Why intangibles are the key to faster growth in Europe

Globally, high-growth companies invest more in intangibles, such as brand, skills, and knowledge. European companies could fuel greater growth with the same strategy.

Key takeaways

  • Globally, investment in intangible assets—such as intellectual property, research, technology, software, and human capital—has risen steadily. Regardless of the sector, companies that invest more in intangibles grow revenues 6.7 times faster.
  • Low-growth European companies could boost growth by investing more in intangibles. They currently invest only 1.4 percent of revenue, less than a quarter the rate of their high-growth peers.
  • Both high- and low-growth European companies underinvest in digital and analytics, presenting a powerful opportunity for proactive companies to seize the advantages these assets offer.

Sidebar

Intangible assets play an increasingly vital role in the knowledge economy and have become integral to corporate growth. Over a quarter century, companies in the United States and Europe have shifted their investment mix toward these assets. Intangible spending, as measured by gross fixed capital formation, rose from 31 percent of all investments in 1995 to 40 percent in 2019 (Exhibit 1). Over the same time, these economies achieved 63 percent growth in gross value added (GVA).

The investment mix has shifted toward intangibles over the past 25 years.
We strive to provide individuals with disabilities equal access to our website. If you would like information about this content we will be happy to work with you. Please email us at: McKinsey_Website_Accessibility@mckinsey.com

Our research—based on a survey of more than 860 executives from North America, Europe, and Asia and sector data from the INTAN-Invest database—shows a positive correlation between investing in intangibles and total factor productivity growth. 1 Globally, high-growth companies invest 2.6 times more in intangible assets (as a proportion of total revenues) than low-growth peers. 2 (High-growth companies are those in the top quartile for revenue growth in their sector, while low-growth companies are in the bottom half.)

This investment paid off. High-growth companies’ median growth globally was 20 percent, compared with 3 percent for low-growth companies (Exhibit 2). This link between growth and investment in intangible assets is persistent. It exists in Europe and globally, regardless of industry sector, and is mainly consistent among countries despite the many factors influencing growth.

High-growth companies invest 2.6 times more in intangibles and grow 6.7 times faster.
We strive to provide individuals with disabilities equal access to our website. If you would like information about this content we will be happy to work with you. Please email us at: McKinsey_Website_Accessibility@mckinsey.com

In Europe itself, the gap in intangibles investment between high- and low-growth companies was particularly large (Exhibit 3). European low-growth companies invested 1.4 percent of revenues in intangibles, below the global and North American 3 rates. In contrast, European high-growth companies invested 4.4 times as much in intangibles (6.2 percent of revenues). These data suggest that many European low-growth companies would benefit from committing a more significant proportion of their revenues to intangible investments.

The gap in intangibles investment between high- and low-growth companies is higher in Europe (4.4 times) than globally (2.6 times).
We strive to provide individuals with disabilities equal access to our website. If you would like information about this content we will be happy to work with you. Please email us at: McKinsey_Website_Accessibility@mckinsey.com

Five areas to prioritize

Our research compared how companies prioritized their intangible investments across five broad areas: brand, innovation, organizational capabilities, ecosystems and partnerships, and digital and analytics. Low-growth companies could improve their performance and revenue growth by aligning priorities with those of their high-growth peers.

High-growth companies placed the most significant emphasis on brand (Exhibit 4). On average, 36 percent of European high-growth companies invested in modern advanced brand capabilities, compared to only 23 percent of low-growth companies. The second-highest priority was innovation (28 percent for high-growth companies versus 18 percent for low-growth peers), followed by organizational capabilities (26 percent versus 22 percent), and ecosystems and partnerships (26 percent versus 21 percent).

European high-growth companies prioritize brand capital; digital and analytics presents the greatest opportunity.
We strive to provide individuals with disabilities equal access to our website. If you would like information about this content we will be happy to work with you. Please email us at: McKinsey_Website_Accessibility@mckinsey.com

European companies assigned the lowest importance to digital and analytics (DnA). Only about one in five companies from the high- and low-growth cohorts alike said they could develop new digital functionality in days or could ingest data and run analytics in real time. The apparent low attainment of DnA capabilities among European companies presents an opportunity, given the potentially powerful advantages these assets provide. In the innovation-driven services sector, DnA capital has been key to delivering disproportionate growth. The sector invests 6.4 percent in DnA capital versus 1.8 percent for all other sectors. Additionally, digital and analytics is a crucial driver of the performance gap between high- and low-growth companies in telecommunications, media, and technology, with high-growth companies investing 5.9 times more than low-growth companies.

Where to invest

In addition to the five broad categories, the research explores high- versus low-growth companies’ commitment to discreet intangible-asset capabilities to determine which are linked with high growth. They include real-time analytics, creative campaigns, and systems for evaluating investment targets. 4

Twelve capabilities were prioritized by at least a third of high-growth companies, which typically pursued them far more frequently (1.2–2.6 times ) than their low-growth peers (Exhibit 5). The gap was particularly notable for high-growth companies’ top priority—personalized customer experiences—which 50 percent of high-growth companies had implemented, compared with only 19 percent of low-growth companies.

At least a third of high-growth companies prioritized twelve key intangible capabilities.
We strive to provide individuals with disabilities equal access to our website. If you would like information about this content we will be happy to work with you. Please email us at: McKinsey_Website_Accessibility@mckinsey.com

High-growth companies pursued four other capabilities at least twice as frequently. They were more than 2.5 times more likely to create a unique value proposition for talent (35 percent versus 13 percent) and to have a rigorous process for measuring R&D and design impact (35 percent versus 14 percent). They were roughly twice as likely to allocate marketing expenditures in real time to the most effective channels (33 percent versus 15 percent) and to personalize experiences at a granular level (33 percent versus 17 percent). These significant discrepancies—particularly personalization—could explain why top performers grow more quickly. Companies that do not already pursue these key capabilities may benefit from evaluating whether they should.

Our empirical research shows that outperformers innovate beyond their core business to achieve their growth aspirations. Those that expand into adjacent industries or segments are 20 percent more likely to achieve greater growth than their peers. In addition, they unlock the next wave of growth by harnessing advanced analytics to identify new growth pockets, drive profitability, and cement their competitive advantages. Forty-two percent said, “Our organization is constantly searching for and investing in disruptive innovation opportunities.”

Although our research concluded that intangible assets are engines of corporate and economic growth, we found that there is no one-size-fits-all set of capabilities in which a majority of European high-growth companies invest. Instead, the optimal mix varies depending on the company, sector, and competition. Top performers assess their attributes and choose the best initiatives that serve their customers, markets, and growth needs.

Customizing the intangible mix

Naturally, investing in intangible assets is not the only driver of success. Making the most of high-value, high-impact intangible assets requires the right mindset, distinctive capabilities, and concrete actions to execute fast growth.

Our research on 4,000 companies over the past 15 years shows that outperformers tend to have a similarly steady and constant focus on these growth imperatives: expanding the core, innovating into adjacencies, and igniting breakout growth. But success starts with an explicit growth ambition and mindset, combined with decisive action.

The role of policymakers

While businesses should take the initiative to target and invest in intangible assets, policymakers also play a vital role. Without intervention, revenue gaps between high- and low-growth companies can expand due to the multiplier effect. Companies that invest in intangibles could grow faster, enabling them to invest even more on both proportional and absolute bases, worsening the divide between leaders and laggards. This could increasingly concentrate power and wealth, put challengers at a disadvantage, and stifle innovation.

Policymakers can fight this trend by creating an environment supportive of companies that embrace disruptive ideas and take entrepreneurial risks. Policy initiatives can promote the reskilling and upskilling essential to competing in a knowledge economy. They can incentivize investment in intangibles that will drive overall economic growth and help laggards compete.

Decisive steps for businesses

To drive growth, executives can invest aggressively in multiple categories of intangibles. European high-growth companies are reaping the rewards of investing more in intangibles. Given the fourfold gap in intangible investment rates and the nearly sevenfold gap in growth, low-growth companies would benefit from increasing their commitment to these assets. Moreover, our research shows that the most robust growth occurs when companies invest in different categories of intangibles simultaneously. Even among companies in the top quartile for growth, those investing in five intangible categories grew twice as fast as those investing in two or less.

In addition to pursuing the right intangibles, companies can develop enabling capabilities. A retailer used this approach to improve productivity by 20 percent within five years and achieved sustained increases in sales and margin. The company developed a top-down workforce demand-and-supply model, activating three levers: innovation, DnA, and human and relational capital. To reach its target, the company mapped out more than 20 emerging roles and upskilled more than 1,000 employees.

In another example, a telecom operator’s executive committee set bold aspirations to unlock growth opportunities by upskilling and developing innovation capabilities within IT operations. After investing in human capital and DnA, the company transformed itself into a legacy-free, digital-native organization. Results included 20 percent greater efficiency in digital operations, a tenfold faster time to market, improved quality of new offerings, and sustained growth.

Keeping an eye on how others in the ecosystem invest in intangibles can accelerate growth. Growth leaders—who generate 80 percent more shareholder value over a ten-year period—typically scan peers to understand what makes them successful. Companies could give special consideration to the capabilities European high-growth companies have prioritized. Additionally, committing to digital and analytics could be attractive since companies are underinvesting in this category. Regardless of a company’s growth rate, it could benefit from assessing whether it is neglecting intangible capabilities that are prioritized by its high-growth peers and then considering whether more significant efforts in these areas would add value.

To achieve long-term growth, prioritizing human capital is paramount. Value in a modern enterprise is primarily tied to people, more so than to other intangible assets or buildings and equipment. A company that hires and cultivates the best talent will have a durable edge, regardless of how business conditions change. Other intangible assets are important, but they are more ephemeral.

Being intentional about determining which capabilities best serve your needs can ensure that intangibles investment is well targeted. Maturity and competition vary. In countries and sectors where investment levels in intangibles are not high, the potential to grow more quickly through these assets is particularly accessible—if executives optimize the capabilities they target. Companies can develop capabilities that create a competitive advantage by thinking hard about how intangibles are deployed.

While many other factors contribute, intangible assets have become key drivers of growth and value creation for companies worldwide. By understanding and investing in the intangibles that will best serve their company’s growth goals, European businesses can compete more successfully in the new economy, help them unlock sustainable growth, and create economic value. As intangibles become more critical than ever, leaders who are prepared to make the right investments can ensure that their organizations leverage these assets to their full potential.

Explore a career with us

Related Articles