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Strategy

When Your Business Needs a Second Growth Engine

by James Allen and Chris Zook

From the Magazine (May–June 2022)

Benedict Redgrove 

Traditionally, the most reliable way for a firm to find its next wave of

growth was to apply the capabilities of its core business in an adjacent market. But

recently a new pattern has begun to emerge. More firms are learning the art of

building large second cores—what...

In a series of forums we held recently with chief executives of

large companies around the world, we uncovered a preoccupation

with obsolescence and renewal. When we surveyed them, 65% of

the CEOs predicted that in five to seven years their firms’ main

competitors would be different from their main competitors

today, and 63% said that new competitors with new business

models would pose a major threat to their firms’ core business.

more

The CEOs projected that in the next decade 40% of the value their

companies created would come from entering new markets and

launching new business models. Clearly, the business landscape

feels highly unstable to them—which is understandable, given

that new technologies continue to upend industries and wipe out

businesses at a remarkable rate.

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The good news is that there has never been a better time for

companies to try to build new engines of profitable growth. We

are in the longest period of low interest rates in modern history.

Besides being cheap, money is abundant: One study by Bain &

Company estimated that global investment capital had tripled in

the past three decades and stood at 10 times global GDP. In

addition, high-growth industries today don’t require as much

investment as they once did; disruptive businesses can scale up

faster in size and power with less capital.

In the past the most reliable way for businesses to find their next

wave of growth was to mine their one or two strongest core

businesses and apply their most distinctive capabilities in

adjacent markets. Classic adjacency strategies included moves

into new geographies (IKEA’s launch of stores in China in 1998

and in India in 2018), new products (Apple’s entry into the

wearables business in 2015 with the Apple Watch, which now

outsells the entire Swiss watch industry), and new customer

segments (Porsche’s foray into the suburban family market in

2002 with an SUV line that now outsells its classic sports cars in

the United States by two to one). Many successful companies have

been propelled for decades by strategies based on adjacencies. We

estimate that in the past 30 years nearly 75% of the companies

that grew revenues and profits by at least 5.5% annually for 15

years or more did so by regularly adapting a repeatable business

model to related segments, applications, or product categories or

new geographies.

Yet recently, we have seen the success pattern begin to change.

More businesses with strong, growing cores are learning the art of

building large new cores—what we call engine twos. The top eight

value-creating companies in the world—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 as much as one-third of

the growth in the market value of large public companies could be

traced to the prospects of their engine twos.

To be sure, the old playbook of expanding from the core into

adjacencies will remain durable for many companies. But change

and disruption now happen so fast that it’s very difficult to be

certain that your company will be one of them. The risk of

inaction is high. In the past five years more than 60% of big public

companies have stalled out—experiencing a sudden large drop in

growth or shareholder returns—or faced threatening levels of

stagnation, underperforming their markets with low-single-digit

growth. According to our studies of stall-outs and other research,

after a large company experiences a downward trend in sales and

profits for 10 years, the chances that it will be reversed are less

than 20%.

That makes finding a successful second core an imperative. To

better understand what that involves, we identified more than

1,000 companies that exhibited features of engine twos. Out of

that set we built a database of 100 new initiatives that were

deemed to have the potential to contribute a major share of a

company’s future growth and were well-documented in company

filings and media reports. We also developed case analyses of

engine twos and distilled lessons from the 180 forums on growth

and business building we’ve held over the past three years, which

were attended by some 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 that often

had been started in response to perceived threats from an

insurgent competitor with a new business model, to a major shift

in customer purchasing patterns, or to rapid technological

advances that allowed companies to quickly create new offerings.

Examples of this form of new engine include the digital bank that

DBS founded alongside its traditional legacy bank, the digital

media business that the traditional German periodical publisher

Axel Springer shifted to, and the content-streaming service that

Netflix built next to its original DVD-by-mail core.

A second form, accounting for nearly half the successful engine

twos, involved moving into a market that historically was just

minimally related to the engine one business, drawing on the first

core’s assets and on new technologies. Consider the French

multinational Schneider Electric: Alongside its core as a provider

of heavy equipment for the transmission and distribution of

electrical power, it created a thriving software and services

business focused on energy management for factories and

businesses. Such engine twos almost always have the additional

benefit of strengthening the engine one and protecting it from

market shifts or competitive threats. As part of its move into

services, for instance, Schneider added internet capabilities to its

equipment, which enabled the company to monitor it and offer

customers invaluable “predictive maintenance” that prevented

disruptions. Eventually, connectivity to the cloud could allow

Schneider to shift to a new model in which it charges customers

for the amount of energy they use instead of selling them

equipment outright.

The third engine-two pattern, accounting for less than one-fifth of

success cases, involved building a brand-new business almost

completely unrelated to the engine one. Nearly all the examples

in this category followed a common formula: preemptively

making a major investment in a new technology, using current

corporate capabilities to leapfrog into a leadership position,

following up with additional heavy investments, and making

acquisitions to obtain needed capabilities or build scale quickly.

This was the path taken by the conglomerate Reliance, which

started out as a synthetic-fiber producer, eventually expanded

into oil and gas, and now is the most valuable company in India.

In 2016, Reliance drew on its capabilities in raising capital for

industrial projects, recruiting top management, and working

closely with government agencies to launch its engine two—Jio,

India’s first 4G mobile network—with an investment of $21

billion. It then spent an additional $15 billion to buy content and

data service providers such as the KaiOS phone operating system

and the music-streaming service Saavn. Today Jio is the leading

telecom company in India, with some 400 million wireless

subscribers and a 36% share of the market.

Benedict Redgrove spent 10 years photographing the magnitude and awe of NASA’s spacecraft and rockets and

other iconic objects of the agency for his book NASA: Past and Present Dreams of the Future.

In our research we saw that four foundational elements were

instrumental in the success of all three types of engine twos. They

should be viewed as essential criteria for any new core a

leadership team is contemplating entering at scale.

1. A Target Market with Large Profit Potential

Most successful engine-two businesses were in a market where

the profit pool—the total profits earned at all points along the

value chain—was sizable, rapidly expanding, or shifting. In more

than 80% of successes, revenues and profits were clearly expected

to rise faster in the engine two’s market than in the engine one’s.

Amazon Web Services (AWS) is the most dramatic and well-

documented example. By dominating the rapidly growing market

for cloud computing, AWS now consistently delivers more profits

than all the rest of Amazon does. (AWS has an operating margin of

about 30%.)

The most common success factor in building new core businesses

was a company’s ability to ride a technology adoption curve in

markets where the profit pools were large or shifting quickly

toward players with new forms of competitive advantage. More

than 60% of the engine twos we studied had business models

based on technology substitution (such as the insurer Ping An’s

online medical service Ping An Good Doctor) or technology

upgrades (such as Reliance’s Jio 4G network). This ability was also

critical to the success of next-generation versions of engine ones

(such as Philip Morris’s entry into smokeless products).

As these examples illustrate, successful second engines are often

built on exciting frontiers opened up by novel technologies.

Notably, we didn’t find any successful engine twos predicated on

consolidating competitors across a declining industry or on

acquiring and rejuvenating an underperforming leader in a

lagging industry.

2. A Proprietary Source of Competitive Advantage

Businesses make money by being sustainably different and better,

not just by pursuing growth. This is the cold truth of hot markets.

Most of the time, more than two-thirds of the profit pool in a

clearly defined competitive arena is captured by the top two

players, with the rest barely earning more than their cost of

capital. When we recently studied the distribution of economic

profits across a wide range of industries, we found that in many

the proportion was even more lopsided. The lesson is clear: If you

don’t possess or can’t see your way to developing a strong

competitive advantage that will be hard for others to replicate,

then think twice about pursuing an engine two.

This lesson was well understood by the management team of the

Belgian company Umicore, a global leader in the reclamation of

specialty metals, whose core business is two centuries old. Seeing

an opportunity in the advent of electric vehicles and clean energy,

the company started an engine two, Umicore Rechargeable

Battery Materials, to focus on the essential products for batteries

and catalysts. Because Umicore had years of experience working

with lithium, nickel, cobalt, and manganese, which are all used in

batteries for electric cars, and refining them into precise, high-

quality formulations, its leadership team was confident that it

could build a new business with a clear technical differentiation

and advantage. To fund the engine two, in 2017 the company

divested some older assets, including its zinc business, which had

begun with a mine granted by Napoléon Bonaparte in 1805. In

short order the engine two revenues eclipsed those of the

reclamation business and became a major source of growth.

Successful second engines are often built on exciting frontiers opened up by novel technologies.

In some cases the differentiated asset or capability of a successful

engine two was a product or service built to support the engine

one. Ant Group, now one of the top financial technology

companies in the world, began in 2004 when Jack Ma, the

founder of Alibaba, created a service called Alipay that online

shoppers could use to pay for purchases on his company’s e-

commerce sites. In 2011, seeing that the online payment market

was growing rapidly and that many adjacent markets were

forming around it, Ma spun off Alipay as a separate company.

Today it is the leading payment service provider in China, used by

more than 80% of Chinese consumers. Alipay’s differentiation

was not only its link to the Alibaba e-commerce businesses, which

fed it tens of millions of customers, but also its approach to the

market. Unlike other online payment methods—and thanks in

part to a conducive regulatory environment in China—Alipay

invested in service both to consumers and to vendors of all sizes

(in the form of data on their businesses and methods for lowering

financial risk). As a multisided platform, it has been able to tap

even larger opportunities for growth.

When an Engine Two Isn’t Right for You

We have argued that it makes sense for more

companies to consider building a second engine of

growth. This ...

Looking at Ant Group and at Umicore’s rechargeable battery

business, one might conclude that an engine two initiative can be

pursued only if all the elements necessary to create the new core

already exist in the engine one. That is not the case. We found that

only about one in four successful engine twos was built

organically end to end; the remaining three did a lot of

acquisitions to assemble the pieces needed to quickly scale up.

For engine twos that were next-generation versions of a core

business, we saw several patterns of acquisitions. One was a

“string of pearls.” Take the Danish company Ørsted. Originally

founded to extract offshore oil and gas resources in the Danish

sector of the North Sea, it decided to leverage its strong



government relationships and engineering capabilities to start a

renewable energy business. It bolstered this successful move by

buying a series of wind farms, quickly gaining scale. Today wind

energy accounts for more than two-thirds of the company’s

revenues and a much larger share of its value creation.

Another pattern was a “big bang” acquisition that formed a major

part of the new core and gave it significant market share, which

the buyer then worked to enhance. A dramatic example is Dell’s

$67 billion purchase of EMC, the leader in computer storage

software and equipment. Note that this is far different from the

“catch and kill” approach incumbents often use to squash

insurgent competitors by buying them only to shutter their

operations.

Acquisitions were also often used surgically to add assets and

capabilities and quickly magnify the power of an engine two that

had begun organically. A recent example of this is the founding of

Disney+ in 2019. This high-profile entry into the streaming

business was called the “highest priority” of Disney by former

CEO Bob Iger, who stepped down from that position and into the

executive chairman role to focus on creating this new core for the

company. (Iger retired at the end of 2021.) While Disney+ began

with a strong brand and a unique entertainment library, the

acquisition of the capabilities of BAMTech, a media-streaming

company, and the purchase of the content creator 21st Century

Fox were central to its strategy. The venture is off to an explosive

start and, if successful, will be the quintessential engine two,

expanding the audience for Disney’s content while increasing

follow-on sales of products based on its characters and shows—

the biggest profit generator of the Disney model.

Benedict Redgrove

The bottom line is that acquisitions were crucial to creating a

differentiated advantage in more than half of the successful

engine twos, either by enabling the quick formation of a new

growth core or by giving companies world-class technical

capabilities.

The first two criteria for a successful engine two—a robust profit

pool and the ability to form a differentiated core—are

fundamentally market-facing conditions. The second two

elements are quite dissimilar but no less important, and they

relate to the internal characteristics of the company.

3. An Entrepreneurial Mindset

Building a second growth engine requires a way of thinking that

doesn’t come naturally in large incumbents. In past research

(described in our book The Founder’s Mentality), we defined the

attributes of this mindset: a strong sense of insurgent mission, an

obsession with the front line, and an ownership attitude. We

found that companies that had those attributes accounted for 87%

of second engines that were home runs, 66% of those that

performed reasonably well, and just 12% of the failures. This

mindset emerged as the strongest of the four success factors in

our research.

How did companies with these traits overcome the bureaucracy

that drags down most large organizations? They didn’t have to.

Instead, they set up stand-alone engine-two units. For instance,

the Brazilian bank Bradesco’s digital venture, Next, was a separate

entity with its own target market of tech-forward customers,

culture, brand, and ways of working. Ørsted made each of its wind

farms an individual unit and gave the manager in charge the

latitude to shape the local culture and strategy, creating a “mini-

founder” experience. Jio was separated from Reliance and given a

capital structure that allowed outside investors to buy shares of it,

while still drawing on corporate assets that accelerated its growth.

The need to give start-up enterprises within a company freedom

is not a new concept. Robert Burgelman wrote about the

challenge of using assets from the original core to build new

businesses in his book Strategy Is Destiny, comparing the

established core to a creosote bush, which discharges sap to kill

any new plants that grow around it—an analogy first used by

former Intel CEO Craig Barrett. Clayton Christensen’s book The

Innovator’s Dilemma documented the many factors that prevent

companies from putting new ventures in separate units. What is

new is how many large companies are finally beginning to crack

the code by giving internal start-ups the ability to make decisions

independently, empowering their leaders with the incentives of

owners, and enabling faster, more-entrepreneurial ways of

innovating.

4. The Ability to Leverage the Scale and Assets of Engine One

It’s easy to focus on the disadvantages that large, often-

bureaucratic companies face in launching new businesses, but

incumbents have advantages too—primarily, not having to start

from scratch.

Ecolab, for instance, built a successful engine two in water

purification by drawing on the capabilities, channels, sales force,

and customers of its engine one. Founded in 1923 by a salesman

who noticed stains on his hotel carpet and created a cleaning

solution, Ecolab grew to be the leader in industrial cleaning

products and services and more than twice the size of its nearest

competitor.

But when the growth of Ecolab’s markets started slowing a decade

ago, its leadership looked for new opportunities and determined

that its customers’ greatest need would be securing access to

clean water. The company predicted that the water purification

market would require highly advanced technology and would

rapidly expand, presenting clear engine-two potential. Ecolab

jumped into the business in 2011 by acquiring Nalco, a leader in

industrial water purification.

Acquisitions were crucial to creating a differentiated advantage in more than half of the successful engine twos.

To fund more than a dozen acquisitions and equity investments

in water-purification-technology companies, Ecolab then sold off

its noncore assets in chemicals and energy. It also leveraged its

cleaning sales force and purification and antimicrobial

technologies to cross-sell water-treatment products and services

to its core customers. Since 2010, Ecolab’s revenue has climbed

from $6.8 billion to $11.8 billion, its enterprise value has increased

by a factor of five, and its stock market value has jumped 465%,

outperforming the overall stock market by more than 50%.

The sharing of capabilities, customer access, or distribution

systems between an established engine one and a fledgling engine

two doesn’t come naturally or happen on its own. Tensions and

trade-offs inevitably arise. The key is to anticipate some of them

early in the process, creating agreements that mitigate them in

advance. In addition, it’s critical to regularly hold a standing

group meeting, attended by leaders of each business and the CEO,

to resolve conflicts, remove bottlenecks quickly, and identify

further synergies.

The Power of Combining All Four Elements

Each of the success factors magnifies and reinforces the effects of

the others. The more potential the market and its profit pool

(element one) have, the more important it is to harness the assets

of the original core (element four) to capture share ahead of

competitors. The stronger the differentiation of your entry

strategy (element two), the more important it is to have an

entrepreneurial mindset (element three) in order to test that

differentiation and continually find ways to improve it, so you

can remain a step ahead of the competition.

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The combined power of all four elements can be seen in the

hypergrowth of the Covid-19 PCR testing division launched by

Thermo Fisher Scientific, which provides diagnostic, life sciences,

and laboratory products and pharmaceutical services. During the

pandemic the company built a new lab-based testing business

that went from producing zero tests to 10 million weekly in six

months. After only 10 months the new venture was on track to

account for 25% of company revenues. Thermo Fisher then

moved into rapid testing by acquiring Mesa Biotech, a small

maker of PCR testing devices for hospitals, physicians’ offices,

and urgent care clinics, and immediately scaled up its

manufacturing and commercial capabilities, increasing sales

volume for those products by 10 times in less than a year.

The company leveraged its engine one capabilities by shifting

nearly 1,000 employees to the new business—notably, more than

100 R&D scientists who were given new six-month contracts. It

promoted an entrepreneurial culture by temporarily walling that

workforce off with a companywide message: “The Covid teams

are doing something important for us and for the world. Please

leave them alone to do it.” The company also formed executive

teams devoted to slicing through bureaucracy, tossing out typical

finance-enforced spending limits and speeding the hiring of more

than 1,300 new employees, which doubled the division’s

workforce. Thermo Fisher’s long-term ambition? The leadership

position in testing in the world beyond the pandemic. Today the

business boasts more than 20 SKUs developed from its first Covid

test.

. . .

Engine two businesses are certainly not for every company or

every situation. However, the environment today is more

conducive to their success than it has ever been before. The

financial conditions are uniquely ideal. Market turbulence is

generating a burst of opportunities—as Thermo Fisher’s story

dramatically demonstrates. As digital technologies continue to

come of age, they’re unleashing new business models, redrawing

market boundaries, and shifting profit pools. And perhaps most

important of all, evolving management practices are making it

easier to foster entrepreneurship within incumbent corporations

and create the kind of flexible, innovative culture that will keep

them strong for years to come.

A version of this article appeared in the May–June 2022 issue of Harvard

Business Review.

James Allen is a partner in Bain & Company’s London office and a member of the firm’s global strategy practice. He is a co-author of a number of bestselling books including Profit from the Core and The Founder’s Mentality: How to Overcome the Predictable Crises of

JA

 

Growth (Harvard Business Review Press, June 2016).

Chris Zook is a partner in Bain & Company’s Boston office and has been a co-head of the firm’s global strategy practice for twenty years. He is a co-author of a number of bestselling books including Profit from the Core and The Founder’s Mentality: How to Overcome the Predictable Crises of Growth (Harvard Business Review Press, June 2016).

CZ

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