Leading Off: Building a new business: A leader's guide

ESSENTIALS FOR LEADERS AND THOSE THEY LEAD

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Beyond his commitment to civil and human rights, one of the defining personal qualities of Martin Luther King Jr., whose life and work we celebrate today, was a relentless entrepreneurial spirit. “Keep moving forward” was one of his frequent injunctions. As the business world enters the third year of the COVID-19 pandemic, its leaders seem to be embracing that attitude as well. Start-ups boomed in 2021 even as many companies shuttered their doors. Americans filed an estimated 4.3 million new-business applications, a 24 percent increase over the previous year and a sharp reversal of a prolonged decline in entrepreneurship since the 1980s. In particular, corporate-backed new businesses are poised for sizable growth. A McKinsey Global Survey shows that incumbent organizations expect to bring in half of their revenues from new products, services, or businesses by 2026. But ambitious goals such as this can be fraught with obstacles. This week, let’s explore ways to improve the odds of success.

AN IDEA

Think big but be realistic

Even before the pandemic, business leaders were scrambling to find new sources of growth, spurred by the threats and opportunities of a digitizing world. In 2020, business building became a top priority for growth. Why? Companies that prioritize business building tend to grow faster and are more resilient than their peers. Yet only 24 percent of the new businesses in big corporations scale up their operations successfully. Those that fail don’t adapt to changing conditions, and they lack a clear strategy for acquiring customers profitably at scale. Successful ventures cushion their budgets to protect against uncertainties, test new products or services early on, and build for scale from the beginning. And they don’t hesitate to pull the plug if things are not working out.

A BIG NUMBER

For many people, that’s a lucky number, and with good reason. According to a McKinsey study, there are seven areas in which a new business must perform well for it to scale: product and strategy, go-to-market planning, technology, people, governance, operations, and capital. The catch: the business must be proficient in all seven areas—even companies that score high marks on as many as five areas can fail to scale successfully.

A QUOTE

“I often say that when you can measure what you are speaking about and express it in numbers, you know something about it; but when you cannot measure it, when you cannot express it in numbers, your knowledge is of a meager and unsatisfactory kind.”

So said the 19th-century physicist Lord Kelvin, in words often paraphrased as “What gets measured gets managed” and attributed to the management theorist Peter Drucker. Big-time success eludes many new ventures because they are uncertain of which capabilities to measure and how. For example, a manufacturing conglomerate found that one team was wasting time and money on building proprietary accounting systems when off-the-shelf alternatives were readily available. The conglomerate solved this problem by setting rigorous criteria for new-business technology decisions, such as building solutions only if they provided a competitive advantage or if equivalents were not available on the market. Sticking to the guidelines led to a roughly 30 percent drop in technology costs for new ventures.

A SPOTLIGHT INTERVIEW

A photo of Tiziana Casciaro, professor of organizational behavior at Toronto’s Rotman School of Management

Leading a successful new business can be heady, but watch out for the downsides of power. Hubristic leaders can wreck an organization, says Tiziana Casciaro, professor of organizational behavior at Toronto’s Rotman School of Management. In this McKinsey Author Talks interview, Casciaro discusses her book, Power, for All: How It Really Works and Why It’s Everyone’s Business, which calls for safeguards to minimize the damage caused by egotistical leaders. “I think that a lot of the bad that happens around power comes from the illusion it gives us that we are capable of doing things on our own,” she says. “To paraphrase Martin Luther King, we are all connected in this garment of destiny. And we can do better if we recognize that.” Casciaro recommends establishing “structures that allow leaders to be reminded that they’re not fabulous all the time, that they have limitations, that they need other people.”

REMEMBRANCE OF THINGS PAST

The outline of a person in front of a clock

Nostalgia can be nice, but sometimes it pays to forget. Institutional knowledge can stall business growth. For example, when a materials-science company entered the genomics industry with a spin-off, it assumed that processes that had worked for the parent company would also work for the new one. But the old ways of solving problems did not offer the agility and speed that the new venture demanded, and two years in, it had to undergo a drastic rebuilding. The lesson? Don’t look back. Institute best practices such as hiring externally, changing traditional methods of communication, and challenging what typical success looks like.

Lead successfully.

— Edited by Rama Ramaswami, a senior editor in McKinsey’s Stamford office

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