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Traditional company, new businesses: The pairing that can ensure an incumbent’s survival

McKinsey 28 Jun 2019 12:00

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The list of long-established companies that have been disrupted by fast-moving, tech-enabled powerhouses gets longer by the day. Facing pressure from younger, more innovative challengers, many incumbent companies in the energy sector are also reinventing themselves through a dual effort to digitize their legacy businesses and create new enterprises. Indeed, McKinsey research shows that top-performing companies in various industries divide their capital evenly between transforming their core businesses and developing new ones.1 1.The survey asked respondents to indicate how much digital capital their companies had allocated to digitizing core businesses and developing new digital businesses. It identified top-performing companies as those in the top decile for organic revenue growth: 25 percent or more in the past three years. For more, see “A winning operating model for digital strategy,” January 2019. Yet few established energy players have managed to turn breakthrough concepts into billion-dollar growth engines that could help secure their long-term survival.

What keeps companies that aren’t digital natives from hatching unicorns? Their capacity for innovation isn’t necessarily constrained by a lack of good ideas. Many invest huge sums in research. They also seek outsiders’ ideas by starting incubators and venture funds and buying start-ups. Rather than a shortage of inspiration, we’ve observed that older companies’ main challenges are an excess of institutional control and an inability to scale up innovations. In a recent McKinsey survey, many respondents said parent companies had hindered the development of their start-ups and limited entrepreneurs’ freedom to make decisions.

A look at BP’s business-building unit

The disruptive threat from very young companies is nearly as menacing. The average unicorn—a company valued at $1 billion or more in private markets—is just six years old, and the market capitalization of unicorns has increased nearly ninefold in the five years since their IPOs.

Amid this boom, large companies have stepped up their attempts to tap the value-creating prowess of entrepreneurs. (This approach isn’t new. In the late 1990s, for example, big businesses rushed to create start-up incubators, acquire fast-growing internet companies, and set up venture-investing units.) To take one measure of their activity, the number of corporate venture-capital (CVC) organizations making their first investments increased from 64 in 2013 to 264 in 2018.4 4.The 2018 Global CVC Report, CB Information Services, February 2019, cbinsights.com. In a recent McKinsey survey of executives involved with CVCs, incubators, and accelerators, 92 percent of respondents agreed that their companies had seen a significant increase in the financial value of the enterprises in which they had invested.5 5.The survey was in the field in May and June 2019 and garnered responses from 93 C-suite and vice president/executive vice president–level executives and managers based in France, Germany, Italy, the United Kingdom, and the United States, representing more than 70 companies across a wide range of industries and company sizes. All respondents indicated that they control one or more of their companies’ business-building activities (investing in start-ups directly or through corporate venture funds, operating a dedicated incubator that helps internal ideas or pilots become stand-alone ventures, operating a dedicated accelerator that helps younger or smaller ventures to scale up, or otherwise building or creating new ventures).

New enterprises and traditional companies: Understanding the mismatch

Fast-paced operations. Speed of learning is a vital factor in a start-up’s success because first movers and fast followers gain major advantages amid digital competition.7 7.For more, see Jacques Bughin, Tanguy Catlin, Martin Hirt, and Paul Willmott, “Why digital strategies fail,” McKinsey Quarterly, January 2018. In a McKinsey interview, José Filippini, the CFO of Youse, a direct-to-consumer insurtech business launched by Brazilian financial leader Caixa Seguradora, said, “We also based the decision to launch Youse on the clear idea that there is strategic advantage in being the first mover.” (For more on Youse, see sidebar “Youse: Digital innovation in Brazil’s insurance market.”)

Sometimes naysayers at the parent company undermine start-ups. Sam Yagan, former CEO of Match, witnessed this dynamic after Match founded Tinder, a mobile dating app. In an interview with McKinsey, he said, “When we launched Tinder inside of Match, we found that there was resistance from some people inside the core business who saw Tinder as a threat—maybe to the business, maybe to their own expertise in the company, and certainly to the culture.”12 12.Building data-driven culture: An interview with ShopRunner CEO Sam Yagan,” McKinsey Quarterly, February 2019.

The position and staffing of the factory ensure that the new businesses are unburdened by the corporate bureaucracy and endowed with the parent company’s advantages. The next sections offer a closer look at these two duties.

Customer relationships. A corporate start-up can gain an advantage with customers if the parent company positions the start-up’s offerings as a complement to its own. For example, Royal FloraHolland, a large flower-growing and trading cooperative, had observed that growers and buyers were finding it more complicated to conduct direct trades because the network of trading platforms was becoming more fragmented. In response, the cooperative built a unified digital marketplace for auctions and direct trading of horticultural products. The new marketplace scaled up quickly because it brought growers and buyers onto a single platform and integrated with Royal FloraHolland’s existing services. “By enabling our customers to thrive in the digital economy, we’re reinventing our business for the future,” said Gerhard van der Bijl, chief digital officer of Royal FloraHolland. (For more on Royal FloraHolland’s digital marketplace, see sidebar “Floriday: A digital hub for horticultural trade.”)

Intellectual property. Established companies possess intellectual capital—including data, technical know-how, and patents—that can benefit start-ups. Knowledge sharing between a parent company and a new venture worked well for ABN AMRO Bank, a large European bank, when it set up a digital-lending subsidiary called New10. New10 kept most of its operations separate from those of ABN AMRO Bank: it recruited and onboarded its own people, formed its own vendor relationships, and set up an entirely new technology architecture. But when it came time to establish other core capabilities, such as regulatory compliance and fraud management, New10 relied on the expertise of ABN AMRO Bank’s compliance and risk functions. “Bringing in ABN AMRO Bank’s expertise enabled New10 to develop our proposition more quickly than a stand-alone company could have and to offer attractive pricing and experiences to customers on the day we launched,” said Patrick Pfaff, New10’s founder. (For more on New10, see sidebar “New10: A digital-lending start-up in the Netherlands.”)

“[Big] companies will never do something substantial or worth thinking about or worth writing a history book about in their core businesses,” said venture capitalist Steve Jurvetson in a McKinsey interview. “But the beauty is that it doesn’t mean big companies are dead; it just means big companies need to innovate outside their core businesses.”14 14.Inside the mind of a venture capitalist,” McKinsey Global Institute, August 2016. Innovating outside the core, however, is easier said than done. Too often, the legacy organization throttles business-building efforts and shuts would-be entrepreneurs out of departments that could give their start-ups an edge. To better the odds that new businesses will strengthen a parent company’s financial prospects and strategic positioning, traditional companies can house their enterprises inside a factory that shelters them from bureaucratic burdens and provides them with the advantages of the parent organization’s scale and know-how. Such a factory can provide long-standing companies with a renewable source of fast-growing business models that will sustain them in the turbulence of digital disruption.

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ABN AMRO BankNew enterprisesMcKinsey QuarterlyMcKinseyRoyal FloraHolland
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