The strategic yardstick you cant afford to ignore.pdf

At first blush, “beating the market” might sound like an expression better suited to investing or financial management than to busi- ness strategy. When you think about it, though, overcoming the profit- depleting effects of market forces is the essence of good strategy— what separates winners from losers, headline makers from also-rans.1 A focus on the presence, absence, or possibility of market-beating value creation should therefore help transform any discussion of strategy from something vague and conceptual into something specific and concrete. While there are many indicators of market-beating strategies, in our experience economic profit (EP)—what’s left over after subtracting the cost of capital from net operating profit—is highly revealing. Using this lens, individual companies can take a hard-boiled look at the effectiveness of their strategies. Recently, we undertook a large- scale analysis of economic profit for nearly 3,000 large nonfinancial companies in McKinsey’s proprietary corporate-performance database.2 That effort enabled us to test some deeply held truths and distill generalizable lessons about what it takes to win consistently. The strategic yardstick you can’t afford to ignore A systematic scan of the economic-profit performance of nearly 3,000 global companies yields fresh insight about where and how to compete. Chris Bradley, Angus Dawson, and Sven Smit 1 For more, see Chris Bradley, Martin Hirt, and Sven Smit, “Have you tested your strategy lately?,” McKinsey Quarterly, January 2011, . 2 For technical details on the calculation of economic profit, including its relationship with the key drivers of corporate value (ROIC and growth), see chapter six and appendix A of Marc Goedhart, Tim Koller, and David Wessels, Valuation: Measuring and Managing the Value of Companies, fifth edition, Hoboken, NJ: John Wiley Sons, 2010. O C T O B E R 2 0 1 3 2For example, we saw that the corporate world, like the world beyond