Growth is harder than ever to find, which is precisely why corporate venture building is gaining steam internationally: In recent McKinsey surveys, about 40 percent of global CEOs continue to cite new-business building as one of their top three strategic priorities despite cost pressures..
This prioritization is largely driven by leaders’ desire for growth and innovation as they attempt to keep up with gen AI and other technologies and external forces.1 Amazon Web Services (AWS) provides a good example of the promise of such an approach: Originally designed as an internal resource for Amazon’s technological infrastructure, AWS has evolved into a platform generating more than $70 billion in annual revenue.
Even in the current volatile business environment, pursuing new ventures remains a sound strategy: According to McKinsey’s most recent survey on new venture building, even in uncertain times, roughly half of reported new businesses meet or exceed expectations, and those that succeed are reaching $10 million in revenue faster than ever—on average, in just 31 months.2
Still, many new corporate ventures struggle to scale—not because ideas are weak but because there is typically no system to support those ideas. The incentives, governance, and cultural norms established for the core business often are at odds with the speed, risk, and autonomy that new ventures require.
Leaders across the organization, including the chief marketing officer, CFO, and chief human resources officer, should collaborate and coordinate efforts and activities associated with launching and scale new ventures; such large transformation initiatives must be symbiotic. However, it’s the CEO who plays the most central role in resolving the timelines and tensions between new growth and the existing business, although resource allocation decisions cannot be their only focus. Strategy, culture, and governance are just as critical for the CEO to own. Indeed, our research shows that those companies in which CEOs personally prioritize venture building consistently outperform their peers, with new businesses contributing nearly 20 percent of enterprise-wide revenue within five years.3
Our own experience in the field shows that venture-building works best when the CEO behaves less like an operator of the business and more like an architect of a portfolio of future businesses, where the CEO typically must make (and continually revisit) a series of hard choices: For instance, how much capital and talent should the CEO divert from core businesses? How aggressively should the new venture be allowed to cannibalize existing revenue? And how can the CEO help the organization address the common collective action problems that often keep new ventures from achieving their full potential?
Trade-offs aside, there are four areas where the CEO’s attention matters most: setting venture building as a top strategic priority; deciding where to play and what to build; committing capital with patience; and creating the culture, capabilities, and partnerships required for new ventures to thrive.
In this article we explore those four focus areas as well as some of the trade-offs CEOs may need to make to move fast on new ventures without compromising the parent company’s brand or operations.
Setting venture building as a top strategic priority
There’s been perennial debate about whether to keep transformation efforts in an organization separate from the core business or integrate them. McKinsey’s research points to the importance of linking transformation efforts with day-to-day operations; it’s the only way to ensure that change sticks.
Similarly, new venture building can only scale when it’s explicitly treated as part of the overarching corporate strategy rather than just a side effort. The entire organization must see the value of continuous innovation and entrepreneurship and commit to the actions required to seize new business opportunities when they arise.
As the “keeper of strategy,” the CEO is best positioned to send the message that building new corporate ventures, and not just pursuing geographic or product line expansions, is central for growth and that some trade-offs may be required vis-à-vis the core business. In some cases, the core business itself can become the biggest obstacle to building the next one.
The CEO’s framing and conversations with the board, members of the senior leadership team, and employees must echo the organization’s first principles of strategy. Specifically, the CEO should be able to codify the scope and strategic intent of new business building and tell a compelling story about it:
Scope and intent. The CEO will need to set parameters for new ventures being proposed: For instance, is the goal here to generate incremental revenue, defend market share, adopt technologies that can help future-proof the organization, or seize another strategic advantage? Should new ventures be designed to complement the core business, replace parts of it, or disrupt it altogether?
When Procter & Gamble’s A.G. Lafley became CEO, innovation at the company was stalled, and growth was inconsistent. Rather than simply tell employees to innovate more, he established strategic guardrails for how and where P&G would build new businesses. Among other rules, he defined specific customer segments and unmet needs to target, prioritizing categories such as home care and beauty. He set new metrics and expectations for where growth would come from: About half of all innovation should come from external partnerships, and growth potential needed to be large scale rather than incremental. Over time, Lafley’s “strategy as choices” model helped P&G significantly improve productivity and growth.4
Storyline. Just as important, and in collaboration with the CMO and other communications professionals, the CEO must tell a story that convinces investors, employees, and partners that business building is a core growth pillar. For instance, in CEO Andy Jassy’s quest to turn Amazon into a portfolio of AI businesses (a platform, a series of custom chips, infrastructure build-outs, and strategic partnerships), he has explicitly and repeatedly framed AI as a once-in-a-lifetime growth opportunity in conversations with critical stakeholders.5 Jassy is consistent with the narrative, regardless of channel or audience. For instance, he structured his annual shareholder letter to convey the six simple truths about AI. In town halls and other public forums, he built credibility with investors and employees by openly acknowledging the tensions between high capital expenditures associated with AI growth and near-term margin pressures. READ MORE
By Daniel Aminetzah, Jorge Grieve, and Paul Jenkins
Source: mckinsey.com
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