What every CEO needs to know about superstar companies

“…economic profit is distributed unequally along a power curve, with the top 10 percent of companies capturing 80 percent of positive economic profit….After adjusting for inflation, today’s superstar companies have 1.6 times more economic profit, on average, than the superstar companies of 20 years ago….. The middle 60 percent of companies record near-zero economic profit on average, showing how hard it can be to defy market forces. The bottom 10 percent destroy as much value as superstars create.We label companies in the top 10 percent as superstar companies…..As economic profits grow larger, so do economic losses at the other end of the distribution. The bottom 10 percent of companies destroy as much value as the top 10 percent create, and today’s bottom-decile companies have 1.5 times more economic loss, on average, than their counterparts of 20 years ago (Exhibit 1). That means for every company that creates economic value, there is another company that destroys economic value.Yet these value-destroying companies continue to survive, holding on to their resources for increasingly longer durations and continuing to attract capital. A growing number are turning into “zombie” companies, unable to generate enough cash flow even to sustain interest payments on their debts. The impact of these economic losses goes beyond these companies’ investors, managers, and workers: it drives down the returns for healthy companies that compete for the same resources or profits….For the vast majority of the world’s largest companies, those making up the middle 60 percent of the power curve, economic profit is hard to retain. They record near-zero economic profit, on average…..Superstar companies stand out for their size. Compared with median companies with annual revenues greater than $1 billion, superstar companies are seven times larger by revenue and capital investment (Exhibit 2). They are also productive, with 20 percent higher capital and labor productivity on average compared with median companies……Global economic data indicate that over the past 20 years, 70 percent of growth in GDP and gross surplus (an economic measure of profit) occurred in just five worldwide superstar activities: financial services, such as banking, credit, insurance, and asset management; internet-, media-, and softwareproduct development; pharmaceutical and medicalproduct development; professional services, such as R&D, management, and other high-skilled services; and real estate, rental, and leasing. Just two sectors of activity, financial services and real estate, account for about 45 percent of all the gains in gross surplus (Exhibit 3)….”

Sree Ramaswamy, Michael Birshan, James Manyika, Jacques Bughin, and Jonathan Woetzel, “What every CEO needs to know about ‘superstar’ companies,” McKinsey Global Institute, April 2019, https://www.mckinsey.com/featured-insights/innovation-and-growth/what-every-ceo-needs-to-know-about-superstar-companies