Although digital transformation is a foundation of modern business, established organizations often struggle with developing the new, customer-centric business models that are essential to successful transformation. For incumbents, especially large companies, innovation management involves simultaneously transforming corporate culture, digital technologies, and market strategies while maintaining existing revenue streams and processes.

The challenge for business leaders is going beyond traditional digital transformation strategy to address business model innovation: nurturing new approaches and creating an agile organizational culture while driving long-term success for the established business.

Ari Libarikian, a Senior Partner with McKinsey, explains that business-building is key to balancing long- and short-term goals:

“At McKinsey, digital transformation means 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 new business building, which really is stepping out of the core and creating something that didn't exist. 

We believe that it's a requirement for long-term success. If you look 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.”

Ari Libarikian is the global leader of Leap by McKinsey, McKinsey and Company’s business-building practice, as well as McKinsey’s digital and analytics work in the insurance sector. In these roles, he helps some of the world’s leading companies to find new value at the intersection of business, design, and technology.

In his work leading Leap, Ari helps organizations to develop holistic, well-structured approaches to business building, creating strong digital businesses by combining the experimental nature of start-ups with the operational excellence of corporations

Transcript

This transcript was lightly edited.

What is a Digital Business?

Michael KrigsmanWhat'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?

Ari LibarikianI'm good, Michael. How are you?

Michael Krigsman: I'm excellent. We're talking about digital business. What is a digital business?

Ari Libarikian: 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.

Michael Krigsman: For an established company, they're still selling their original set of products and services or is it something different?

Ari Libarikian: A lot of cases, 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.

Digital Transformation vs. Digital Business

Michael Krigsman: How is this different from digital transformation?

Ari Libarikian: 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.

Michael Krigsman: Why is it so important to build a digital business?

Ari Libarikian: Our belief, as McKinsey, is that it's a requirement for long-term success. If you look at 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.

Michael Krigsman: There are risks that are associated with not embracing this kind of digital business building.

Ari Libarikian: Mm-hmm.

Michael Krigsman: Tell us about that.

Ari Libarikian: 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.

What is McKinsey’s Strategy for Business Building?

Michael Krigsman: Ari, let's talk about the strategy of building a business. How does a company begin?

Ari Libarikian: 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.

Michael Krigsman: I would imagine developing the judgment, making the strategic decisions really can be a difficult challenge, especially for an established organization.

Ari Libarikian: 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"?

What is the Role of Company Culture in Business Transformation and Innovation?

Michael Krigsman: You mentioned culture earlier. That seems to be an important issue. Please, elaborate on that.

Ari Libarikian: 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.

How Should Business Leaders Use Business-Building to Transform Their Organizations?

Michael Krigsman: Based on your experience, what's the lifecycle of developing a business such as you've been describing?

Ari Libarikian: 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.

Michael Krigsman: Ari, can you give us an example of a company or an industry that has done this well?

Ari Libarikian: 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.

Advice for Business Leaders Running Established and Incumbent Organizations

Michael Krigsman: 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?

Ari Libarikian: 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.

Michael Krigsman: Ari Libarikian, Senior Partner at McKinsey & Company, thank you so much.

Ari Libarikian: Thank you, Michael.

This transcript was lightly edited.

What is a Digital Business?

Michael KrigsmanWhat'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?

Ari LibarikianI'm good, Michael. How are you?

Michael Krigsman: I'm excellent. We're talking about digital business. What is a digital business?

Ari Libarikian: 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.

Michael Krigsman: For an established company, they're still selling their original set of products and services or is it something different?

Ari Libarikian: A lot of cases, 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.

Digital Transformation vs. Digital Business

Michael Krigsman: How is this different from digital transformation?

Ari Libarikian: 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.

Michael Krigsman: Why is it so important to build a digital business?

Ari Libarikian: Our belief, as McKinsey, is that it's a requirement for long-term success. If you look at 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.

Michael Krigsman: There are risks that are associated with not embracing this kind of digital business building.

Ari Libarikian: Mm-hmm.

Michael Krigsman: Tell us about that.

Ari Libarikian: 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.

What is McKinsey’s Strategy for Business Building?

Michael Krigsman: Ari, let's talk about the strategy of building a business. How does a company begin?

Ari Libarikian: 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.

Michael Krigsman: I would imagine developing the judgment, making the strategic decisions really can be a difficult challenge, especially for an established organization.

Ari Libarikian: 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"?

What is the Role of Company Culture in Business Transformation and Innovation?

Michael Krigsman: You mentioned culture earlier. That seems to be an important issue. Please, elaborate on that.

Ari Libarikian: 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.

How Should Business Leaders Use Business-Building to Transform Their Organizations?

Michael Krigsman: Based on your experience, what's the lifecycle of developing a business such as you've been describing?

Ari Libarikian: 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.

Michael Krigsman: Ari, can you give us an example of a company or an industry that has done this well?

Ari Libarikian: 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.

Advice for Business Leaders Running Established and Incumbent Organizations

Michael Krigsman: 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?

Ari Libarikian: 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.

Michael Krigsman: Ari Libarikian, Senior Partner at McKinsey & Company, thank you so much.

Ari Libarikian: Thank you, Michael.