Large corporations need to strongly consider new business building

When the topic of tech innovation comes up, one usually thinks of plucky startups and their founders hunched over computer screens, coding away in a basement or garage.

Isn’t it odd that large, established organizations aren’t the first to come to mind even though they have the resources to lead the charge and execute new ideas?

“It’s a bit of a fallacy to think that large companies can’t innovate and do not build new businesses,” says Dilip Mistry, partner and co-leader of Leap by McKinsey in Southeast Asia, McKinsey & Company’s business-building practice. “Since the beginning, these companies have been building new businesses and products, that’s how they’ve been able to grow and scale over the years.”

Dilip Mistry, partner and co-leader of Leap by McKinsey / Photo credit: McKinsey & Company

On the other hand, failure to continually innovate could topple even the largest incumbents in a space. Take the camera company Kodak, for example. Founded in 1892, it held such a dominant position in the photography industry that, in the 20th century, events that were important and deserved to be recorded came to be known as “Kodak moments.”

It was actually an engineer in the company’s research and development laboratories who invented the digital camera. However, the likes of Canon, Nikon, and Olympus are now the ones leading the pack. Kodak wasn’t able to capitalize on its head start because its leadership team was more concerned with how the digital camera might cannibalize its existing film business.

Legacy processes and heavy responsibilities

And therein lies the crux of the issue: Just having a good idea isn’t enough.

“I think the big challenges for incumbent organizations are because many of these truly disruptive business models require different talents, different processes, and different speeds to go to the market,” says Vivek Lath, partner at McKinsey & Company and co-leader of Leap by McKinsey in Southeast Asia.

“Typically, in large corporations, there is a bigger focus on thinking about institutional control and they don’t have the required processes to scale up innovations.”

Vivek Lath, partner at McKinsey & Company and co-leader of Leap by McKinsey / Photo credit: McKinsey & Company

Larger companies are also answerable to a greater variety of stakeholders – a publicly-traded company is “essentially beholden to the street,” as Mistry puts it. Quarterly targets have to be hit, and so these corporations have to approach risk-taking very carefully. This is in contrast to smaller firms, which have less to lose and can act faster and take bigger risks.

Mistry says the struggles that large organizations face with innovation also stem from the lack of a clear north star metric and a misunderstanding or lack of alignment around which aspects of the business to measure and keep track of.

“Startups wake up, and day in and day out they talk about customer acquisition cost, lifetime value, and monthly active users. Most large companies are mainly concerned about meeting quarterly profit and loss (P&L) targets,” he says.

A culture shift is the need of the hour as corporate longevity is at an all-time low. Venture building is important for incumbent companies to head off competitive threats and take advantage of opportunities that an increasingly-digital world presents – and the pandemic has exacerbated the need for it. Companies need to find ways to replace shrinking revenue streams, and organic growth often yields great returns without costing as much as mergers and acquisitions.

There’s also a strategic benefit for companies with recognizable brand names that explore new ventures: They set themselves up as a magnet for talent. It’s a great way of getting innovative minds on board.

What venture building is like on the ground

These large organizations have everything they need to innovate and the benefits are clear but it’s a matter of knowing how to use those resources more effectively and efficiently. “There’s a method to the madness – corporations can build a business-building muscle,” says Mistry.

This “method to the madness” that Mistry refers to comes from Leap by McKinsey’s experience helping build and launch more than 300 new businesses over the past five years – something that large organizations, with their extensive resources and networks, can do as well. It also helps to hire talent with founder experience, as they bring an innovation mindset with them.

The hard truth is building new businesses is inherently risky. Fewer than one in four (24%) new businesses launched in the past decade are viable large-scale enterprises today, according to McKinsey’s annual business building survey. However, companies that have launched at least four new businesses in the past ten years were upwards of twice as likely to generate returns of five or more times their investment than less frequent business builders. This suggests that business builders learn from experience and can even improve their rate of success over time.

Photo credit: dragonimages / 123RF

Part of this success is due to a portfolio effect. “Instead of betting on a single new business, leading companies build a series of businesses, diversifying risk and generating above-average returns,” Mistry says. “Meanwhile, they build the core capabilities needed to launch and scale new businesses successfully.”

Lath and Mistry also emphasize the need to work as a team and be driven by measurable objectives.

“We’re building a business,” Mistry says. “As an entrepreneur, I need to see progress, day in and day out. Have we built any more code? Have we got any more customers? Have we proven any more models? And so that’s the mindset we have when we walk in every day.”

A need that extends into the future

Business building is a challenge that companies in various industries and stages of maturity are grappling with. “​​I’ve helped mining, retail, healthcare, and insurance companies,” says Mistry. “I get calls to help with a variety of industries every day.”

It’s a concern that’s not limited to the private sector. In Singapore, for example, the Economic Development Board has created the Corporate Venture Launchpad program, which is designed to enable corporations to launch a new venture out of Singapore within six months.

Looking ahead, business building will face new challenges. Environmental sustainability is one development that has gone from a “nice-to-have” to a necessity. “A lot of talent also want to work on this type of problem,” says Mistry. “It’s about building businesses that not only drive growth and attract talent, but also actually work on the biggest problem of them all.”

The world keeps changing and large companies need to be able to keep up.

“The world is becoming smaller and it’ll be interesting to see where the next generation of solutions are going to come from,” Mistry says.

Leap by McKinsey works with established organizations to imagine, build, and scale new businesses – and develop the capabilities needed to do it again and again.

Learn more about how corporate business building works and the benefits it could provide to your organization at this link.

This content was produced by Tech in Asia Studios, which connects brands with Asia’s tech community. Learn more about partnering with Tech in Asia Studios.