As economic profits grow larger, so do economic losses at the other end of the distribution; the vast majority of the world’s largest companies (the middle 60 pct of the power curve), record near-zero economic profit, on average

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

The superstar effect is real

The distribution of economic profit along the power curve has gotten more skewed over the past 20 years. 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. It is not just economic profit that qualifies these companies as superstars: they are among the world’s most sought-after employers, most valuable brands, and most valuable equity listings.

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 (June 2017: https://www.oecd-ilibrary.org/economics/the-walking-dead_180d80ad-en), 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. For these companies, market forces are powerful constraints on creating and retaining value, forcing them to compete away whatever advantages they may have in the marketplace. For the average company, the skew of economic profit means that it becomes relatively more painful to be in the middle of the pack, and strategy becomes even more relevant.

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 (June 2017: https://www.oecd-ilibrary.org/economics/the-walking-dead_180d80ad-en), 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.