Built to last: Why companies should be building more new businesses

BUSINESSES that stand still are liable to get run over, particularly in fast-moving South-east Asia. That is one conclusion of our survey of 99 regional corporate leaders about their efforts to build new businesses.

Almost half said that building new businesses – meaning creating new products, services or businesses from within – has become a higher priority over the last year. All but one has formed partnerships to do so.

And now there is a new wrinkle: generative artificial intelligence (AI). A quarter said the emergence of generative AI will likely nudge them to invest more in new business-building (NBB).

Yet, there is a disconnect between these theoretical statements and on-the-ground actions. Only a third of the business leaders said NBB is a top five priority, fewer than the 42 per cent who said it was not even in the top 10.

That is particularly striking, since most respondents believed conditions were good for existing organisations to accelerate NBB efforts, including through acquisitions.

In a sense, the hesitation is easy to understand. Building new businesses is difficult. Failure is not only an option; it’s common, with only 35 per cent of new builds considered successful.

There are also issues specific to how companies operate, such as difficulty getting the budget to support NBB, internal resistance, and a shortage of expertise. The most cited reason for not building new businesses is risk aversion. Leaders worry about committing to a strategy that might not work.

How can companies create conditions to improve the chances of success?

First, it can be helpful to focus efforts on existing capabilities.

This approach, which is the one cited most often by the respondents, builds on a company’s strengths. In addition, it can use assets in place. As a result, the risks are mitigated, and the budget is less burdened. On that basis, boards are more likely to give the go-ahead.

For example, in 2022, Thailand’s CP Axtra, the country’s largest wholesale food distributor, launched Makro PRO, a business-to-business (B2B) online marketplace for food products and services.

By working with its parent’s existing network of warehouses, as well as its 5,000 partners, Makro PRO was able to get off to a running start. It is already Thailand’s leading B2B marketplace in the hotel, restaurant, and catering sector.

Second, it is important to contain pressure on the budget.

One way to do so is to adopt “resource-light strategies”. Consider Uber, which became a global transportation provider while owning no vehicles. Closer to home, we see a rise in digital-only banks that have grown significantly without major overhead costs of branches and large sales and service teams.

Resource-light innovation can help companies innovate new business models, while also keeping spending in check. Another option is to establish a separate NBB budget; fewer than one in five of South-east Asian business leaders surveyed currently do this.

Finally, companies may benefit by exploring external funding sources such as private equity, venture capital, and government programmes.

An example of the latter is the Singapore Economic Development Board’s Corporate Venture Launchpad (CVL). Launched in 2021, CVL supports companies with Singapore-based operations with the incubation of innovative business ideas.

External funding can bring in capital, although of course it will also affect balance sheets. In our survey, though, 66 per cent said these were healthy, suggesting that there is room to manoeuvre. Such investors bring more than money to the table; they can also be valuable advisers. Globally, McKinsey found that successful new businesses were more likely to have tapped venture capital or private equity.

In the survey, the South-east Asian corporate leaders estimated that 20 per cent of revenue would come from NBB in the next five years, compared to 13 per cent over the past five years. That’s a substantial increase – and one that has to be achieved, not assumed.

That is why it is important for organisations to see business-building as a capability, and to create a systematic method that enables them to launch multiple businesses. Experience is a great teacher. Taking a portfolio approach spreads out risk and increases expertise: the more new businesses companies build, the better they get at it.

It’s a risk, of course – but the greater one may be not doing enough.

Vivek Lath is a partner in McKinsey & Company’s Singapore office, where Sujin Saj is an associate partner