Mcsey

&company

TransformationPractice

Dualtransformation:

Optimizingthecoreandbuildingnewbusinesses

Withtheeconomystillinflux,establishedcompaniescouldpotentially

unlockandsustaingrowthbybuildingnewbusinesseswhilesimultaneouslytransformingthecore.

byAriLibarikian,ChrisHagedorn,MattBanholzer,andRyanNguyen

August2024

Inrecentyears,theworldhasexperienced

significantdisruptionstotheglobaleconomy—withlastingeffects.Elevatedinflation,thougheasinginsomepartsoftheworld,remainsaseriousissue,

andheightenedgeopoliticaltensionsshownosignsofdissipating.Highinterestratescontinuefornow,andvolatilecommoditypricesalsopersist.It’s

becomeincreasinglyclearthatthesedisruptionsmaynotbetemporary;rather,theyarelikely

stickingaroundfortheforeseeablefuture.

Atthesametime,themarketlandscapehasbeen

shiftinginfundamentalways.Corporatelongevityis

atanall-timelow.Fiveofthetoptenlargest

companiesintheworlddidn’texist25yearsago,

andtheaveragetenureofacompanyintheS&P

500isnowlessthan20years,comparedwith25

yearsin2015.Newcompanies,manyofwhichare

digitalbased,haveupendedthewaybusinessis

conductedacrossallindustries,capturing8to25

percentofmarketshareinmostindustriesafterfivetosevenyears.

Giventhesetrends,corporatereinventionhas

becomemoreimportantthanever,especiallyfor

establishedcompanieslookingtoachievesustainedgrowthinthefaceofnewcompetition.Butsuccessfulandenduringtransformationsare

difficulttopull

off,

anda

businesstransformation

byitselfmaynotbeenough.Leaderswouldbewise,therefore,to

lookfornewopportunitiesbywideningtheirscopebeyondthecorebusiness.

Indeed,growthcancomefromadualtransformationthatinvolves

reinventingandtransformingthe

corebusiness

and

buildingnew

businesses

.Thisapproachcanenhancecompanies’longevityand

openupnewavenuesforexpansion,allowing

themtopotentiallyrealizesignificantvalueand

outpacemarketgrowth.Accordingtothe

2022

McKinseyGlobalSurveyonnew-businessbuilding

,everydollarofrevenuegeneratedfromnew

businessescreatestwicetheenterprisevalueofadollarfromthecorebusiness.Atthesametime,theinitialcashflowunlockedfromcoretransformationsprovidesessentialflexibility,facilitatingthe

developmentandscalingofnewventuresfreefrominvestorpressures.

Althoughtherecanbechallengestoexecutingthiswell—suchasanunclearstrategicvision,funding

constraints,oroperationalcomplexity—adoptingatwo-prongedapproachcanbroadentheimpactofaneffectivetransformation.Itcanalsoenhance

successfulbusinessbuilding,wherethesynergiescreatedtogethercanexceedthecontributionsfromeachalone.

Inthisarticle,weoutlinetheopportunitiesfor

leaderstorealizedisproportionatevaluefor

sustainablegrowthanddescribethecompetitiveadvantagesthatcanresultfromsimultaneouslyundertakingatransformationandbuildingnew

business.Wealsohighlighthowtogetstartedonthereinventionjourney.Finally,wesuggestfiveprinciplesleaderscanfollowtohelpensure

impactfuloutcomes.

Thepowerfulpotentialofdualreinvention

Theopportunitiesthatemergewhenmarryingtransformationwithbusinessbuildingcanbe

powerful.Companiesthatpursueadualreinvention

havethepotentialtostrengthenthemselves.Theycanleverageasharedinfrastructure,energize

stakeholderswithaboldstrategicvision,and

introducemoreeffectivewaysofworking.Throughtheirpursuitoftransformation,companiescan

developcomprehensivekeycompetenciesforresourceallocation,strategicalignment,and

continuousimprovement—allcriticalfornew-businessbuilding.Andtheirpursuitofnew

Dualtransformation:Optimizingthecoreandbuildingnewbusinesses2

businessesallowscompaniestomakeboldmovesandpositionthemselvesforfutureopportunities.

Sustainingvalue:Createquickwinsforcashandlong-termvaluegeneration

Whenatransformationisunderway,financialimprovementssuchascostcuttingorcash

managementcandelivervaluequickly,andthe

valuerealizedcanbeusedtofund,eitherpartlyorfully,anewbusiness.Thiscanbehelpfulwhen

cashoralternativefundingsourcesarescarce.In

suchcases,leaderscanchoosetobeginwitha

transformation,thenlaunchanewbusinessascoreperformanceimproves.Thetransformation

infrastructurethat’sdevelopedcanprovidevisibility,increasedconfidence,andaconsistentexecutionenginethatcanbeleveragedforfutureefforts.

Executionengine:Buildrigorintoperformancemanagement

Transformationsoflegacybusinessescanprovideanidealenvironmentforsuccessfulbusiness

buildingbecausetheycantacklethechallengesofscalingandintegrationthatbusinessbuildswithoutsufficientresourcingoftenstrugglewith.AccordingtoMcKinseyresearchconductedin2023,by

leveragingaparentcompany’scorecompetencies,supportednewbuildshaveamorethaneighttimeshigherlikelihoodtoscalecomparedwithhigh-

potentialstart-ups.Adualapproachincorporatesstrictgovernanceandtrackingoffinancial,

operational,andinnovationmetricstodrive

ownership,accountability,andsuccessful

outcomes.Byleveragingtherigorousdecisionmaking,execution,androadblock-mitigation

processesestablishedduringtransformations,organizationscaneffectivelynavigatethe

complexitiesandrapiddecisionmakingneeded

duringnew-businessdevelopment.However,theyshouldtakecaretofocusonenhancingstructureandtransparencywithoutstiflingthegrowthofanewbusinesswithexcessivebureaucracy.

Innovation:Reimaginenew-businessbuilding

Inturn,new-businessbuildingcreatesanaturalwaytodrivethenexthorizonofgrowth.Accordingtothe

2022McKinseyGlobalSurveyonnew-business

building

,68percentofcompaniesthatfocuson

businessbuildingasatopthreepriorityoutgrowthemarket.Growthfromnew-businessbuildingcan

alsobuilduponitself.Serialnew-businessbuilders(definedashavingundergonemorethanfivebuilds)

deliver1.4timestheaveragerevenueandmorethantwicetheROIofnonserialbuilders.Theincreased

revenuetypicallyleadstoavaluationboost,too:ouranalysisfindsthatcompaniesthatfindnewsourcesofgrowthhaveamarketvaluethatis1.3times

higherthanthatoftheirslower-growingpeers.

Takingadisciplinedapproachtonew-business

buildingcanhelpleaderssimultaneouslymaximize

returnsandremovemuchoftheriskfromtheir

investments.Thisincludesusingamilestone-basedapproach,startingwithaminimumviableproduct

(MVP)toproveouttheconcept,releasingadditionalcashasmilestonesareachieved,andinvesting

furtherintotheorganizationforfutureinnovations,suchasbyreleasingnewproducts.Forexample,a

globalautomotivecompanytransformeditscore

businessanddeployedauser-testedMVPacross

differentregionstoexplorenewgrowthopportunities.

Sixmonthsafterlaunchingthenewbusiness,thecompanysecureddouble-digitpayingcustomerswithcontractsworthmillionsofdollars.

Culture:Establishorganizationalhealthwithbest-in-classtalent

Dualreinventioncanmakeacompanymorerobust

andnimbler,withfreshtalentandexpanded

competenciesandefficiencies.Italsogalvanizestheorganizationaroundabold,compellingstrategywithafocusonimprovingorganizationalculture,for

example,byprovidingroleclarityandinspirationtoemployees.Upskillingandreskillingeffortsprovidetalentpoolsfornewbusinessestodrawfromwhile

Dualtransformation:Optimizingthecoreandbuildingnewbusinesses3

alsoencouragingemployeestoworkinaleaner

wayandtakeownershipoftheirinitiativesand

workstreams.Thiscanhelpfosterbetterintegrationbetweenoldandnewbusinessunits,withlasting

benefitsforongoingbusinessdevelopment.TaketheexampleofaLatinAmericanbank,which

transformedfromatraditionalproject-oriented

organizationintoadigitalbankwiththousandsofitscurrentemployeestrainedtoworkinnew

ways—includingbyconductingdaily“stand-up”andsprint-planningmeetings—allwhileachieving

significantimprovementsinemployeesatisfaction.

New-businessinitiativescanalsorevitalizeold

companieswithfreshleadershipandagile,cross-functionalteams,breakingdownrigidsilos.

Companiescanpilotinnovativeprocessesthat,ifsuccessful,canbeintegratedintothecore

business,invigoratingtransformationsandencouragingbold,risk-managedstrategies.

Gettingstartedonthereinventionjourney

Foranycompanyreadytoembraceadual

transformation,it’simportanttofirstdefineaclearstrategyonwheretoplayandhowtosucceed.Thisinvolvesconductingathoroughevaluationofa

company’scorebusinesstogaugeitscurrent

performance,strengths,andweaknesses.Italso

meansexploringpotentialgrowthopportunities

withincoremarkets.Atthesametime,thecompanyshouldemphasizestrategicinnovation,identifyingnewmarketsorsegmentswhereitcaneffectively

competeandgrow.Thisdual-focusedapproach

ensuresabalancebetweenstrengtheningexisting

capabilitiesandactivelypursuingexpansionopportunities,settingthestageforsustainedsuccessinadynamicbusinessenvironment.

Astrategy-leddualtransformationisparticularly

importantforcompanieswherethepathforward

maybeunclear,suchaswhenacompany’score

businessispositionedinalessfavorablesegmentofitssector,orwhenshiftingmacroeconomicfactorsreshapeconsumerdemands.Acomprehensive

strategicreassessmentinvolvesseniormanagementseekinginputfromastrategyteamaswellas

externalperspectives—andsteppingbackto

criticallyanalyzeindustrytrends,lookatmarket

attractiveness,andevaluatecompetitivepositioning.Suchstrategicevaluationsarecrucialforinformingdecisionsonwhethertogrow,harvest,ordivest

aspectsofabusinessportfolio.Thiscanbe

particularlyeffectiveinsituationswherecore

marketsareexpectedtoundergosignificantshiftsorfacechallenges,orwhenanoverarching,holisticviewofthecompany’sstrategyisessential.

Onceleadersdecidetoembraceadualtransformation,therearethreepotentialpathwaystoinitiatethe

journey.Theoptimalchoiceamongthemdependsonthespecificcircumstancesandneedsofacompany,asthereisnoone-size-fits-allapproach.

Integratedlaunchofacoretransformationandnewbusinessgrowth

Theidealapproachtoreinventionistoundertakeatransformationandnew-businessbuilding

concurrently.Thisisthemostdirectpathtocapturevalueandefficienciesofscale—andallowsfora

harmoniousreinvention,wheretheneedsofbothtracksarealignedandaddressedcollectively,

maximizingthepotentialforsuccessfuloutcomes.

Thisconcurrentapproachworksbestwhenthereis

astrongdesiretocapturemaximumvalueas

quicklyaspossible.Thisisoftenthecasewhenacorebusinessalreadyhassignificantmarket

Dualtransformation:Optimizingthecoreandbuildingnewbusinesses4

presencebutfacestheriskofstagnationifitisnotinnovating,orwhenthetargetmarketforthenew-businessbuildisdynamicandpresentsafleetingwindowofopportunity.

Whilethissimultaneousdual-trackstrategyis

optimal,itisnotwithoutitschallenges.Financial

constraintsortheproportionalsizeoftheopportunityrelativetoacompany’scurrentcapabilitiescanbe

hurdles.Tonavigatethesecomplexities,acompanycanundertakeadiagnosticonthecorebusiness

whilesimultaneouslyinitiatinganew-businessbuildinacarefullyselectedtargetspace.

Prioritizingacoretransformationbeforenew-businessdevelopment

Inanever-evolvinglandscape,somecompanies

mayopttostartwithatransformationstrategy,

focusingfirstonreinforcingtheircorebusiness

beforeventuringintonewgrowthareas.This

approachisparticularlyeffectivewhenthecore

businessormarketisfacingrapiddeclineorothersignificantchallengesthatdemandimmediate

attention,orwhenthereislimitedcashflowtosupportgrowthandinnovationinitiatives.

Companiesthatadoptthisapproachshouldbeginwithacomprehensiveevaluationtopinpointtheir

fullpotential,challengingembeddedassumptions

andanalyzingopportunitiesacrossgrowth,pricing,operations,organizationalhealth,andworking

capital.Suchadetailedreviewhelpssetarealisticandachievabletarget,servesastheguidingstarforthejourney,andprovidesthenecessaryresourcesforanysubsequentnew-businessbuilding.It’salsoimportanttomaintainasteadfastcommitmentto

radicalinnovationthroughouttheentirereinventionprocesstoensuresustainedsuccessinadynamicbusinessenvironment.

Oneexampleofacompanythatstartedwitha

transformationbeforebuildinganewbusinessis

theLatinAmericanbankreferencedearlier,which

hadlaggedthemarketasaresultofslowinnovation

andpoorcustomerexperience.Thebank’s

fragmenteddeliverymodelandburdened

operations,coupledwithtraditionalbudgeting,hinderedproductinnovation.Byinitiatinga

comprehensivetransformationfocusedoncorestabilizationandsubsequentlyadoptinga

digital-firstmodelenhancedbyenterpriseagility,analytics,cloudtechnology,andinnovation,

thebankwasabletoboostprofitabilityandsetasolidfoundationforfuturegrowth.

Businessbuildingasatriggerforbroadertransformation

Insomecases,leadersmayopttobeginwith

businessbuildingtogeneratemomentumand

acceleratetimetomarketbeforeembarkingonafulltransformation.Thisapproachisparticularlyrelevantwhenmarketdynamicsarerapidly

evolving—duetotheemergenceofnewcompetitorsanddisruptivetechnologies—andthecompany

cannotaffordadelayinresponse.Itfuelsoverallchangebydemonstratingthatboldinitiativesarerewarded,astheyencouragecross-functional

teamworkandcreatenewcareeropportunities.

Toimplementbusinessbuilding,acompany

identifiesahigh-potentialbusinessideathrough

marketanalysisandvalidation.Adedicatedteam—typicallyanadvisoryboard,whichincludesthe

CEOandoverseesthedevelopmentofthenew

business—isthenassembledtodevelopanMVP,iteratingbasedoncustomerfeedback.Oncea

productmarketfitisachieved,thebusinessscalesbyexpandingmarketreach,optimizingoperations,andsecuringresourcesandinvestments.

Dualtransformation:Optimizingthecoreandbuildingnewbusinesses5

Thisoftenleadstoanorganizationseekingwaystoenhancethecorebusiness,leveragingcapabilitiesdevelopedduringthebusinessbuild.Thismethodismosteffectivewhenthecorebusinessisstable,

thereareclearopportunitiesinadjacentmarkets,

andsignificantinvestmentisflowingfrommarketchallengers.

InNorthAmerica,onepublichighereducation

institutionrecentlydevelopedanewofferingfor

employerstoupskilltheiremployeesthroughonlineprograms.Atthesametime,itrecognizedthe

potentialtoaccelerategrowthofitsexistingonlineofferingdirectlytolearnersandtoenablesynergiesacrossbrand,portfolio,technologyinfrastructure,

andexperiencedesign.

Fiveprinciplesforsuccess

Eventhemostholistic-mindedleadersmayface

challenges,suchaswithchangemanagement,talentretention,orshiftsinconsumerpreferences,once

theybegintheirdual-reinventionjourney.Regardlessofwhethertheytakeaconcurrent,transformation-led,ornew-business-ledapproach,leadersshouldkeepthefollowingprinciplesinmind.

Articulateacompellingvisionfordualreinvention

Toigniteatransformativejourney,leadersshould

firstaspiretoandenvisionafuturewheretheir

organizationthrivesthroughdualreinvention—by

notjustenhancingexistingoperationsbutboldly

creatingnewavenuesforgrowth.Thisvisionshouldinspireandguideeverystrategicdecisionand

action,mergingtheoldwiththenewtoforgeadynamicfuture.

Thisjourneyismorethanplanning;it’sabout

craftingacompellingstrategy,vision,andnarrativethatunitesandenergizestheentireorganization,

encouragingittosurpassboundariesandexpandintonewterritories.Thishappensbyeducatingandbringingalongallstakeholdersincludingtheboardofdirectors,theleadershipteam,investors,and

employees.Byarticulatingabroadstoryof

innovationthatencompassestransformationandnew-businessbuilding,leadersensureeveryoneisengagedandunderstandstheirindividualrolein

thissharedvision.

Establishaclearroadmaprootedinlong-termthinking

Achievingpeakperformanceofanyenterprise

requiresaroadmap.Successfullyembarkingonadualreinventionoftransformationandnew-businessbuildingisnodifferent.Leadersmustposition

new-businessventuresaslargelyindependentyetinterconnectedwiththecoreorganizationfor

sustainedgrowth.Theyshouldoutlineaclear

trajectoryofmilestonesandtimelines,focusingonbothimmediateandfuturegoals.

Theroadmapshouldconsidertheallocationof

dedicatedresourcesandindependentfundingfor

newbusinessunitsduringfinancialforecastingandplanningcycles,sothatnewventurescanthrive

withoutbeingstifledbybroadertransformation

efforts.It’simportanttoresistthetemptationtopullbackfrominvestinginbusinessbuildingduring

downturns,astheseperiodscanprovide

opportunitiesforgrowth.Theroadmapcanhelp

teamsstayoncourse.Forexample,companies

thatcontinuedtoinvestinnewbusinessesduringthe2008–09economicdownturnsaw20percentmorerevenueandmorethan30percenthigher

EBITDAmarginsby2011,ascomparedwithpeersthatdidnot.

Theimplementationroadmapshouldalso

includethestrategicuseoffundsfreedupby

transformations.Theseshouldbedirectedtoward

Dualtransformation:Optimizingthecoreandbuildingnewbusinesses6

new-businessinitiativesorfurthertransformationalefforts,withfundingreleasedbasedonthe

achievementofspecificmilestonestomitigaterisk.

Strengthenthefunctional‘commonchassis’forlong-termgains

Leadersshoulddrawonsharedresources,suchascontractingcapabilitiesorITplatforms,thatcan

benefitboththenewbusinessandongoing

transformations.Theyshouldalsoidentifycapabilitiesrequiredforthenewbusiness,suchasinventory

managementandwarehousing,thendetermine

whichofthesecanbeadoptedfromthecore

business.Forinstance,acompanylaunchinganewsaleschannelforsmallenterprisesmayfinditmore

effectivetorecruitexternaltalentwithsmall-

businesscustomerexperience,ratherthandeployitsexistingsalesforce,whichisfocusedon

largeraccounts.

Oncetheappropriatecorecapabilitiesare

identified,leadersshouldensureresourcesmeetthedemandsofboththenewandexisting

businesses.Finally,leadersshouldassessany

remainingneedsofthenewbusinessthatthecorebusinesscannotfulfillduetogapsinskillsor

expertiseanddeterminethebestapproachtoaddressthesegaps,whetherthroughhiring,

third-partycontracts,partnerships,ormergersandacquisitions.

Putpeoplefrontandcenter

CEOsorothertopleadersshouldensurethatthetransformationandnew-businessbuildingaretopprioritiesforrelevantleadersandmanagersand

thattheiraspirationsandincentivesarealigned.

Theycandosobyarticulatingthevisionandlayingouttheroadmapforthetransformationand

businessbuild,thenappointindependentbut

closelylinkedleadersforboth.Itisimportanttoreinforcethiscultureofagility,innovation,and

collaborationearlyandoftentodrivemomentum;

withoutenergizingtheteams,buy-inandtransformationadoptionwillbedifficult.

Todrivethiscultureinacorebusiness

transformation,theorganizationshouldappointadedicated

chieftransformationofficer

(CTO),whowillberesponsibleformobilizingtheorganizationanddesigninganddrivingcultureandperformancemanagementthrougharigorousweeklycadence.TheCTOshouldbesupportedbyadedicated

transformationofficeteamwithsignificant

knowledgeandconnectionsintheorganization;inaddition,dedicationisrequiredfromkeycore

businessunitandfunctionalleaderswhotypicallyplaytheroleofsponsorsorworkstreamleads.

Businessbuildscanbeledbyadedicatednew-

ventureleaderwhoorchestratestheresourcesto

buildanewbusinessandisapeertotheCTO.

Talentforthenewbusinesscanbesourcedfrom

internalorexternalchannelstoformadedicated

teamwithminimalduplicationinrolesandturnover.

Establishaperformanceinfrastructure

Finally,agooddualreinventionhingesonrobust

infrastructure—onethatemphasizesaccountabil