When incumbents breed unicorns: Building new businesses as the next wave of growth

For the past three decades, the business world has intently watched the growth and innovation fueled by startups – and rightly so. Six of the top 10 tech companies today didn’t exist back then. But in fixating so much on this one segment of value creation, we may be collectively overlooking an even bigger opportunity: the incumbent business as a startup machine.

Historically, when talking about large enterprises getting entrepreneurial, it has mostly meant M&A or behemoths engaging in corporate venturing. Faced with a need for more bold action to deliver sustained, profitable growth, incumbents are now transitioning into building wholly new businesses from scratch. This concept flies in the face of traditional academic wisdom that suggests companies stick to the core business. But given the pace of disruption today, “staying in your lane” is no longer a viable strategy.

More and more business leaders are recognising the imperative to turbocharge growth through the serial creation of interdependent yet autonomous new businesses. In fact, 55% of leaders in a recent Leap by McKinsey survey consider building new businesses to be a top three priority – nearly double a few short years ago. Further, more than one-fifth name it as their company’s top strategic priority. This new urgency is a global and cross-industry phenomenon.

It’s not hard to see why. The approach can generate significant revenue. In fact, 74% of companies that identified it as their main strategy outperformed their industry. Far from distracting an organization from its core work, business building expands the very nature of its business to leverage its unique capabilities, customer insights, and economies of scale – the so-called incumbent’s unfair advantage. Similarly, as the competition for talent plays on, new businesses can offer attractive opportunities for employee development as well as acquisition of new talent that might otherwise have stayed away.

Here's the challenge. Even as business-building shoots to the top of the strategic agenda as an effective way to grow, few companies manage to realize its full potential. Building a new business is difficult, and less than one in five scale successfully. On the upside, those that become serial builders, with three or more new businesses, deliver 1.4 times the average revenue for each new business.

So how could your organization beat the odds? Following are four key considerations:

1. A supportive, champion CEO. The chief executive is integral to ensuring a new business’ success – there is no way around it. Business-building CEOs set realistic expectations for the business’ investment needs and time to profitability, and they are willing to invest in growth at the expense of near-term profit. In the building period, they publicly voice their support for the endeavour and ring-fence investment in the new business. A recent McKinsey survey found that when CEOs took all four of these actions, their new business was nearly twice as likely to be successful. The survey also found that women-led business-building efforts are 12% more likely to meet or exceed expectations for growth.

2. The right amount of autonomy. The core organization’s technology and operations are often too cumbersome for a swift-moving new business. These ventures need to stay nimble and move fast. Successful business builders grant the new business considerable autonomy in areas such as IT, marketing, HR, and data and analytics – but never at the expense of strategic alignment.

3. Deeper customer insights. From concept generation to scaling, rich knowledge of the customer is invaluable. Successful business builders dig far deeper than merely tracking the number of customers and metrics on product usage. They employ surveys, feedback panels, diary studies, and ethnographic field studies to glean more nuanced, holistic insight into customer needs, expectations, and pain points. By contrast, a shallow understanding of the customer is the organization’s most common regret in the business-building process.

4. A focused, selective acquisition strategy. Successful business builders make savvy use of acquisitions that deliver value immediately and thus help to scale. New businesses that made two acquisitions early in the scaling process were 25% more likely to significantly exceed expectations than those that either made no acquisitions or that made three or more of them.

Business leaders today face significant disruption, from external factors like climate change and the COVID-19 pandemic to new competitive dynamics with the acceleration of digitization and growing concerns about inflation. Sustained, margin growth likely requires a new approach. Many business leaders expect that by 2026 half of their revenue will come from products, services, or businesses that don’t yet exist. Simply put, today’s behemoths cannot afford inaction.

Conversely, we could be on the cusp of a major wave of innovation as incumbents muscle in on the startup space. Moreover, organizations that pursue new business building as a strategy are growing in ways that are more sustainable and inclusive. Some 92% of leaders expressed that they’re building new businesses with sustainability in mind.

Business leaders today have an opportunity. If they can hone their business-building abilities and make bold moves to invest in next-generation markets for a better, healthier future, the result could be far greater than a healthy bottom line. It may help realize sustainable, inclusive growth, and launch a new age of prosperity.