Global success these days is more spectacular, but that success comes at a steep price for everyone else, according to new research from the McKinsey and Company’s McKinsey Global Institute.
Profits are becoming much more concentrated among the few and the trend has grown worse in the last two decades.
McKinsey calls it the “superstar” effect but also hints at a darker interpretation – the growing concentration of economic success.
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In a new online paper called, “Whatever CEO needs to know about superstar companies” authors Sree Ramaswamy, Michael Birshan, James Manyika, Jacques Bughin, and Jonathan Woetzel write, “We are also struck by the fact that the superstar phenomenon … can be observed not just among companies but also in other aspects of the global economy, such as cities and sectors of economic activity.”
The researchers say they analysed 5,750 of the world’s largest public and private companies who between them account for almost two-thirds of the world’s global pre-tax EBITDA and they identified superstars by creating a metric based on multiplying a company’s invested capital by the return it achieved above its weighted cost of capital.
On doing this they found the fruits of success were very unevenly distributed along what they describe as a power curve with the top 10 per cent of performers hoovering up 80 per cent of the positive economic profit. The top one per cent took a whopping 36 per cent of the prize for themselves.
Among the top performers; global banks and manufacturers, well known Western consumer brands and not surprisingly, fast growth US and Chinese technology firms.
As always success is its own reward. Not only are these superstars taking all the profits, they are also, “…among the world’s most sought-after employers, most valuable brands, and most valuable equity listings.”
On the flip side reality if brutal for the losers. The bottom 10 per cent of companies destroy as much value as the top 10 per cent create.
“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.”
And in the middle? Everyone is getting squeezed and finding it harder to hold onto profits, and often they are forced to trade away their unique advantages just to stay in the game because of growing competition.
The report also found that 70 per cent of the growth in GDP and gross surplus occurred in just five worldwide superstar activities: financial services, internet, pharmaceuticals, professionals services, and property.
The study also reinforced earlier research which suggested that sector or geography contributes an outsized contribution to the economic success of a company.