New business building – growth and innovation in a volatile era

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Ari Libarikian, Senior Partner , Global Leader of Leap by McKinsey, Belkis Vasquez-McCall, Partner, North America Leader, Build by McKinsey, Homayoun Hatami, Senior Partner, McKinsey & Company

• After three years of economic and social disruption, we may have entered a new business era dictated by radical changes and systemic challenges.
• Those that succeed in a consistently tumultuous environment will be those who move into and create new growth opportunities and new businesses.
• Every sector is ripe for new business building and those fuelled by innovation and backed by insights will likely be the ones who are the most successful.

In volatile times, many organizations constrict, cut and generally hunker down to make it through unpredictable economic periods. Given the past three years of continuous economic and social disruption, we may have entered a new business era dictated by radical changes and systemic challenges. In this new environment, efficiency measures alone won’t help businesses survive or grow.

Those that succeed in a consistently tumultuous environment will be those that boldly move into – and create – new growth opportunities and new businesses. The winners will be those who have heard the saying “what got you here won’t get you there” (thank you, Marshall Goldsmith) and will leverage and change their organizations to actually get there. Established companies that create successful new ventures have the chance to leapfrog their competitors – and reshape their future.

The benefits of a bold approach can be high, particularly for large incumbents, where revenue-at-stake expected from new business building may be as much as $30 trillion by 2027 and those that prioritize this type of entrepreneurship are nearly three times more likely to experience growth of more than 10% above market rates.

Fast and frequent: a new business building mantra

Resilient organizations emphasize agility, speed and innovation in the face of disruption. After several years of unexpected challenges, the widening gap in corporate performance continues to grow.

To gain ground, some global business leaders report building 50% more new businesses per year than they did two to five years ago. This rise in frequency is matched by the great acceleration of market launches of new digital products and services since the start of the COVID-19 pandemic.

The more new businesses an organization builds, the better they get at it. McKinsey research shows serial business builders can be twice as likely to generate higher returns (five times or more from their investments). It’s not surprising that in 2022, eight in 10 surveyed CEOs report new-business building as a top priority.

In addition, revenue expectations from new business building are higher than ever to offset the losses from more fickle and fast-changing markets. To meet higher demand, organizations will need to more than double their current rate of business building.

Realizing value from new business building

We estimate that in 2021 more than $800 billion was invested in new businesses by large incumbents and that figure is trending up, with 63% of surveyed business leaders looking to increase investment in new business building.

How and where CEOs decide to invest during volatile times and what support models they put in place, will determine their organization’s chance of success.

We identify five areas of focus for business-building CEOs:

• Build on existing strengths. To power entrepreneurship and business-building capabilities, established organizations should focus on their advantages like scale, brand, data and customers. Quickly testing assumptions with existing assets and learning on-the-go can provide the speed and agility necessary to pivot under fast-changing circumstances.
• Make moves in sustainability. All sectors have to change to reach net zero. Industry dynamics will open new markets and upend others. Playing offence with bold moves into green business building will separate the winners from the mere survivors. Already, about one-third of surveyed organizations plan to build a sustainability-focused business in the next five years.

• Tackle businesses that build resilience. Counter-cyclical and resource-light businesses that cater to markets or customers with relatively inelastic and growing demand allow established companies to weather cyclical swings and provide a financial safety net. Identifying business opportunities that face fewer headwinds in the near term could also prove fruitful. For example, exploring circular business models that aren’t as influenced by supply chain disruptions.
• Launch more and bigger technology plays. Top performers tend to double down on technology. In McKinsey’s recent survey, business leaders report data, analytics and digital platforms will be the next wave of new business. This is supported by another piece of recent research that showed global business adoption of artificial intelligence (AI) has increased significantly since 2017, from 20% to 50%, with 63% of businesses expecting investment in AI to increase over the next three years.
• Consider external funding. Internal budgets are the most common way to fund new-business building, but we also see external sources of funding, including venture capital, private equity and grants. Interestingly, new business respondents that say they met or exceeded organizations’ expectations for scale or growth are more likely to have received external funding. One benefit of external funding is separate from the actual investment – venture capital firms can encourage greater discipline, resource efficiency, and potentially separation from the core – all keys to success in corporate entrepreneurship.

Recent social and economic difficulties have caused many organizations to stumble and even fail. If we are indeed entering a new era in business, where steady state becomes obsolete and is replaced by a constant marshalling for competitive advantage, resilient companies will hold a strong lead.

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Those fuelled by innovation and backed by insights will likely make faster, bolder, and more frequent moves in new business building and, in turn, realize more value from it. Every sector is ripe for new businesses. Now is the time to build.