Building new businesses within an organization requires some adaptation and patience, and the efforts can quickly get derailed. Just ask General Motors, which scaled back investments in self-driving cars and electric vehicles last week after projecting it would incur billions in costs from new labor union deals.
But a new Leap by McKinsey study of business executives and equity investors showed that many CEOs and CFOs of established businesses had business-building on their minds — and equity investors were willing to support such initiatives.
Six in 10 (58%) leaders within established businesses are placing a higher priority on creating new products, services, or businesses than in the previous two years, according to a recent study surveying 1,000 senior business leaders and 150 investors and analysts across Europe, North America, and Asia.
The CFO respondents indicated that creating new products, services, or businesses within their organizations was their company’s most likely strategic move in the next 12 months.
Among equity investors, 90% believed incumbent organizations should increase or maintain such investments, according to McKinsey. But expectations for success were high: investors wanted such ventures to generate higher valuations than if launched as an entirely standalone start-up or other entity, and they also expected one in three of these launches to become viable large-scale ventures.
On third-quarter earnings calls, many CEOs and CFOs emphasized operating efficiency and cost-cutting achievements. Still, some are also “looking around the corner and prioritizing medium-to-long-term disruptive business model changes,” said Ari Libarikian, a senior partner at Leap by McKinsey. “They recognize you can’t just do the near-term resilience stuff,” he said.
From a conversation with Libarikian, we extracted five pieces of advice on new-business building.
1. Leverage an incumbent advantage. Corporations successfully build businesses when they leverage a core competitive advantage such as proprietary data, a strong brand, or a distribution network. Companies that fail to launch new businesses are sometimes “not super-sharp on what incumbent advantage they will leverage in the new business,” said Libarikian. “They build something around a very good idea but then compete on even footing with everybody else.”
“Large companies are not very good at understanding what success looks like three months into building a business."
Senior partner, Leap by McKinsey
2. Use a different funding and performance management model. Business-building is a risky proposition and needs to be managed and funded as such. A venture capital-like, stage-gated funding model works well for some new businesses. “Large companies are not very good at understanding what success looks like three months into building a business,” said Libarikian. The milestones in the first year are not financial but concern product, customer feedback, attracting talent, and the like. Investors tend to be more patient than executives think, said Libarikian. It’s a difficult decision to distinguish “a business hasn’t' scaled yet but is on the right track” versus “this is not going to scale,” he said. CEOs are at risk of pulling the plug too early.
3. Form ecosystems and partnerships. Rarely are new businesses built successfully within the four walls of one company. Builders “operate in a much more open architecture, leveraging partnerships and JVs,” Libarikian said. Partners can bring in specific capabilities, distribution, platforms, data, and other key elements to get a new business off the ground quickly.
4. Try generative AI. About half (56%) of leaders believed that generative AI would be necessary to launch new ventures over the next five years – double the share for any other specific technology mentioned in the survey.“There are a bunch of cool applications for leveraging [generative] AI on the ‘how’ of strategizing, blueprinting, and then building businesses,” said Libarikian.
Gen AI won’t replace the insights and tough questions of battle-hardened executives, but it can help get to outcomes faster, he said. “In the past, there would be three or four weeks of workshops that an executive team would do to figure out what should [they] build, to ask, ‘What are the biggest value opportunities?’” In the new gen AI world, said Libarikian, “we're seeing maybe three days of generating ideas [though an AI tool] and then a couple of days of workshops.”
“At a time when the core business might be under cost pressure, how does the CFO make sure they don’t suffocate the new business?”
5. The right level of investment is crucial. A new business investment requires creating a pro forma P&L statement, estimates of when the new business will contribute to the parent’s P&L, and expected return on investment. But the most important role of the CFO is approving the right level of investment, said Libarikian. “At a time when the core business might be under cost pressure, how does the CFO ensure they don’t suffocate the new business?” he asked. “Because the easiest thing in the world is to say every part of the company is taking a haircut on their budget.”
In many ways, the new business has to be treated differently. “You’re looking to add jet fuel if [the new business] is working,” said Libarikian. “And if it’s not working, you're gonna be very sharp on” diagnosing problems or reviewing whether the value proposition still makes sense, he said.