Business leaders are waiting According to McKinsey’s latest global survey, half of their companies’ revenues five years from now will come from products, services or businesses that don’t yet exist.
on the new building.
Given the drive to develop these new revenue streams, many of which align with sustainability goals and technological change, it’s no surprise that the majority of respondents say business development is one of their organizations’ top strategic priorities — twice as many as in recent years .
Unlike the M&A-only strategy (where corporations buy or merge with established companies) and corporate venture capital (where they invest in outside startups), new business creation leverages the existing assets and capabilities of your core organization to create separate, but related enterprises offering new products, services or business models. They often concern new markets and regions. Also, unlike mergers and acquisitions or corporate ventures, building new businesses generates organic growth that often generates greater excess returns for shareholders than deals. Examples of new business building include Telkomsel by.U, which provides prepaid cellular services for Gen Z, and Lab at RXR Realty, which is reimagining the tenant experience in residential, commercial and mixed-use properties.
Our annual survey shows that the more new businesses you create, the better you build them; there is an experience curve that may explain why only a small segment of companies derive most of their growth from new business creation. To join their ranks, you need to learn by doing. This year’s survey examines the successful approaches of leading business builders, providing insights to help organizations climb the learning curve faster. These include the critical role played by the parent CEO, the delicate balance between autonomy and centralization, the rationale for supporting new business through acquisition, and the true depth of customer understanding required to succeed. Of course, leadership matters, and not just at the parent company: our survey found that female-led startups are more likely to succeed.
More than a fifth of the surveyed business leaders call the creation of new enterprises the main strategic priority of their companies.
In the charts and text below, we detail the survey findings, starting with the urgent need for companies to diversify their revenue sources to meet the challenges of sustainability, changing customer demand and technological change.
Why the construction of new enterprises is becoming more urgent
This new urgency is a global phenomenon, with most leaders in every region saying the topic is top three.
Imperative of stability. Green plays an important role in new business creation, with more than nine in ten respondents saying they will build new businesses at least in part to meet demand for green products and services. Additionally, 42 percent expect to put sustainability at the heart of their new business value proposition. But the survey also shows that companies looking to meet their sustainability goals are just getting started: Nearly 80 percent of respondents say their new business doesn’t track sustainability goals related to carbon emissions or other environmental impacts. environment.
Building a new business is difficult. Few observers may be surprised to learn that new businesses often fail to scale. Four or more years after launch, at least 80 percent of all new companies did not exceed $50 million in annual revenue, according to respondents. More than half of the new businesses did not reach $1 million in annual revenue or were closed entirely.
How to create a new successful business
These CEOs refuse to invest in new business and are willing to invest in development, even at the expense of short-term profitability. They also set realistic expectations for both internal and external stakeholders regarding the investment needs of the business and the timing of returns, and publicly express support for new ventures. The survey found that when CEOs took all four of these actions, their new businesses were 1.9 times more likely to succeed than new businesses led by other CEOs.
The right amount of autonomy. The survey shows that those who successfully build businesses give their new businesses significant autonomy in core IT, marketing, data and analytics. In these areas, the core organization’s technology stack or operational processes can often be too cumbersome to rapidly generate new business. Successful business builders are also more likely to separate the HR function from the core business, which can help new businesses compete with startups for talent. Despite this degree of autonomy, successful business builders are careful to ensure that their new ventures are strategically aligned.
Acquisitions can accelerate success. Successful business builders report making a small number of targeted acquisitions at the beginning of scaling their new business. New businesses that make two acquisitions early in the scaling process are 25 percent more likely to significantly exceed expectations than those that either make no acquisitions or make three or more acquisitions. This means considering acquisition targets in the first few months of a new business, but choosing them wisely. Some types of acquisitions deliver value immediately after acquisition and thus help the business scale faster, instead of requiring valuable time and effort to unlock value.
Deeper understanding of customers. The survey shows that developing a deep understanding of customers during both conceptualization and scaling also helps new businesses succeed. While half of respondents said their companies measured customer engagement (such as customer count and product usage rates) through early scaling, successful business builders also use more holistic customer-related metrics such as customer surveys, feedback panels, research diaries. and ethnographic field research on customer experiences throughout the decision journey. Additionally, when asked what they wish they knew before their organizations created new business, respondents most often wished they had a better understanding of their customers’ needs, expectations, and pain points.
Today’s companies aim to generate 50 percent of their revenue from new products, services or businesses by 2026. Building new business is a crucial way to achieve this. While it’s true that the more new businesses you build, the better you get at building them, it’s also true that less experienced business builders can improve their chances by learning from leaders. As our new survey shows, sustainable growth through new business creation requires careful attention to the role of the parent CEO, the acquisition rationale, the depth of your customer understanding and the diversity of your leadership.