A practical guide to new-business building for incumbents

Disruption was once considered the trademark of start-ups. Today, incumbents are actively seizing the opportunity to disrupt themselves. In boardrooms and executive meetings, directors and leaders frequently chase the dream of building a unicorn, but the results of these ambitious pursuits have been mixed. Only 16 percent of executives report that their corporate builds have achieved blockbuster success.¹Leap by McKinsey’s New-Business Survey 2020, n = 651.

When it comes to building a business, being an incumbent has both advantages and drawbacks. Leaders often underestimate the difficulty of starting a new venture within the existing landscape of processes, culture, and behaviors. Unlocking the power of a new-business build requires finding the right balance between short-term wins and long-term success, playing to your strengths, and understanding the customer.

Drawing from our experience, we’ve distilled five key lessons that can help incumbents avoid the most common pitfalls of venture building and greatly increase the chances of success for their new businesses.

Stay close to the customer the entire way through

Too often, incumbents build a wish list of features or look to their stakeholders to guide product development. Rather than anchoring on the “what,” incumbents should build their product vision centered on the “who”—in other words, their customers.

Building a new venture starts with defining a strong customer value proposition to inform the product vision. The first steps of this journey are to identify target customer segments, discover their pain points and unmet needs, and select key segments to prioritize. From there, the new-venture team can narrow it down to key personas, map their user journeys, and conduct user testing to gather feedback and confirm purchase intent (Exhibit 1).

1

Throughout the product development cycle, employees—including and especially leaders—need to personally spend time with customers (for example, through exploratory interviews and focus groups with target customers). From the very first week, employees should adopt a mindset of “getting out on the street,” aiming to interact with customers as frequently as possible on an ongoing basis. As customer needs continuously evolve (at a faster and faster pace), the work of listening to and understanding the customer never ends. This may seem obvious, but after initial focus on the customer, teams often become distracted and overwhelmed by other factors, and the customer can recede to an afterthought.

Focus on strengths rather than trying to act like a start-up

Incumbents should not try to imitate start-ups for the simple reason that they are not start-ups. Those that assume they can move faster than their start-up competitors across all areas of the business are typically mistaken.

Rather than trying to make up for their weaknesses, incumbents should tap into the strengths of the parent company and leverage the unique advantages that set them apart. These could include brand recognition, existing store and logistics infrastructure, access to customer data and regular customer interactions, a large base of suppliers, and strong sourcing capabilities. By doubling down on their strengths, incumbents can accelerate their new-venture build and more effectively differentiate themselves from the competition.

However, building on strengths should not come at the expense of mitigating potential risks. Leaders should proactively identify and address any existing constraints that may hamper the success of a new venture. In our experience, these can include entrenched ways of working, cultural norms and mindsets, and overly complex processes. Incumbents that tackle these issues head-on and modernize their underlying infrastructure can smooth the path of their new business while avoiding many of the pitfalls that often derail them.

Focus on learning, not perfection

Many incumbents chase the “perfect” product for their new venture, waiting until everything is ready for launch. Yet despite the additional time and effort, they often find that their underlying assumptions are wrong and have to revise and rebuild the product anyway.

The goal is not to achieve perfection but to learn as quickly as possible. Nothing increases the velocity of learning faster than a live minimal viable product (MVP) that customers actually like. The best time to launch a product is the moment that it is usable, with the expectation that there will be gaps and areas to improve. Until customer feedback comes in, everything is theoretical. While companies launch their MVP, they should start building and iterating toward a “minimal lovable product” that can address some of the gaps present at launch (see the following table for an illustrative example of a phased rollout and release plan).

During this iterative test-and-learn process, incumbents can take three actions to ensure customer centricity and achieve product–market fit in as little time as possible:

1. Form a panel of customers to regularly give feedback and test products.
2. Measure and track everything with data, and iterate based on what you learn.
3. Experiment using evidence-backed techniques (especially A/B testing).

^Table
An iterative rollout process generates a strong feedback loop.

The executive’s guide to new-business building

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Build for scale from the beginning

Starting a new venture requires daily attention, but leaders cannot lose focus on the long-term strategic vision. While launching an MVP and achieving product–market fit are important short-term objectives, incumbents must also focus on scale from the beginning. Otherwise, as often happens, a promising product can’t manage to reach the scale it needs to become a real success.

From the start, leaders should set an aggressive go-to-market plan, test the scalability of their customer acquisition channels, and maintain a running backlog and up-to-date research plan to enable scale. Further, incumbents should strike a healthy balance between developing new capabilities, building long-term solutions, and optimizing existing features. A bias toward quick fixes for the short term can lead to a buildup of technical debt that makes it hard to scale down the road (Exhibit 2).

2

Avoid the traps of the established culture

New businesses require fresh energy, novel approaches, and meaningful shifts in mindsets and behaviors. “Established” cultures won’t bring those traits. Incumbents must instead focus on carving out a cultural identity that is related to but distinct from the parent company. To do so, new-venture leaders need to define strong values, disconnect from existing processes and ways of working that don’t serve the new venture, and model the new behaviors they wish to see.

In our experience, successful venture leaders build integrated, cross-functional teams and leverage agile principles in their day-to-day running of the business. For example, leaders can transform their regular steering-committee meetings from the traditional “report and oversee” agenda into agile ceremonies that instead focus on creating alignment, unblocking impediments, and driving the business forward. Moreover, successful ventures often adopt a flat hierarchy and a hands-on communication culture that delegates decision making to the lowest possible level, enabling greater speed and accountability throughout the organization.

Starting a new digital venture is not easy, and incumbents face specific challenges that can derail their chances of success. By taking a customer-centric, agile, and scalable approach, leaders can avoid common pitfalls and create the foundation for long-term, sustainable growth.