Intensifying competitive pressures and a tougher operating environment could put a damper on future corporate profit growth. And with each passing year, there will be more companies fighting for a smaller slice of the pie, writes James Manyika on LinkedIn.
For the past three decades, multinational companies have been profiting handsomely from market expansion and declining costs. From 1980 to 2013, global revenues nearly doubled in real terms—and the biggest corporations more than tripled their earnings before interest and taxes. Thanks to sharp declines in statutory corporate tax rates and borrowing costs, net incomes after interest and taxes rose fivefold.
Companies from advanced economies still earn more than two-thirds of global profits. Those from North American and Western Europe are the world’s most profitable, and the after-tax profits of US companies are at their highest level as a share of national income since 1929. The biggest firms have been the biggest winners. In fact, among the world’s public companies, just 10 percent of firms account for 80 percent of profits.
But MGI’s recent research report warns that this unprecedented run may be ending. Intensifying competitive pressures and a tougher operating environment could put a damper on future corporate profit growth. And with each passing year, there will be more companies fighting for a smaller slice of the pie.
In the past decade, a growing wave of competition has become a tsunami. There are twice as many multinational firms active today as in 1990, and most of that growth has occurred since 2000. Corporate performance is becoming steadily more subject to sharp swings, and M&A deals are rapidly changing the roster of top players in many industries. The rise of emerging economies has fueled formidable new competitors. Between 1980 and 2000, emerging-market companies accounted for a relatively steady 5 percent of the Fortune 500. By 2013, their share had risen to 26 percent. Many of them now have the global reach to take on industry-leading firms that may have held comfortable market positions for decades.
But nothing has super-charged the competitive dynamic quite like the technology sector. By building powerful digital platforms and networks, the most successful tech companies have created a model that allows them to scale up to unprecedented size. while driving their marginal costs to almost zero. They can add millions of users and transactions at very little cost, all while capturing potentially valuable consumer data.
Tech companies have also demonstrated the ability to make lightning-fast moves into new sectors—often to the delight of consumers and users, who flock to these new offerings for convenience, simplicity, or even free services. But the incumbents in these industries are often caught flat-footed by digital challengers who may not be burdened with heavy capital costs. Skype, for instance, shifted some $37 billion to consumers in 2013 alone. And the competition from tech players does not only come from the big names.
And the tech giants themselves are not the only threat. The biggest e-commerce marketplaces, such as Amazon, Alibaba, and eBay, give thousands of small and medium-sized firms the resources and global reach to go head-to-head with much bigger names.
The rules of the game are changing, but incumbents can take a page from their competitors’ playbook. The new tech and tech-enabled disruptors take advantage of large network effects because their platforms are designed to attract participation. They know that the user experience drives engagement and adoption, so they stress the importance of excellent design and a customer-focused mindset. Analytics are at the heart of creating a personalized experience and capturing valuable data that can create a stronger digital balance sheet. Tech companies are building teams with sophisticated capabilities and turning to M&A as a strategic weapon to acquire critical assets and stake out new market positions quickly.
The most formidable technology-powered companies are continuously inventing, experimenting, and taking risks—and incumbents will have to do the same if they hope to survive and thrive in this hypercompetitive new world.
After a 30-year period of stellar growth, the decade ahead is shaping up to be much tougher and more volatile for global corporations. But there are still plenty of markets to capture as consumption continues to rise in the emerging world and technology creates new products and services. Traditional businesses need the vision to spot these opportunities—and the aggressiveness to outmaneuver a new breed of lean, fast-moving new competitors.
This article originally ran in LinkedIn.