I recently spoke with the vice president of marketing at a New England technical firm who stated that his company has an effective process in place to identify and select appropriate business growth opportunities. I was excited to hear this, as I know this is rare. Now a recent McKinsey study confirms the rarity. It found that few companies actually increase their revenues by pursuing growth outside their core business, and uncovered 3 steps to overcome this challenge.
Companies that effectively scan, evaluate and integrate new non-core businesses are twice as likely to create significant value for their company, a McKinsey Global Study found.
Many try to expand beyond beyond their core business. Over the past five years, 75% of respondents have tried to grow in at least one area outside their core business and 14% more want or wanted non-core growth over the next five years. The majority view the growth as a long term opportunity, as well as a way to protect the core business.
Few succeed. Only one-third report their companies’ initiatives outside the core create more than 10% of today’s revenues. Those with more initiatives create more revenues. Yet only 35% of those with ten or more initiatives report more than a 10% increase in revenues. Mostly, respondents say diversification just created some value.
How can you succeed? Gaining success is deceptively simple. Companies need to utilize best practices for identifying new opportunities, selecting new opportunities and integrating the non-core business — and executives know they are struggling in these areas.
- Only 27% of respondents have all the best practices in place to scan for new business opportunities. Yet companies that successfully do this are 1.9 times as likely to create significant value from their biggest moves.
- Only 29% of companies have the best practices in place to evaluate new business opportunities. Those who do are 2.1 times as likely to create significant value from their biggest moves.
- Only 33% effectively integrate new opportunities into the existing business, and companies like this are twice as likely to create significant value from their biggest moves.
Interestingly, 55% of companies have the best practices for managing the new activities. The emphasis is placed correctly on this, as this provides the greatest reward – companies who implement effectively are 2.7 times more likely to gain significant value from their biggest moves.
Executive teams and boards are considered responsible for evaluating opportunities in the new categories. Most evaluating bodies agree that the new opportunities shouldn’t be too far from the main business. In fact, almost two-thirds of respondents require links between the new and existing business. However, beyond this, most evaluating bodies fall short.
How to create significant non-core value
Highlights for creating significant non-core value include:
- Scanning – Use a wide variety of sources to identify growth opportunities. 36% of companies say they do, and 23% say they don’t.
- Evaluating – Establish a clear process for evaluating new non-core opportunities. 37% say they do. 19% say they don’t.
- Integrating – Implement an institutionalized approach to and process for integrating non-core acquisitions. 42% say they do. 17% say they don’t.
For more help effectively growing outside your core business, contact PARTNERS. We are happy to help with scanning, evaluating and integrating non-core business activities for significant growth.
McKinsey study methodology: “The online survey was in the field from November 4 to November 14, 2014 and garnered responses from 1,143 executives at companies with annual revenues of $500 million or more, representing the full range of regions, industries, functional specialties, and tenures. Of them, 904 executives say their companies have either pursued or considered pursuing growth in a new product or service category, beyond their companies’ core business, in the past five years. To adjust for differences in response rates, the data are weighted by the contribution of each respondent’s nation to global GDP.”
Partners Creating Growth works with companies to realize their profitable opportunities. We have considerable experience in generating and selecting innovative ideas; developing and commercializing new products; and connecting to new markets. We offer coaching, strategic planning, market research and financing expertise worldwide to help organizations grow & disadvantaged regions thrive. Contact Tove Rasmussen @ 617-615-6419 or 207-409-7576 Email: Tove@PartnersCreatingGrowth.com
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