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Introducing a new growth model

To flourish, new businesses require a tailored, light-touch governance and operating model tied closely to the very top of the organization. This structure calls for support from a dedicated unit with specific business-building/entrepreneurial talent (sales, growth hacking), tech talent (software engineers, DevSecOps engineers, data engineers, and data scientists), and product talent (product owners, designers) to achieve the sole purpose of maximizing the odds of success by balancing risk with execution speed.

A number of leading companies have achieved this balance by developing a growth engine that incorporates the necessary flexibility and scalability to propel innovation, from conception to a multibillion-dollar business, for multiple ventures simultaneously (see sidebar “bp Launchpad”). The growth engine is a separate entity from the parent company and focuses support along three phases of growth (Exhibit 2).

Phase one: Foundation

For an early-stage product or business looking for a market, the growth engine takes on a dual role. First, it implements in new ventures best practices that lay the necessary foundation for growth. Second, it establishes strong financial discipline: project leads must validate a business’s potential under a constrained-funding scenario, which focuses leaders on the items that are most critical for their project’s success.

To achieve these objectives, parent companies must vet new entrants and take them on only if they meet criteria for being “ready.” That means the product must be ready for testing and have a leader capable of steering the project through its first six to 18 months, similar to the standard for seed-level venture investing.

Once promising ideas have been screened, the growth engine acts as an incubator. It supports the project by offering guidance on best practices and hands-on delivery muscle (for example, rapid design-driven prototyping) to begin testing the product in the market. As well-defined success milestones (adoption, customer-acquisition costs) are passed one by one, funding is gradually increased until the business has validated its potential for hyperscaling.

Phase two: Scale-up

The challenge now shifts from establishing first signs of traction (the “zero to one” stage) to rapidly scaling the business (the “one to ten” stage). As the venture enters this scale-up phase, the capital requirements grow exponentially. Consequently, the growth engine should confirm several elements before beginning rapid acceleration:

  • The market’s appetite and the venture’s scaling potential must be validated based on customer-oriented key performance indicators (KPIs) such as revenue, number of users, or value created.

  • The unit economics and business model must either already be profitable or demonstrate a clear pathway to profitability.

  • Last, and most important, a leadership team capable of steering the team through rapid growth must be in place.

Once a venture is judged to be scale-ready, the growth engine shifts its support to operate as a “scale-up factory.” It deploys relevant experts who have experience in achieving scale, such as developing targeted marketing programs or managing scale-up operations. The growth engine also works with the venture to take advantage of its parent company’s advantages, such as providing leverage in negotiations with key vendors, building distribution networks, or accessing the senior levels of potential B2B customers.

Phase three: Strategic growth

In this phase, the relatively mature venture no longer needs hands-on support. The growth engine shifts to a strategic role both on the venture’s board and as a lead player in either helping the business reintegrate into the parent company or maximizing returns through exit.

As new ventures move from hypergrowth to relative maturity, executives can verify a venture’s readiness for reintegration or exit along two fronts. First, it has graduated from the growth phase of typically triple digits annually to the high double digits. Second, the new business is or will be a material contributor to bottom-line earnings. For integration into the parent company, ventures must consider two dimensions:

  • Strategic alignment with the parent company. In some cases, integrating a growth business into the parent requires a willing disruption or replacement of legacy business. For example, a financial-services institution that launches a fast-growing digital-banking venture might gain an advantage by folding the incumbent into the digital venture’s brand.

  • Impact on future revenue. Moving too quickly on this front, though tempting, carries the risk that increased governance and short-term pressure to deliver profits will cost the parent company a larger contribution from future potential returns

Article has been taken from McKinsey&Co please see the original article below:


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