Navigating the Future: Building New Engines of Growth in an Unstable Business Landscape
A common concern emerged in recent forums with chief executives from large global companies: the fear of becoming obsolete and the need for continuous renewal. Our survey revealed that 65% of these CEOs believe their main competitors will change within five to seven years, and 63% foresee significant threats from new competitors with innovative business models. They anticipate that within the next decade, 40% of their companies' value will come from entering new markets and launching new business models. This sense of instability is understandable, given the rapid technological advancements that disrupt industries and displace businesses at an unprecedented rate.
However, there is a silver lining: now is an excellent time for companies to pursue new profitable growth engines. We are experiencing the most extended period of low interest rates in modern history, making capital cheap and abundant. A study by Bain & Company estimated that global investment capital has tripled over the past three decades and is now ten times the global GDP. Additionally, high-growth industries today require less investment than in the past, allowing disruptive businesses to scale rapidly with less capital.
Traditionally, businesses achieved growth by leveraging their most robust core capabilities and applying them to adjacent markets. Classic adjacency strategies included expanding into new geographies (such as IKEA’s expansion into China in 1998 and India in 2018), new products (like Apple’s entry into the wearables market in 2015 with the Apple Watch), and new customer segments (Porsche’s foray into the SUV market in 2002). Many successful companies have thrived for decades by adapting a repeatable business model to new opportunities. Over the past 30 years, nearly 75% of companies that grew revenues and profits by at least 5.5% annually for 15 years or more did so by regularly adapting their business model to new opportunities.
However, the success pattern is changing. More businesses with intense, growing cores are learning to build large new cores—what we call "engine twos." The top eight value-creating companies globally—Amazon, Google, Apple, Microsoft, Tencent, Ping An, Reliance, and Samsung—have aggressively channeled their capabilities and cash flow into developing new cores. From 2008 to 2018, one-third of the growth in the market value of large public companies was attributed to the prospects of their engine twos.
The traditional playbook of expanding from the core into adjacencies remains valid for many companies. Yet, the pace of change and disruption is so rapid that it's challenging to be sure your company will remain successful. The risk of inaction is high. Over 60% of large public companies in the past five years have experienced significant growth slowdowns or stagnation, underperforming their markets. According to our studies, after a large company experiences a downward trend in sales and profits for ten years, the chances of reversal are less than 20%.
Thus, finding a thriving second core is crucial. To better understand this process, we identified over 1,000 companies with features of engine twos and created a database of 100 new initiatives that had the potential to drive future growth. We also developed case analyses of engine twos and distilled lessons from 180 forums on growth and business building, attended by 3,000 CEOs in 35 countries.
Three distinct archetypes of successful engine twos emerged. About a third were next-generation versions of original core businesses or engine ones. These were separate units often started in response to perceived threats from insurgent competitors with new business models, shifts in customer purchasing patterns, or rapid technological advances. Examples include the digital bank DBS founded alongside its traditional bank, Axel Springer’s shift to digital media, and Netflix’s transition from DVD rentals to streaming.
Nearly half of the successful engine twos involved moving into markets historically unrelated to the core business, leveraging new technologies. For instance, Schneider Electric, traditionally a provider of heavy equipment for electrical power transmission, created a software and services business focused on energy management. Such engine twos often strengthen and protect the original core business. Schneider added internet capabilities to its equipment, enabling predictive maintenance and potentially shifting to a model where customers are charged based on energy usage.
The third engine-two pattern, accounting for less than one-fifth of success cases, involved building entirely new businesses unrelated to the core. These ventures often involved significant investments in new technologies, leveraging corporate capabilities to achieve leadership positions quickly. Reliance, initially a synthetic fiber producer, expanded into oil and gas and launched Jio, India’s first 4G mobile network. Reliance invested $21 billion to launch Jio and an additional $15 billion to acquire content and data service providers, making Jio the leading telecom company in India with 400 million subscribers.
Our research identified four foundational elements crucial for the success of all three types of engine twos:
1. A Target Market with Large Profit Potential: The most successful engine twos were in markets where profit pools were sizable, rapidly expanding, or shifting. For instance, Amazon Web Services (AWS) dominates the rapidly growing cloud computing market, consistently delivering high profits.
2. A Proprietary Source of Competitive Advantage: Successful businesses make money by being sustainably different and better. Umicore, a global leader in specialty metals reclamation, leveraged its expertise to enter the electric vehicle market with Umicore Rechargeable Battery Materials, building a differentiated business based on technical know-how.
3. An Entrepreneurial Mindset: Building a second growth engine requires a mindset not typical in large incumbents. Companies like Ørsted and Jio created separate units for their new ventures, allowing them to operate with the agility and independence of startups.
4. The Ability to Leverage the Scale and Assets of Engine One: Incumbents can use their existing capabilities, channels, and customer bases to support new ventures. Ecolab leveraged its industrial cleaning expertise to enter the water purification market, acquiring Nalco and cross-selling to its core customers.
Combining these elements can significantly enhance the chances of success for new ventures. For example, Thermo Fisher Scientific leveraged its existing capabilities to scale its Covid-19 PCR testing division rapidly, achieving significant growth.
While engine two businesses are unsuitable for every company or situation, the current environment is more conducive to their success than ever. Financial conditions are ideal, market turbulence creates new opportunities, and digital technologies enable new business models and shift profit pools. Most importantly, evolving management practices foster entrepreneurship within large corporations, helping them create flexible, innovative cultures that ensure long-term success.
