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Sustainable Advantage in Corporate Performance —
9 Out of 20,000+

George B. Weathersby

Chairman & CEO, Genesys Solutions, LLC

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McKinsey and Company recently published their study of the sustainable advantage of corporate performance, which they entitled. "The elusive goal of corporate outperformance" (McKinsey Quarterly, April 2007). They started with over 20,000 companies globally for which they had ten years of performance data. By comparing the performance in rolling five-year intervals in each of seventeen industries for the period of 1994 through 2004, among large corporations (>$5 Billion revenue in 2004), McKinsey identified 138 superior performers. Among these superior performers over the past decade, 30 demonstrated superior revenue growth, 99 demonstrated superior growth in profitability, and 9 demonstrated superior growth in both revenue and profitability. The evidence is that sustainable, exceptional performance is very rare and conventional wisdom concludes that it must be difficult to achieve.

McKinsey went to the next step to analyze why the nine (or the 138) actually achieved superior performance. They could not identify any management actions that could explain the difference in performance. They did identify two characteristics of outperforming corporations that they argued may have some impact. The first characteristic is the use of acquisitions and divestitures to fuel growth in revenue and profitability. For the outperforming corporations, less than 20% made any acquisitions and among the remaining 80% very few of their acquisitions were large (exceeding 30% of their market capitalization in the year preceding the acquisition). Most outperforming corporations achieved superior growth in revenue and profitability without engaging in significant acquisitions. The second characteristic was the ratio of intangible to tangible assets within each corporation. The outperforming corporation was recognized for its intangible assets at market values reflecting multiples of two to four times its tangible assets. These multiples were over twice their industry comparables.

While McKinsey has not measured the "ability to execute" of the companies in its data base, Genesys has measured the ability to execute of over 300 business units and based on these empirical results would offer the following interpretation for outperforming corporations. The 138 superior performing corporations all demonstrated a market-leading ability to execute over a decade--they produced exceptional results in sustainable growth in revenue (30 corporations), in sustainable growth in profits (99 corporations) and in both (9 corporations). Most acquisitions fail to meet their financial objectives. It is not surprising that the consistently outperforming corporations are those that have honed their execution skills on their core businesses and have kept their focus on their core business without any (or any large) acquisitions. Over time the capital markets recognize companies that are able to execute well and their market values are rewarded not only because of patents and proprietary market positions but primarily because of successful management systems that enable ordinary people to consistently produce extraordinary results.

Leaders today who want to join the list of the nine global firms with sustained exceptional outperformance would do well to focus on their firm's ability to execute. While other factors are always significant (e.g., their industry or the nation in which they are based) among the aspects of their performance which can be impacted through leadership, the most likely path to achieving sustained outperformance is through improving the ability to execute throughout their corporation. Exceptional execution creates sustained value.

In our experience, any organization can significantly improve its ability to execute in a relatively short period of time and without significant costs. We have assisted many firms to accelerate and improve their performance with reduced risk and would welcome the opportunity to discuss with you how we might work together to create sustained outperformance in your organization.