The Covid-19 crisis has intensified existing trends, widening the gap between those at the top and bottom of the power curve of economic profit. Will your strategy keep you ahead of the accelerated pace of change?
The fault lines between industries and business models that we understood intellectually before the COVID-19 crisis have now become giant fissures, separating the old reality from the new one. Just as an earthquake produces a sudden release of pent-up force, the economic shock set off by the pandemic has accelerated and intensified trends that were already underway. The result is a dramatic widening of the gap between those at the top and the bottom of the power curve of economic profit1 —the winners and losers in the global corporate-performance race.
Along with the accelerated pace of change, however, comes a unique opportunity to unlock big strategic moves. Our research found that companies that pursued big strategic moves persistently, through every phase of the economic cycle, increased their odds of outperforming their peers. Much of the organizational inertia that usually stands in the way of unlocking these big moves is now gone, as the crisis has rendered obsolete the budgets and personal targets that make such moves so hard to achieve.
Mind the gap
To understand how the COVID-19 crisis is shifting profit pools, we have used changes in market capitalization to calculate market-implied longterm economic profit for the largest companies globally.2 While the question of whether share prices are a fair reflection of our new reality is open to debate, we aren’t as interested in the overall market-capitalization levels as in the patterns emerging among companies and industries. And those patterns are meaningful, consistent across measurement periods and with our clients’ experience, and very different from what we saw during the global financial crisis of 2008–09.
Our analysis reveals that the gap in economic profit between the top corporate performers and everyone else has widened dramatically. In effect, the crisis has accelerated a trend that was already present (Exhibit 1). Between December 2018 and May 2020, the top quintile of companies grew its total market-implied annual economic profit by $335 billion, while companies in the bottom quintile lost a staggering $303 billion. And while the specific numbers can fluctuate from day to day, the larger trend is unmistakable: a gap is opening up, and it’s rapidly expanding. That’s a pattern that has been evident since 2010. Now, the COVID-19 pandemic is pushing it to entirely new levels.
Read more at https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-great-acceleration?cid=other-eml-alt-mip-mck&hlkid=33f92356dad34cd3a14c8e964310e224&hctky=1277356&hdpid=d9cf6b8a-1d54-4d03-8b7b-be32198560be
- McKinsey & Co - Chris Bradley, Martin Hirt, Sara Hudson, Nicholas Northcote, and Sven Smit