Executives expect new business lines to drive half of future revenues

18 January 2022 Consultancy-me.com 4 min. read

Faced with an ever-increasing world of disruption and shifting customer demand, business leaders around the world are anticipating half of their future revenues will soon come from new areas.

The latest global study by McKinsey & Company has revealed that business leaders are on average expecting half of their company’s revenues will be derived from new products, services or businesses by 2026, with one in five considering new business building their foremost priority.

The share of executives viewing business building as a top three priority has nearly doubled in recent years

Altogether, over half of the almost 1,200 executives surveyed stated that building new businesses – defined as the creation of new products or services where a company does not have an existing footprint, or the building of new business models entirely – was currently a top-three priority, a sizeable jump on previous surveys.

Regardless of industry, the urgency for branching out has practically doubled in the space of just a few years. The sentiment among executives was consistent across regions, as the business world looks to respond to ever-growing disruptions.

Between 2018 and 2020, respondents cited new business building as a top priority at a rate of 10 percent, with a further 18 percent considering it a top-three priority. Those figures are now 21 percent and 34 percent respectively. At the other end of the scale, just 7 percent say that developing new business isn’t among their top ten areas of concern, down from one fifth.

The global trend-line extends equally to the Middle East. “There is a shift in the mindset of many MENA groups,” said Dubai-based McKinsey senior partner Ahmed Youssef. “They understand that what has gotten them the growth in the past decade won’t necessarily get them the growth they aspire for in the next decade. This has led them to explore the incubation of and investment in new businesses to fuel more inclusive and sustainable growth.”

Success rate of new businesses launched by large organisations

The execution gap

Nevertheless, McKinsey’s survey among the large-scale corporate respondents also found that of their new businesses launched between 2011 and 2014, more than half had been discontinued or brought in annual revenues short of $1 million four or more years later, while only one in five had scaled beyond the $50 million revenue mark.

While the fail-rate isn’t necessarily surprising (a well-known figure in the world of business is that some 70% of initiatives fail to meet [all] objectives), there were a number of identifiable factors common among the successes.

Learning from the best

McKinsey’s survey data shows that new businesses are more likely to succeed than others if granted significant autonomy in the areas of core IT, marketing, and data & analytic, while being kept strategically aligned; if targeted acquisitions are made early in the process to deliver immediate value; if customer experience data is a focus rather than simple user metrics; if diversity in leadership is ingrained from the get-go; and if parent CEOs play an active role.

Sucessful CEOs take four key actions to support their companies new-business building

As to the latter, those CEOs who stated their company’s new business had significantly exceeded expectations for scale or growth were more likely to have ring-fenced investments into the new business at a rate of 28 percentage points higher than those who described their new businesses as performing below expectations. Setting realistic expectations internally and externally was another key factor, as was patience toward profitability and public statements made in support.

According to the consulting firm, new businesses are almost twice as likely to succeed if those four key actions are taken together, while those that made two targeted acquisitions for immediate impact – rather than three or more or none at all – also had a 25 percent greater chance of exceeding expectations.

In particular, successful business builders were more than three times more likely to have made an ‘acquihire’ – an acquisition which brings in senior talent – or a geographically strategic one.

“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 odds by learning from the leaders,” the McKinsey authors conclude. “Sustainable growth through new-business building requires close attention to the role of the parent company’s CEO, to the rationale for making acquisitions, to the depth of your customer understanding, and to the diversity of your leadership.”