The status of new business construction

Business leaders wait half of their companies’ revenue five years from now will come from products, services or businesses that don’t yet exist, according to McKinsey’s latest global survey.

to the construction of new businesses.

Given the ambition to develop these new sources of income, many of which respond to sustainability goals and technological change, it is not surprising that the majority of respondents say that business creation is one of the main strategic priorities of their organizations, double the share of recent years. .

Unlike an M&A-only strategy (where corporations buy or merge with established companies) and venture (where they invest in outside start-ups), new business creation makes the most of assets and existing capabilities of your core organization to create separate but linked businesses that offer new products, services or business models. They often target new markets and geographies. Also, unlike mergers and acquisitions or business ventures, new business creation generates organic growth, which often generates greater excess returns for shareholders than dealmaking. Examples of new business buildings include Telkomsel’s by.U, which offers a prepaid mobile service aimed at Gen Zers, and the Lab at RXR Realty, which reimagines the tenant experience in residential, commercial and mixed-use properties .

Our annual survey shows that the more new business you create, the better you are at creating it; there is an experience curve that may explain why only a small segment of companies capture most of the growth in new business creation. Joining their ranks requires learning by doing. This year’s survey examines the success approaches of top business builders, providing insights to get organizations up the learning curve faster. These include the crucial role played by the CEO of the parent company, the tricky balance between autonomy and centralization, the rationale for strengthening the new business through acquisitions, and the true depth of customer knowledge needed to succeed. Leadership is important, of course, and not just at the parent company: our survey found that female-led start-ups are more likely to succeed.

More than a fifth of the business leaders surveyed consider new business creation to be the top strategic priority for their companies.

In the graphics and text that follow, we describe the survey findings in detail, starting with the urgent need that companies feel to diversify their revenue sources to respond to sustainability challenges, changing customer demand and change technological

Why it is increasingly urgent to create new businesses

New urgency Companies are now more likely to focus on creating new businesses than in previous years. More than one-fifth of business leaders surveyed name new business creation as their companies’ top strategic priority, and 55 percent list it as one of their top three priorities, nearly double the proportion who said that was as high a priority for their companies between 2018 and 2020. CEOs are now twice as likely to say it is a top priority than in previous years.

New income The urgency to create new businesses directly reflects respondents’ belief that current products and services will be insufficient to address disruption and achieve a sustainable future. More than 80% of respondents say that new business creation will help them respond to disruptions and changes in demand, while 62% of respondents prioritize new business creation to generate one or more new revenue streams . Respondents predict that in five years, half of their revenue will come from new products, services and business models. Some of this new revenue may be driven by large-scale efforts to address sustainability issues, but the rapid pace of technological progress is certainly another factor. Regardless of the reason, respondents across all industries see new business creation as critical to their companies’ financial health: 24% say it will be the main source of new revenue growth for their companies.

The imperative of sustainability. Sustainability plays an important role in new business creation: More than nine in ten respondents say they will create new businesses at least in part to meet demand for sustainable products and services. In addition, 42 percent expect to put sustainability at the heart of the value proposition of their new businesses. But the survey also suggests that it’s early days for companies looking to address their sustainability goals: Almost 80% of respondents say their new businesses don’t track sustainability goals related to their carbon footprint or other environmental impacts.

Building new businesses is hard. It may surprise few observers to hear that startups often fail to scale. Four or more years after launch, at least 80 percent of all new companies have not grown more than $50 million in annual revenue, according to respondents. More than half of the new companies either failed to reach $1 million in annual revenue or closed entirely.

How to create successful new businesses

The role of the CEO. CEOs of core organizations have an active role to play in ensuring the success of new ventures. We identified four specific actions that respondents said CEOs of companies that have built a successful new business are much more likely to take than leaders of organizations with underperforming companies.

The right amount of autonomy. The survey suggests that successful business founders give their new businesses considerable autonomy in core IT, marketing and data and analytics. In these areas, the technology stack or operational processes of the core organization can often be too cumbersome for rapid new business creation. Successful business founders are also more likely to keep the HR function separate from the core business, which can help new companies compete with start-ups for talent. Despite these degrees of autonomy, successful business builders are careful to keep their new businesses strategically aligned.

Acquisitions can accelerate success. Successful business founders report making a small number of focused acquisitions early in the scale of their new businesses. New companies that made two acquisitions early in the scaling process are 25% more likely to significantly exceed expectations than those that made no acquisitions or made three or more acquisitions. This means looking at acquisition targets in the first few months of building a new business, but choosing them wisely. Some types of acquisitions provide value immediately after acquisition and thus help a business scale faster, rather than requiring precious time and effort to obtain value.

Deeper customer insights. The survey suggests that developing a deep understanding of customers, both during concept generation and scaling, also helps new businesses succeed. While half of respondents say their companies measured customer engagement (such as customer count and product usage metrics) through an early scale, successful business builders also use more holistic customer-related metrics such as customer surveys, feedback panels, newspaper studies. , and ethnographic field studies, related to customers’ experiences along their decision journey. Additionally, when asked what they wish they knew before their organizations built their new businesses, respondents often wished they had a better understanding of their customers’ needs, expectations and problems.

Diverse leadership. The survey also found that women-led businesses are 12% more likely to meet or exceed growth expectations, but only 14% of respondents say the new business they are most familiar with was led by a woman in her early stages. Without board-level representation, startups could miss out on the benefits of diverse leadership. The survey shows that startups that have diverse boards, whether gender-diverse or racially and ethnically diverse, are more likely to be led by a woman.

Today’s companies are looking to derive 50 percent of their revenue from new products, services or businesses by 2026. Creating new businesses is a crucial way to get there. While it’s true that the more new businesses you create, the better you’ll be at building them, it’s also true that less experienced business builders can improve their odds by learning from leaders. As our new survey shows, sustainable growth through new business creation requires special attention to the role of the CEO of the parent company, the rationale for acquisitions, the depth of understanding of your customers and diversity of your leadership.

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