What's the next step beyond digital transformation?
For many large organizations, it's building a new business within the established company.
We're speaking with Ari Libarikian who is a senior partner with McKinsey & Company.
Hey, Ari.
How are you?
I'm good, Michael.
How are you?
I'm excellent.
We're talking about digital business.
What is a digital business?
In this era, customers are expecting more and more technologically enabled services.
They want to go online and buy stuff.
A digital business is basically a business that's centered around technology, both in
the construction of the product as well as delivery and the service of the product.
The experience for the customers ends up being typically faster, cheaper, more seamless,
and easier because it's accessible everywhere and it's much more user-friendly.
For an established company, they're still selling their original set of products and
services or is it something different?
A lot of cases, what they do is, they leverage some of the intelligence and experience they
have in the core company, but they leverage that into a digital business and they build
something that looks completely different, ground up, to serve customers.
How is this different from digital transformation?
At McKinsey, when we talk about digital transformation, we talk about two things at the highest level:
transforming the core, which is taking what we do today and leveraging technology to do
it better, faster, cheaper, more effectively; and we talk about new business building, which
really is stepping out of the core and creating something that didn't exist.
Typically, that business building is a much more radical step out for companies because
the executives who are very good at running a large company, some of them, many of them
don't have the experience of building something and scaling it.
Why is it so important to build a digital business?
Our belief, as McKinsey, is that it's a requirement for long-term success.
If you at the Fortune 20 companies today versus the list 20 years ago, it's almost entirely
different.
Every company on the list today has regenerated itself through business-building or was a
startup a few years ago and has scaled massively.
There are risks that are associated with not embracing this kind of digital business building.
Mm-hmm.
Tell us about that.
The obvious risk is viability and long-term success is put at risk.
A lot of industries are being disrupted by startups, by venture capital and private equity-backed
companies.
The risk is if incumbents today don't think about business building and reinventing themselves
that way, they could be out of business or, at a minimum, not as successful as they today,
just in a few years.
Ari, let's talk about the strategy of building a business.
How does a company begin?
It is a tough process and primarily because most companies don't have the capability or
the muscle to do this.
The first step is always grounding this new business idea in what is the value; imagining
into the future what might be best for the customer and defining the market opportunity
that way.
Also, answering the question, "Why us?"
We always say at McKinsey, "As an incumbent, it's important to figure out what is your
unfair advantage to building this business?"
Once you have that view of the strategy, then you move into what we call an MVP or minimum
viable product stage where you don't go ahead and build this big thing on day one, but you
build a small version of it.
You build a first version of it.
It typically takes two, three, four months.
You start to test it with customers.
You start to get real-time feedback from customers to complement your strategic analysis.
Then it's all about scaling.
In scaling, you start to think more about what are the types of talent we need to hire
at scale.
These typically involve new skillsets that incumbents don't have as much of.
Data scientists, engineers, designers, agile coaches, scrum masters: you go down the list.
You start to hire them pretty quickly and at scale all the while, by the way, keeping
a light connection back into the mothership, into the incumbent because, again, you don't
want to lose the value built up in the incumbent.
There's data.
There are assets.
There are good people, and you want to selectively pull some of those in.
I say selectively because if you pull too much in, you bring a lot of the culture in
and that's not a great thing.
I would imagine developing the judgment, making the strategic decisions really can be a difficult
challenge, especially for an established organization.
It is very difficult.
You run into a lot of governance challenges.
How do you make decisions on how much money?
In a given year, there's a certain pot of capital.
As the CEO, how much money do you put into the core business, which has been your bread
and butter for many years?
How much do you put into the new business?
If you're under cost pressures and you're looking to reduce budget, how do you think
about the core business versus this new business which, by the way, may take a year or two
or more to prove itself out?
How do you think about your best people and where they should be?
How do you avoid creating an environment where both sides are looking at each other and saying,
"Well, you know, we're better than them"?
You mentioned culture earlier.
That seems to be an important issue.
Please, elaborate on that.
Culture is, in my view, the most important issue here.
A great culture in a company that knows how to build something ground up will eventually
land on a great idea and scale a great business.
When I say culture, I mean what's the way of working.
What type of people are you hiring?
How are you learning from mistakes?
Are you blending different functions together?
One of the exciting things you see in successful new businesses is, you see a designer with
a technologist with a businessperson with a marketer with legal and compliance, all
of them together every day, engaging in rapid conversation.
They all have the mindset of how do we push this thing forward quickly.
Based on your experience, what's the lifecycle of developing a business such as you've been
describing?
At McKinsey, we have a practice called Leap by McKinsey.
That is our business building practice.
We've built over 200 businesses over the last few years.
Our experience has shown us that there are a few steps here.
I won't get into it in great detail but let me just give you the highlights.
The first is grounding in the strategic framework.
We're not building a business because we like shiny objects.
We're building a business because there's a real value opportunity and market opportunity
here; we're going to pursue that; being clear on that.
Then you get into building the MVP and starting to pilot this thing.
Build something small, make sure it works, and get real customer feedback from that.
As you do that, start to build a team around it, all the different skill sets we've talked
about, and then you start to scale from there.
You say, "If this kernel is working, what does a bigger version of this look like?"
Eventually, you get to a stage when this is a thriving business and you're asking the
question, "What is the strategic end state?" as we talked about earlier.
Do we merge it with the mothership?
Do we take over the mothership?
Do we keep it separate?
Do we spin it off?
At that point, there's a series of strategic options.
Ari, can you give us an example of a company or an industry that has done this well?
A few months ago, many of you would have seen the news that a couple of tech giants made
investments in the pharmaceutical industry in the United States.
They made a couple of acquisitions.
Well, that sent shockwaves through the industry.
A health services company, one of the leading ones, approached us, approached Leap by McKinsey,
and asked for help in, how do I stay competitive and stay successful in this new world which
seems like it's going digital pretty quickly because we've noticed these tech giants?
We helped them envision a fully digital business that allows customers to buy, order, and get
delivered to their house their pharmaceutical medication in under two hours.
Over the course of nine months, we helped them imagine this business, frame up the opportunity,
size it, define the customer journeys that matter.
Then build a tech architecture, do an MVP, show that it works, and scale from there.
By the end of that period, they had three products defined and they were on their way
to scaling to the point where I think they were targeting several million customers having
their prescriptions filled through this digital business in a couple of years.
Ari, as we finish up, what advice do you have to business leaders and incumbents who are
listening to this and saying, "Yes, we need to look at this"?
What advice do you have?
How do they start?
The first thing I would say is, you're exactly right.
As I said earlier, this is a requirement.
It's not a luxury anymore, so definitely look at it.
In terms of advice, I would say the first is to ground in business ideas.
Running towards a business built for the sake of a business build is not a smart thing to
do.
Running towards a business build because there is a customer and market opportunity that
you understand and you have numbers around, projections around, and you've engaged a team
on is a great way to get started.
The second piece of advice is, understand that there's a capability build.
There is something you need to learn how to do or hire into the company that may not exist
today.
That's hard work.
Taking what you've done already and just trying to repurpose it is not a great recipe or not
a great approach.
The third thing I would say is, how you measure and evaluate this thing is really important.
Measuring it on P&L too soon is a high-risk approach.
Thinking about and leveraging some of the new talent you have to figure out how do you
think about success in month 3, month 6, month 9, month 12, different from year 3 or year
6, and having a clear view of the leeway you're going to give the new business build and having
a clear view for what success really looks like after a year or what have you is really
important.
I would say, go into all of that eyes wide open to give this thing the best chance of
success and scaling.
Ari Libarikian, Senior Partner at McKinsey & Company, thank you so much.
Thank you, Michael.