With the economy in continuous change, companies can unlock and sustain growth by building new businesses while reinventing and transforming the core business. Below, you will learn about dual transformation and 5 principles to new business success.
As reported by McKinsey & Company on August 24th, 2024, by Ari Libarikian, Chris Hagedorn, and Ryan Nguyen.
Dual transformation: Optimizing the core and building new businesses
In recent years, the world has experienced significant disruptions to the global economy—with lasting effects. Elevated inflation, though easing in some parts of the world, remains a serious issue, and heightened geopolitical tensions show no signs of dissipating. High interest rates continue for now, and volatile commodity prices also persist. It’s become increasingly clear that these disruptions may not be temporary; rather, they are likely sticking around for the foreseeable future.
At the same time, the market landscape has been shifting in fundamental ways. Corporate longevity is at an all-time low. Five of the top ten largest companies in the world didn’t exist 25 years ago, and the average tenure of a company in the S&P 500 is now less than 20 years, compared with 25 years in 2015. New companies, many of which are digital based, have upended the way business is conducted across all industries, capturing 8 to 25 percent of market share in most industries after five to seven years.
Given these trends, corporate reinvention has become more important than ever, especially for established companies looking to achieve sustained growth in the face of new competition. But successful and enduring transformations are difficult to pull off, and a business transformation by itself may not be enough. Leaders would be wise, therefore, to look for new opportunities by widening their scope beyond the core business.
Indeed, growth can come from a dual transformation that involves reinventing and transforming the core business and building new businesses. This approach can enhance companies’ longevity and open up new avenues for expansion, allowing them to potentially realize significant value and outpace market growth. According to the 2022 McKinsey Global Survey on new-business building, every dollar of revenue generated from new businesses creates twice the enterprise value of a dollar from the core business. At the same time, the initial cash flow unlocked from core transformations provides essential flexibility, facilitating the development and scaling of new ventures free from investor pressures.
Although there can be challenges to executing this well—such as an unclear strategic vision, funding constraints, or operational complexity—adopting a two-pronged approach can broaden the impact of an effective transformation. It can also enhance successful business building, where the synergies created together can exceed the contributions from each alone.
In this article, we outline the opportunities for leaders to realize disproportionate value for sustainable growth and describe the competitive advantages that can result from simultaneously undertaking a transformation and building new business. We also highlight how to get started on the reinvention journey. Finally, we suggest five principles leaders can follow to help ensure impactful outcomes.
The powerful potential of dual reinvention
The opportunities that emerge when marrying transformation with business building can be powerful. Companies that pursue a dual reinvention have the potential to strengthen themselves. They can leverage a shared infrastructure, energize stakeholders with a bold strategic vision, and introduce more effective ways of working. Through their pursuit of transformation, companies can develop comprehensive key competencies for resource allocation, strategic alignment, and continuous improvement—all critical for new-business building. And their pursuit of new businesses allows companies to make bold moves and position themselves for future opportunities.
Sustaining value: Create quick wins for cash and long-term value generation
When a transformation is under way, financial improvements such as cost cutting or cash management can deliver value quickly, and the value realized can be used to fund, either partly or fully, a new business. This can be helpful when cash or alternative funding sources are scarce. In such cases, leaders can choose to begin with a transformation, then launch a new business as core performance improves. The transformation infrastructure that’s developed can provide visibility, increased confidence, and a consistent execution engine that can be leveraged for future efforts.
Execution engine: Build rigor into performance management
Transformations of legacy businesses can provide an ideal environment for successful business building because they can tackle the challenges of scaling and integration that business builds without sufficient resourcing often struggle with. According to McKinsey research conducted in 2023, by leveraging a parent company’s core competencies, supported new builds have a more than eight times higher likelihood to scale compared with high-potential start-ups. A dual approach incorporates strict governance and tracking of financial, operational, and innovation metrics to drive ownership, accountability, and successful outcomes. By leveraging the rigorous decision making, execution, and roadblock-mitigation processes established during transformations, organizations can effectively navigate the complexities and rapid decision making needed during new-business development. However, they should take care to focus on enhancing structure and transparency without stifling the growth of a new business with excessive bureaucracy.
Innovation: Reimagine new-business building
In turn, new-business building creates a natural way to drive the next horizon of growth. According to the 2022 McKinsey Global Survey on new-business building, 68 percent of companies that focus on business building as a top three priority outgrow the market. Growth from new-business building can also build upon itself. Serial new-business builders (defined as having undergone more than five builds) deliver 1.4 times the average revenue and more than twice the ROI of nonserial builders. The increased revenue typically leads to a valuation boost, too: our analysis finds that companies that find new sources of growth have a market value that is 1.3 times higher than that of their slower-growing peers.
Taking a disciplined approach to new-business building can help leaders simultaneously maximize returns and remove much of the risk from their investments. This includes using a milestone-based approach, starting with a minimum viable product (MVP) to prove out the concept, releasing additional cash as milestones are achieved, and investing further into the organization for future innovations, such as by releasing new products. For example, a global automotive company transformed its core business and deployed a user-tested MVP across different regions to explore new growth opportunities. Six months after launching the new business, the company secured double-digit paying customers with contracts worth millions of dollars.
Culture: Establish organizational health with best-in-class talent
Dual reinvention can make a company more robust and nimbler, with fresh talent and expanded competencies and efficiencies. It also galvanizes the organization around a bold, compelling strategy with a focus on improving organizational culture, for example, by providing role clarity and inspiration to employees. Upskilling and reskilling efforts provide talent pools for new businesses to draw from while also encouraging employees to work in a leaner way and take ownership of their initiatives and workstreams. This can help foster better integration between old and new business units, with lasting benefits for ongoing business development. Take the example of a Latin American bank, which transformed from a traditional project-oriented organization into a digital bank with thousands of its current employees trained to work in new ways—including by conducting daily “stand-up” and sprint-planning meetings—all while achieving significant improvements in employee satisfaction.
New-business initiatives can also revitalize old companies with fresh leadership and agile, cross-functional teams, breaking down rigid silos. Companies can pilot innovative processes that, if successful, can be integrated into the core business, invigorating transformations and encouraging bold, risk-managed strategies.
Getting started on the reinvention journey
For any company ready to embrace a dual transformation, it’s important to first define a clear strategy on where to play and how to succeed. This involves conducting a thorough evaluation of a company’s core business to gauge its current performance, strengths, and weaknesses. It also means exploring potential growth opportunities within core markets. At the same time, the company should emphasize strategic innovation, identifying new markets or segments where it can effectively compete and grow. This dual-focused approach ensures a balance between strengthening existing capabilities and actively pursuing expansion opportunities, setting the stage for sustained success in a dynamic business environment.
A strategy-led dual transformation is particularly important for companies where the path forward may be unclear, such as when a company’s core business is positioned in a less favorable segment of its sector, or when shifting macroeconomic factors reshape consumer demands. A comprehensive strategic reassessment involves senior management seeking input from a strategy team as well as external perspectives—and stepping back to critically analyze industry trends, look at market attractiveness, and evaluate competitive positioning. Such strategic evaluations are crucial for informing decisions on whether to grow, harvest, or divest aspects of a business portfolio. This can be particularly effective in situations where core markets are expected to undergo significant shifts or face challenges, or when an overarching, holistic view of the company’s strategy is essential.
Once leaders decide to embrace a dual transformation, there are three potential pathways to initiate the journey. The optimal choice among them depends on the specific circumstances and needs of a company, as there is no one-size-fits-all approach.
Integrated launch of a core transformation and new business growth
The ideal approach to reinvention is to undertake a transformation and new-business building concurrently. This is the most direct path to capture value and efficiencies of scale—and allows for a harmonious reinvention, where the needs of both tracks are aligned and addressed collectively, maximizing the potential for successful outcomes.
This concurrent approach works best when there is a strong desire to capture maximum value as quickly as possible. This is often the case when a core business already has significant market presence but faces the risk of stagnation if it is not innovating, or when the target market for the new-business build is dynamic and presents a fleeting window of opportunity.
While this simultaneous dual-track strategy is optimal, it is not without its challenges. Financial constraints or the proportional size of the opportunity relative to a company’s current capabilities can be hurdles. To navigate these complexities, a company can undertake a diagnostic on the core business while simultaneously initiating a new-business build in a carefully selected target space.
Prioritizing a core transformation before new-business development
In an ever-evolving landscape, some companies may opt to start with a transformation strategy, focusing first on reinforcing their core business before venturing into new growth areas. This approach is particularly effective when the core business or market is facing rapid decline or other significant challenges that demand immediate attention, or when there is limited cash flow to support growth and innovation initiatives.
Companies that adopt this approach should begin with a comprehensive evaluation to pinpoint their full potential, challenging embedded assumptions and analyzing opportunities across growth, pricing, operations, organizational health, and working capital. Such a detailed review helps set a realistic and achievable target, serves as the guiding star for the journey, and provides the necessary resources for any subsequent new-business building. It’s also important to maintain a steadfast commitment to radical innovation throughout the entire reinvention process to ensure sustained success in a dynamic business environment.
One example of a company that started with a transformation before building a new business is the Latin American bank referenced earlier, which had lagged the market as a result of slow innovation and poor customer experience. The bank’s fragmented delivery model and burdened operations, coupled with traditional budgeting, hindered product innovation. By initiating a comprehensive transformation focused on core stabilization and subsequently adopting a digital-first model enhanced by enterprise agility, analytics, cloud technology, and innovation, the bank was able to boost profitability and set a solid foundation for future growth.
Business building as a trigger for broader transformation
In some cases, leaders may opt to begin with business building to generate momentum and accelerate time to market before embarking on a full transformation. This approach is particularly relevant when market dynamics are rapidly evolving—due to the emergence of new competitors and disruptive technologies—and the company cannot afford a delay in response. It fuels overall change by demonstrating that bold initiatives are rewarded, as they encourage cross-functional teamwork and create new career opportunities.
To implement business building, a company identifies a high-potential business idea through market analysis and validation. A dedicated team—typically an advisory board, which includes the CEO and oversees the development of the new business—is then assembled to develop an MVP, iterating based on customer feedback. Once a product market fit is achieved, the business scales by expanding market reach, optimizing operations, and securing resources and investments.
This often leads to an organization seeking ways to enhance the core business, leveraging capabilities developed during the business build. This method is most effective when the core business is stable, there are clear opportunities in adjacent markets, and significant investment is flowing from market challengers.
In North America, one public higher education institution recently developed a new offering for employers to upskill their employees through online programs. At the same time, it recognized the potential to accelerate growth of its existing online offering directly to learners and to enable synergies across brand, portfolio, technology infrastructure, and experience design.
Five principles for success
Even the most holistic-minded leaders may face challenges, such as with change management, talent retention, or shifts in consumer preferences, once they begin their dual-reinvention journey. Regardless of whether they take a concurrent, transformation-led, or new-business-led approach, leaders should keep the following principles in mind.
Articulate a compelling vision for dual reinvention
To ignite a transformative journey, leaders should first aspire to and envision a future where their organization thrives through dual reinvention—by not just enhancing existing operations but boldly creating new avenues for growth. This vision should inspire and guide every strategic decision and action, merging the old with the new to forge a dynamic future.
This journey is more than planning; it’s about crafting a compelling strategy, vision, and narrative that unites and energizes the entire organization, encouraging it to surpass boundaries and expand into new territories. This happens by educating and bringing along all stakeholders including the board of directors, the leadership team, investors, and employees. By articulating a broad story of innovation that encompasses transformation and new-business building, leaders ensure everyone is engaged and understands their individual role in this shared vision.
Establish a clear road map rooted in long-term thinking
Achieving peak performance of any enterprise requires a road map. Successfully embarking on a dual reinvention of transformation and new-business building is no different. Leaders must position new-business ventures as largely independent yet interconnected with the core organization for sustained growth. They should outline a clear trajectory of milestones and timelines, focusing on both immediate and future goals.
The road map should consider the allocation of dedicated resources and independent funding for new business units during financial forecasting and planning cycles, so that new ventures can thrive without being stifled by broader transformation efforts. It’s important to resist the temptation to pull back from investing in business building during downturns, as these periods can provide opportunities for growth. The road map can help teams stay on course. For example, companies that continued to invest in new businesses during the 2008–09 economic downturn saw 20 percent more revenue and more than 30 percent higher EBITDA margins by 2011, as compared with peers that did not.
The implementation road map should also include the strategic use of funds freed up by transformations. These should be directed toward new-business initiatives or further transformational efforts, with funding released based on the achievement of specific milestones to mitigate risk.
Strengthen the functional ‘common chassis’ for long-term gains
Leaders should draw on shared resources, such as contracting capabilities or IT platforms, that can benefit both the new business and ongoing transformations. They should also identify capabilities required for the new business, such as inventory management and warehousing, then determine which of these can be adopted from the core business. For instance, a company launching a new sales channel for small enterprises may find it more effective to recruit external talent with small-business customer experience, rather than deploy its existing sales force, which is focused on larger accounts.
Once the appropriate core capabilities are identified, leaders should ensure resources meet the demands of both the new and existing businesses. Finally, leaders should assess any remaining needs of the new business that the core business cannot fulfill due to gaps in skills or expertise and determine the best approach to address these gaps, whether through hiring, third-party contracts, partnerships, or mergers and acquisitions.
Put people front and center
CEOs or other top leaders should ensure that the transformation and new-business building are top priorities for relevant leaders and managers and that their aspirations and incentives are aligned. They can do so by articulating the vision and laying out the road map for the transformation and business build, then appoint independent but closely linked leaders for both. It is important to reinforce this culture of agility, innovation, and collaboration early and often to drive momentum; without energizing the teams, buy-in and transformation adoption will be difficult.
To drive this culture in a core business transformation, the organization should appoint a dedicated chief transformation officer (CTO), who will be responsible for mobilizing the organization and designing and driving culture and performance management through a rigorous weekly cadence. The CTO should be supported by a dedicated transformation office team with significant knowledge and connections in the organization; in addition, dedication is required from key core business unit and functional leaders who typically play the role of sponsors or workstream leads. Business builds can be led by a dedicated new-venture leader who orchestrates the resources to build a new business and is a peer to the CTO. Talent for the new business can be sourced from internal or external channels to form a dedicated team with minimal duplication in roles and turnover.
Establish a performance infrastructure
Finally, a good dual reinvention hinges on robust infrastructure—one that emphasizes accountability and ownership through detailed initiative planning that incorporates business cases, milestones, and KPIs. Additionally, a governance structure should be established with a regular cadence to monitor performance, facilitate rapid decision making, and remove roadblocks.
One example of a company that took this kind of comprehensive approach to dual transformation is a leading Asian online retailer that sought to reinvent itself as an online commerce platform. It created transformation architecture to assist in the building of three new businesses: a third-party marketplace, a retail-media network, and livestream commerce. It’s using that same infrastructure to instill rigor, manage milestones and performance, and challenge the status quo in its transformation of the core business, too.
Not every transformation or new-business build calls for a dual approach. However, for those organizations that adopt such an approach, it can significantly enhance and accelerate long-term value creation versus maintaining the status quo. Leaders should carefully consider opportunities to integrate these strategies when feasible, as this can maximize the potential for sustainable growth and competitive differentiation. By thoughtfully aligning transformation and business-building initiatives, organizations can respond quickly to immediate market challenges and proactively shape their future in a dynamic business landscape. This holistic approach enables a robust platform for innovation, fostering resilience and agility that will serve the company well into the future.
Additional Business Success Resources
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