McKinsey Quarterly

Reflections on 20 years of McKinsey on Finance—and three challenges ahead

Revolutionary innovations, brilliant ideas, and climate imperatives will change everything—except the fundamentals of finance and economics.

This is the 20th anniversary of McKinsey on Finance—and the 80th issue. We released our first in the summer of 2001, when companies were still reeling from the dot-com crash—and only a few weeks before the world-shattering events of 9/11. 1

In the decades since, we’ve seen wars, financial crises, a global pandemic, a substantial decline in trust for some major institutions, and a heightened urgency about existential climate change. We’ve witnessed technological advances on an almost incomprehensible scale, millions of people lifted out of poverty, the dramatic rise of Asia, and stunning medical breakthroughs.

What will the next 20 years bring? One ignores the likelihood of immense changes at one’s peril. We don’t have a crystal ball. But we do have a compass: long-term value creation. 2 We’ve studied, been challenged about, sharpened our thinking on, and ultimately reinforced our appreciation of core economic and financial principles, particularly as they apply through very uncertain times.

Winston Churchill famously observed that “the longer you can look back, the farther you can look forward.” We might add, “and the more broadly you can see.” There are certainly a great many more challenges worth considering. In this article, we address three of the most pressing challenges for large companies: massive innovation, good ideas taken too far, and competitive advantage in the net-zero transition.

1. Investing in innovation: A lesson in creative destruction

The past 20 years have seen tremendous innovation in the real economy. Advances have been profound across sectors—and even created new ones. When we launched McKinsey on Finance, Alphabet, Amazon, Netflix, and Tencent were in their early days. Apple had not yet introduced the iPod, let alone the iPhone. Airbnb and Meta did not exist. Tesla was known, if at all, as a Serbian engineer.

In fact, well beyond the tech sector, innovations have added years to life, and life to years—and unleashed tremendous value. Life sciences companies continue to conceive of and introduce lifesaving medicines and therapies, sometimes at almost inconceivable speed (prominently so in the development of COVID-19 vaccines and therapies). In consumer packaged goods, to take food and beverages as just one example, we’ve seen healthier foods and more consumer choice, including new and popular waters, iced teas, and alcoholic beverages. Retailing has been upended by e-commerce. Automobiles are not only going electric but may someday be smart enough to drive themselves.

From an economy-wide perspective, it doesn’t matter where the innovation comes from; we all benefit. But from the perspective of big companies and their investors, it’s disappointing that so much innovation has come from outside company walls. Some large companies do follow through on building new businesses. Yet our colleagues have found that while 84 percent of CEOs believe that innovation is critical to growth, only 6 percent of CEOs are satisfied with their company’s innovation performance.

Loss aversion, bureaucracy, and organizational inertia can often make large corporations hit the brake on innovation. While bigger companies do create incentives for progress by purchasing innovations from smaller companies, this may be an inefficient use of capital: shareholders of large corporations can sometimes pay more for innovation than they would if they had funded it at the source. Sometimes, shareholders are left holding the bag as much more innovative companies leave traditional ones behind.

While 84 percent of CEOs believe that innovation is critical to growth, only 6 percent of CEOs are satisfied with their company’s innovation performance.

What has happened over the past two decades is a textbook illustration of Joseph Schumpeter’s creative destruction: if a business doesn’t disrupt itself, a more innovative business will disrupt it instead. We believe that large companies can be innovative, but only if they are willing to encourage risk taking and stop worrying so much about quarterly earnings. The future will not be decided in a quarter. The smartest investors know this, and our research shows that it’s these investors who drive share prices in the long term. 3 Although they pay attention to quarterly earnings for clues about a company’s future prospects, they don’t want companies to meet quarterly earnings at the expense of long-term health and growth.

There is no evidence that companies which consistently meet or beat consensus estimates are valued more highly than companies which fluctuate around the consensus. On the contrary: companies that play for the short term are more likely to lose ground over the longer term or to fail entirely. 4 Indeed, sustained growth without sufficient investment in innovation is incredibly hard to pull off. One recent study from our colleagues found that only about one in ten companies achieved higher revenue growth and profitability than their peers across a given decade-long cycle of economic downturn and prosperity.

2. Avoiding systemwide failure: When good ideas go bad

Innovation has, by and large, been a tremendous benefit for society, even though some industries have been adversely affected. External tragedies, on the other hand—as we have seen, for example, in the COVID-19 pandemic and the war in Ukraine—have the power to disrupt economies. But many sector- and economy-wide failures have been self-inflicted.

Poor economic outcomes have directly followed when good or well-intentioned business ideas were taken too far. In the past 20 years, three ideas in particular that were good in principle—until they clashed with the fundamentals of finance and economics—were responsible for major market losses and economic recessions.

The first idea was to move rapidly in a “new economy”: if companies can catch an early technological wave, positive results will follow. No doubt being an early mover can be a very good idea and can confer benefits such as network effects. But merely taking up space on a new frontier does not necessarily mean that a company can sustain (or even achieve) attractive returns on its cost of capital. It certainly does not mean that traditional value-creating principles will no longer apply or that the economics will eventually come through.

Merely taking up space on a new frontier does not necessarily mean that a company can sustain (or even achieve) attractive returns on its cost of capital.

In the late 19th century, for example, the United States experienced a railroad boom; tens of thousands of miles of track were laid, often with obvious and significant redundancies. Investors and entrepreneurs put growth in this new technology first: Why miss out? It was a period of fund and fund, build and build—until it all went bust in 1894, ushering in a major economic depression. Of course, the bust did not result in the end of railroads. On the contrary: visionary thinkers went on to run the smarter, more rationalized railways that unleashed massive growth across the economy in the early 20th century. These thinkers understood the railroad business, recognized the levers of value creation, and could more clearly see and capture the possibilities.

History repeats, or at least rhymes, as the internet and the dot-com bubble show. We remember the mantra that the World Wide Web would “change everything.” As the market in the late 1990s and early 2000 became increasingly frothy, very smart people confidently asserted that the rules of economics and finance had changed. The popular 1999 book Information Rules, by Carl Shapiro and Hal Varian, describes how some companies can earn increasing returns to scale. As these companies get bigger, the book explains, they earn higher margins and returns on capital. The authors also specifically described how rare it is for companies to realize efficiencies in this way.

But new-economy proponents—some may not have read the book at all—touted a winner-take-all world, where staking out a place in the ether was all that mattered. This simplistic view imagined that the laws of economics were suspended. The zeitgeist, fueled by sky-high valuations, led some companies to create and expand dot-com businesses at all costs. Many investors and managers lost sight of the fundamentals. 5 This was a bubble doomed to pop.

After it did, the internet, like railroads more than a century before, became a source of enormous, and far more enduring, value creation—and an enabler of broader economic growth. Successful entrepreneurs did the hard, detail-oriented work of analyzing the specific circumstances in which enormous value creation was possible. These entrepreneurs created value-sustaining businesses, which generated returns far above their cost of capital.

A second idea that can be taken too far is that size alone provides a competitive advantage. Of course, size matters—but only if size befits a company’s business model. Regrettably, the idea that size is an end in itself has occurred across industries, geographies, and eras. One illustration is electric-power generation in the United States. In the late 1990s, as a number of states deregulated power generation, multiple US electric-utility companies spun off their power generation units so they could raise more capital and grow faster. They were spurred on by some who argued that the biggest power generators would create the most value. Some companies pursued more thoughtful strategies than others. But several companies, in their rush for size, ended up with a diverse collection of power plants across the United States—and sometimes across the globe—with few strategic benefits (and a large pile of debt). The rush for size also contributed to overcapacity in the industry as a whole. Overcapacity and commodity price changes led to lower returns for power producers. Some large producers, especially those without coherent strategies and competitive advantages, as well as with high debt levels, ended up in bankruptcy.

A third idea that was good until taken too far—with significant repercussions for millions of people—was securitizing mortgage debt. Bundling individual mortgage loans, turning them into securities, and then selling the securities to investors was certainly innovative. But the practice was taken to such an extreme that it led to the financial crisis of 2008. Many have focused on what could have been done to mitigate the crisis once it started. History has shown, though, that most financial crises are caused by imbalances in the allocation of economic resources. Once the imbalances become too large, it can be exceptionally difficult to avert a collapse.

By 2005–06, a financial crisis was virtually inevitable. Banks, enabled by their ability to package and sell mortgage-backed securities, were lending too much money to too many people, who were buying too many houses. Mortgages, including a rising number of subprime mortgages, could be repaid only if property prices continued to rise at abnormal rates for an unsustainably long time. Also, when mortgage-backed bonds were first issued, the buyers were sophisticated investors who spent considerable effort analyzing the underlying portfolios. As the bonds became more popular, however, they were purchased by less sophisticated investors who did not do their own research; many relied on bond-rating agencies. These agencies were in competition with one another and were paid by the issuers of the mortgage-backed bonds. They were thus under tremendous pressure to give the bonds high credit ratings. Other investors relied, too, on the fact that the mortgages were being pooled—normally, a way to mitigate risk. Bad mortgages, though, are still bad mortgages. Bundling them together, selling them to less diligent investors, and relying on home prices to rise forever reaped the whirlwind.

Of course, innovation can’t come from “the same old ideas.” Questions about how far is too far are bound to arise, at least initially. New theories are already shedding light on the disruptive potential of block­chain (including its use in cryptocurrencies) and the ways that businesses could be transformed in the metaverse. Another idea now in contention is the sustainability of low interest rates and the attendant risks of inflation. After the 2008 financial crisis, and again after the magnitude of the COVID-19 pandemic became clear, central banks pushed down interest rates through various mechanisms, including purchasing large amounts of government bonds. This has allowed governments to borrow vast sums of money at very low rates, which not surprisingly has led to an upsurge of spending and larger government deficits.

The question today is whether lower interest rates—even given the recent rise—will be the new normal, enabling governments to run larger deficits. One side argues that the world has changed: central banks can keep interest rates relatively low, so governments can keep borrowing to finance initiatives such as social spending and climate action. The other side argues that once government debt rises too high, it’s almost impossible to contain inflation, especially when borrowing is facilitated by central banks printing money. Both ground their hypotheses in economics; the future will have the final say.

3. Competing under climate change: Capital is not enough

A third major development of the past 20 years is the sharpening awareness of climate change and the dramatic shifts this has brought to regulation, capital allocation, and consumer behavior. Climate change threatens the world. It creates enormous challenges—and tackling it opens up enormous opportunities. Across industries and sectors, climate change is a clarion call for innovation and for the reallocation of resources. Our colleagues at the McKinsey Global Institute estimate that to achieve net-zero emissions by 2050, $9.2 trillion in annual average spending on physical assets—$3.5 trillion more than today—would be required.

Entrepreneurs and companies that seek to create value from less carbon-intensive businesses, however, will need a competitive advantage; simply having capital to invest or reallocate will not be enough to compete and win in a net-zero world. Today, private equity, venture capital, pension funds, and sovereign-wealth funds are investing billions of dollars in renewable energy, alternative fuels, carbon capture, and new technological solutions. It is not a foregone conclusion that a company from a traditional industry will have the expertise, incentives, employee capabilities, and organizational agility to be in the vanguard in these fields. Companies that plan to compete in the net-zero transition must figure out how they can be the visionaries that best understand the new businesses, rather than be the followers that don’t have a well-considered strategy, or the ones who entirely ignore the imperative to change.

Companies that seek to create value from less carbon-intensive businesses will need a competitive advantage; simply having capital to invest or reallocate will not be enough.

As the economy shifts from fossil fuels to renewables and other sources of energy, companies in sectors such as oil and gas, chemicals, and mining should think carefully about how to manage the decline of their traditional businesses. Moving away from their core businesses requires careful consideration of the impact for stakeholders and a thoughtful approach to navigating through challenging competitive forces. If, after frank consideration, companies determine that they cannot reinvest their excess cash flows in technologies in which they can have a competitive advantage, they can release that unused cash back to their investors. In that way, the money can flow to those who do have a competitive advantage in new value-creating low-carbon solutions.

The complexities and the possibilities of the net-zero transition are enormous. They are not so enormous, however, as to bend the laws of finance and economics. Forgetting core principles of competitive advantage and the need to earn returns above the cost of capital bodes ill for the sustainability of companies, the livelihoods of their employees, the investors (on behalf of millions of people) whose funds are at risk, and a multitude of constituencies worldwide.


It would be simplistic to say that enormous challenges lie before us, even when those challenges include developing innovation from within, comprehending new ideas, and navigating businesses through existential climate change. It is more correct to recognize that those challenges are already here. Fortunately, so too are the time-proven principles of finance and economics—including the need to pursue change relentlessly, the imperative to seek competitive advantage, and the foundational requirement to understand one’s business in order to create value, societal as well as economic, from the opportunities for sustainable, inclusive growth.

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