BUSINESS SPECIAL... ‘Superstars’: The dynamics of firms, sectors, and cities leading the global economy PART I

‘Superstars’: The dynamics of firms, sectors, and cities leading the global economy PART I

Is there a superstar effect? McKinsey Global Institute research uncovers the dynamics of superstar firms, sectors, and cities in the global economy.

There is much discussion about “superstar” firms and “superstar effects” in reaction to the rapid growth of very large global companies. This has been accompanied by a growing body of research examining various aspects and drivers of superstar effects in the economy. Yet questions remain, and much of the evidence is still inconclusive as well as incomplete. Our research aims to fill some of the empirical and data gaps, take a global perspective, and examine the issue beyond just firms.

We assess the extent to which a superstar effect can be observed in the global economy in three arenas—firms, sectors, and cities—and inspect the dynamics, including churn and changing characteristics, in each of these arenas. We also examine what characteristics, similarities, differences, and linkages can be observed across firms, sectors, and cities and what economic effects and questions they raise for further research. At the same time, we draw some preliminary implications for leaders.

We find superstars exist not only among firms but among sectors and cities as well, although the trend is most evident among cities and firms. Relative to peers, superstars share several common characteristics. In addition to capturing a greater share of income and pulling away from peers, superstars exhibit relatively higher levels of digitization; greater labor skill and innovation intensity; more connections to global flows of trade, finance, and services; and more intangible assets than do their peers. Yet there are some variations. We find a higher churn rate among superstar firms compared to cities, indicating higher levels of persistence among superstar cities.

1. We focus on economic profit for firms and extend our analysis to cities and sectors of economic activity

Although a variety of definitions exist, we define superstar to mean a firm, sector, or city that has a substantially greater share of income than peers and is pulling away from those peers over time.

For firms, our metric is economic profit, a measure of a firm’s invested capital multiplied by its return above the cost of capital. We focus on economic profit rather than revenue size, market share, or productivity growth because these other metrics have a risk of including firms that are simply large and might not create economic value.

For sectors, our metric includes gross value added and gross operating surplus accruing to various types of activities (such as production, sales, and services) that cut across business establishments such as factories, laboratories, and retail stores. In part, a sector perspective provides an indication of the size of superstar profits in relation to the entire economy—at $3.5 trillion in pretax earnings, superstar firms’ earnings represent 13 to 15 percent of the entire global pool of economic surplus and 22 to 25 percent of all corporate earnings worldwide.

For cities, our metric includes GDP and personal income per capita. These measures allow us to discover which economic activities are becoming more valuable over time, where the benefits flow, and what linkages exist, if any, among sector activities and superstar firms and cities.

2. The dynamics of firms

For firms, we analyze nearly 6,000 of the world’s largest public and private firms, each with annual revenues greater than $1 billion, that together make up 65 percent of global corporate pretax earnings. In this group, economic profit is distributed along a power curve, with the top 10 percent of firms capturing 80 percent of economic profit among companies with annual revenues greater than $1 billion. We label companies in this top 10 percent as superstar firms.

The middle 80 percent of firms record near-zero economic profit in aggregate, while the bottom 10 percent destroys as much value as the top 10 percent creates. The top 1 percent by economic profit, the highest economic-value-creating firms in our sample, account for 36 percent of all economic profit for companies with annual revenues greater than $1 billion.

Over the past 20 years, the gap between superstar firms and median firms—and also between the bottom 10 percent of firms and median firms—has widened. Today’s superstar firms have 1.6 times more economic profit on average than superstar firms 20 years ago. Today’s bottom-decile firms have 1.5 times more economic loss on average than their counterparts 20 years ago, with one-fifth of them (a growing share) unable to generate enough pretax earnings to sustain interest payments on their debt. The growth of economic profit at the top end of the distribution is thus mirrored at the bottom end by growing and increasingly persistent economic losses, suggesting that in addition to firm-specific dynamics, a broader macroeconomic dynamic might be at work.

Superstar firms continue to be displaced from the top 10 percent and the top 1 percent. Indeed, some firms have risen from the bottom 10 percent to higher deciles—a few all the way to the top 10 percent. In each of the past two decades (corresponding to a business cycle), nearly 50 percent of all superstar firms fell out of the top 10 percent during the business cycle, and when they fell, 40 percent fell to the bottom 10 percent.

The top 1 percent is also contestable, with two-thirds being new entrants to this top rank in the latest cycle. There is also some variation by sector and geography. Superstar firms from emerging economies, for instance, have a higher churn rate of 60 percent compared to 40 percent for firms from developed economies.

Overall, after adjusting for the growth of M&A activity since the 1990s, we find no evidence of an economy-wide reduction in churn over time. In other words, contestability has remained about the same.

Superstar firms are diverse and getting more so over time. They come from all regions and sectors and include global banks and manufacturingcompanies, long-standing Western consumer brands, and fast-growing US and Chinese tech firms.

The sector and geographic diversity of firms in the top 10 percent and the top 1 percent by economic profit is greater today than 20 years ago. The 575 superstar firms in our analysis exhibit widely acknowledged markers of successful firms: they include 315 of the world’s 500 largest firms by market capitalization, 230 of the world’s 500 most valuable brands, 188 of the world’s 500 best employers (as rated by their employees), and 53 of the world’s 100 most innovative companies.

CONTINUES IN PART II