new tech infrastructure. The company also improved its capacity to make processing performance enhancements quickly as the new businesses expanded.

A QUOTE

“I visualize the large corporation as a big tanker going in a direction that’s very difficult to steer. The new ventures are like lots of little motorboats that are around the tanker—satellites that are moving very quickly.”

That’s Hitachi executive Ram Ramachander on the dynamics of managing start-ups within a larger company. As the CEO of Hitachi ZeroCarbon and chief digital officer of Hitachi Europe, Ramachander runs a portfolio of new ventures that combine net-zero objectives and digital solutions. In a conversation with McKinsey partner Subu Narayanan, Ramachander points out that when launching new businesses, leaders at large corporations may need to rethink traditional measures of success such as quarterly performance expectations. “In the early stages, you need to invest without necessarily knowing where all of the revenue opportunities exist,” he says. “You’ve got to be very open-minded about that.” He compares his organization at Hitachi to the little motorboats circling a tanker: “We work in an entrepreneurial style, we fail fast, we have agility. And we want to bring the tanker in the same direction.”

A SPOTLIGHT INTERVIEW

An image linking to the web page “Collaborations between corporates and start-ups” on McKinsey.com.

Partnering with start-ups to create new ventures may offer established organizations access to faster product development and top talent; for their part, start-ups stand to gain vital financing, along with access to the corporate partner’s customers. “The growth in digitization over the past year has driven the need to innovate, putting even more spotlight on getting these partnerships right,” says McKinsey partner Tawanda Sibanda in an episode of McKinsey’s Inside the Strategy Room podcast. Potential pain points to watch for include cultural gaps, unclear strategic objectives, lack of executive commitment on the corporate side, and slow corporate processes. “Companies often get stuck in pilots, with no path to scale in terms of resources, stakeholders’ buy-in, and so on,” cautions McKinsey partner Miao Wang. “You end up in a holding pattern that frustrates start-ups.”

PEOPLE SKILLS

An image linking to the web page “Getting the talent strategy right: Critical factors for new businesses” on McKinsey.com.

Talent is a critical asset in any business, but even more so in new ventures. Companies may need to be especially vigilant when appointing leaders for new businesses, according to McKinsey’s Rohan Jain and Vivek Lath—the ideal candidate would be both an experienced entrepreneur and a seasoned corporate executive. To nurture a longer-term source of new ideas, leaders may want to foster “intrapreneurship,” whereby employees are empowered to create new products or services: some of the most famous business innovations have happened this way.

Lead by building new businesses.

— Edited by Rama Ramaswami, senior editor, New York

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﻿Don’t act like a start-up

“I visualize the large corporation as a big tanker going in a direction that’s very difficult to steer. The new ventures are like lots of little motorboats that are around the tanker—satellites that are moving very quickly.”

Out now: New issue of McKinsey Quarterly

Don’t act like a start-up