Nordic champions: The value creation formula at the cusp of a new era

| Article

This article is the third in a series on Nordic champions and builds on insights from the first article, “Bold moves to forge Nordic champions.” In the first article, we found that Nordic companies lack growth and an ability to create new global champions. In the second article, “Playing offense to create Nordic sustainability champions,” we outlined how Nordic companies are uniquely positioned to lead the world in combating climate change, potentially creating a Nordic Silicon Valley of sustainability. This article seeks to bring a refreshed 2023 perspective to understand the underlying mechanisms of how Nordic companies generate value that increases the presence of new Nordic champions.

For decades, the Nordic countries have embodied societies in which equality, happiness, and environmental consciousness reign supreme. Indeed, Denmark, Finland, Norway, and Sweden have consistently been ranked among the happiest countries in the world in recent years.1 Despite these countries not being as widely known for their global business competitiveness, recent McKinsey research reveals that they should be.

Though they represent only 1.3 percent of the global GDP, Nordic countries defy their size and yield outsize economic profit and market value while taking a leading position within the green transition. Over the past two decades, Nordic companies have outperformed their global peers on value creation, delivering an average annual TSR of 11.6 percent, surpassing the global average of 9.4 percent as well as averages in the United States (10.3 percent), Asia (9.4 percent), and Europe (7.6 percent).

But the story is nuanced. Despite this outsize value creation and shareholder profits, Nordic companies are slightly trailing global peers in terms of growth over the past 20 years.

We analyzed 311 Nordic firms spanning 11 industries, drawn from a sample of the world’s top 10,000 public and private companies.2 We discovered not only what’s driving these companies’ successes but also how they might reach even greater heights, spurring growth and generating a host of new Nordic champions.

Why Nordic companies create more value and generate a higher return to shareholders than global peers

Nordics’ TSR has consistently outpaced peers’ over the past two decades, though the past five years have seen a significant acceleration of this trend (Exhibit 1). Our research found a few reasons for this.

Nordic companies have outperformed global peers on TSR for decades—especially in the past five years.

Favorable sector exposure and sector-leading performance spur outsize returns

We find that the foundation of Nordic companies’ outsize returns lies in the combination of two distinct elements (Exhibit 2).

Favorable sector exposure and sector-leading performance contribute to Nordic companies’ TSR overperformance.

Favorable sector exposure. This measures the region’s concentration in sectors with higher returns; it contributes 20 percent of the TSR difference from the global average. The favorable Nordic sector exposure is mainly driven by the increasingly important healthcare sector (which, from an economic profit point of view, has been one of the most attractive industries over the past 20 years) but also by the broader industrial sector. Today, healthcare and industrial companies make up about 45 percent of total market capitalization of public companies in the Nordics.

Sector-leading performance. This measures the extent that businesses outcompete their sector peers on returns; sector-leading performance accounts for 80 percent of the TSR difference from their global sector peers. Nordic companies’ outsize returns are driven by their ability to differentiate and take more-niche, high-margin positions in their respective industries (more than 45 percent of Nordic companies are leaders in gross margin in their sectors). Exhibit 3 breaks down TSR into different components: the “steady state,” which is the TSR if no company improvements occurred; performance improvements (either operational or capital efficiency); and the change in market expectations. Our research indicates that the main drivers for Nordic businesses’ outperformance are performance improvements spurred by higher margin expansion than global peers, whereas the Nordics’ sales growth has trailed that of global peers.

Margin expansion plays a key role in Nordic companies' sector-leading performance.

The outperformance is not limited to a single sector but is evident in eight out of 11 sectors (Exhibit 4). The two largest sectors based on total market capitalization in the Nordics are the industrial and financial sectors. In these sectors, the Nordic region consistently delivers shareholder returns well above the global median. In the third-largest sector, healthcare, the region ranks comfortably within the top 25 percent of companies. Conversely, the Nordic region faces challenges in the IT sector, lagging other regions. This discrepancy contributes to a decline in the sector’s relative market capitalization over the past 20 years.

Compared with the rest of Europe and the United States, the Nordics have above-median TSR in eight out of 11 industries.

Four structural factors also contribute to the Nordics’ outperformance

Outperformance is driven by a number of underlying structural factors. We have identified four dimensions in which Nordic companies distinguish themselves from their global peers:

They are leaders on differentiation. Nordic companies are renowned for their emphasis on differentiation, which translates into sector-leading returns on sales. This distinctive trait allows them to secure prevalent, high-margin positions within their niche markets, bolstering their financial performance and delivering superior returns to shareholders. Interestingly, more than 35 percent of Nordic companies excel as sector leaders when it comes to gross margin (45 percent for public companies), underscoring their prioritization of differentiation over sheer scale. The margin expansion has historically played a pivotal role, contributing to approximately 30 percent of total shareholder return. It’s worth noting that while Nordic companies excel in margin expansion, there is room for improvement in overall operating productivity, measured by SG&A margin, compared with their global peers.

They have long-term orientation. Nordic companies invest for long-term differentiation through higher R&D spending, as evident from about 80 percent of Nordic companies outpacing sector peers. This holds especially true in R&D-intensive sectors. The long-term orientation can be partly explained by the ownership structure, in which about 80 percent of top Nordic companies have long-term ownership, surpassing about 60 percent in Europe and about 20 percent in the United States, allowing for a long-term orientation that fosters stability, sustainable practices, and investments in innovation. The strong performance indicates that the long-term ownership and presence of strategic investors has a positive value-creating effect on Nordic performance. This might hold in certain industries where long-term investment and stable trends are present (such as healthcare and heavy industrials). We also see that the Nordic companies have been unable to sustain presence in fast-moving sectors such as the technology sector.

They are leading on digital and sustainability. Nordic companies are leading the adoption of digital technologies, with 10 to 15 percent higher adoption rates compared with European peers, fostering top-tier digital maturity in the region across industries.3 Propelling the high adoption rates are an extensive use of digital public services and a leading proportion of the population with basic digital skills. Additionally, Nordic companies are committed to sustainability: they are overrepresented in global climate tech champions—companies that deliver a disproportionately high degree of economic profit—compared with GDP (two times their fair share), and their Science Based Targets initiative (SBTi) goals are 3.5 times higher than the global average representation. Nordics’ agility to invest in new trends is supported by 5 to 10 percent higher workforce participation in training and reskilling than the European average.4

They exhibit higher resilience than global peers. In a period characterized by rising uncertainty and a tense geopolitical climate, operational stability and supply chain resilience are poised to emerge as crucial differentiating factors for companies and pivotal investment criteria for discerning investors. Over the course of the past two decades, Nordic companies have exemplified a noteworthy track record of resilience, displaying lower volatility in eight out of ten sectors when measured by ROIC. This stability is particularly pronounced in capital-intensive domains, such as industrials and materials, which is underpinned by the region’s robust trade ties with the European Union, which account for roughly 75 percent of the Nordic region’s exports.5

The Nordic paradox: Why superior performance doesn’t equal superior growth

Despite all the above, Nordic companies are slightly trailing some global peers in terms of revenue growth since 2002 (Exhibit 5).

Despite their outsize TSR, Nordic companies have trailed the global average in revenue growth since 2002.

The lack of growth has resulted in the Nordics growing fewer global champions. We have identified a few underlying trends that can help us understand the lack of growth in Nordic companies:

Exposure to countries with lower structural growth. Nordic countries are more exposed to countries with lower structural growth than their peers are. The United States, for instance, enjoys growth exposure that is roughly 30 percent higher than the Nordic average and is driven by robust, higher domestic GDP growth and export ties to burgeoning economies in Asia and Africa.

Less investment in growth. Nordic companies are investing less in growth measured by invested capital than global peers are. Specifically, the Nordics invest comparably less in capital expenditure in seven out of 11 industries. This stands in contrast to the region’s long-term orientation toward investing in R&D.

Failure to expand beyond their core. Nordic companies have historically struggled to keep pace with emerging trends beyond their core areas. Just 17 percent of the companies in our sample have prioritized and successfully expanded into fast-growing new regions—a far cry from the 53 percent seen in the United States. Moreover, a mere 2 percent of Nordic companies have managed substantial growth in adjacent business areas, compared with 17 percent of US companies. While Nordic firms are as active on M&A, including programmatic M&A, as their global counterparts, they could harness M&A to an even greater extent as a lever for growth and exposure to high-growth areas and markets.

Several high-profile, highly profitable companies have emerged from the Nordics in recent years. And these companies have spurred much of the growth that we see. This surge has largely been in the climate tech sector, where the Nordics boast a remarkable 2.4 times overrepresentation compared with GDP.6Playing offense to create Nordic sustainability champions,” McKinsey, September 1, 2022. But to flourish in an increasingly uncertain future, Nordic companies must diversify their growth sources and look beyond the traditional avenues.

The road ahead: How to win in a new era

We are likely at the cusp of a new era. Shifting demographics, high interest rates, unstable geopolitics, challenges to energy security, and a complicated decarbonization transition are all intertwined with the AI-fueled tech revolution. This will define the corporate landscape of the future and yield new challenges and opportunities—opportunities that the Nordics are strategically poised to seize.

Their companies’ high degree of differentiation and value creation, leading profile within sustainability, and strong stance within the adoption of AI and digital tools may allow Nordic countries to cultivate more global champions in the coming years. While the path to growth will be unique for each Nordic country, a few strategic aspirations may be imperative to the future success of companies across the region.

Grow in burgeoning economies

About 75 percent of Nordic countries’ exports go to Europe and its neighboring countries, making them the most important trading partners for the Nordics.7 However, many of these countries are low-growth markets. The next wave of economic prosperity will be created in new high-growth markets such as India, Indonesia, and Vietnam. It is important that Nordic companies harness their strengths and build up strong market positions selectively in these high-growth regions.

Pursue growth and capabilities with M&A

The Nordics are on par with global peers in terms of the degree that M&A is leveraged and how M&A is driven programmatically. But they have the capital and capabilities to use M&A more aggressively to outgrow global peers. This could be a way to shrink the growth deficit versus global peers. M&A could also help the Nordics achieve market access to economies with higher growth and access to critical technological capabilities.

Improve operational performance

Despite impressive improvements in operational performance, driven mainly by gross margin, Nordic countries are slightly behind global peers in terms of operational efficiency. Nordic companies have a couple options to pursue here.

Nordic companies already embrace and lead the adoption of AI and digital tools in their businesses. Thus, Nordic companies are well positioned to scale and leverage the power of AI and drive innovation within business domains, especially in their differentiated stronghold niches. Executives could reimagine the business and identify use cases that build value through improved productivity, growth, and new business models. AI, especially generative AI, will be imperative to sustain industry-leading positions on differentiation and heighten productivity. Productivity-focused firms recovered rapidly from the previous financial crisis,8Bubbles pop, downturns stop,” McKinsey Quarterly, May 21, 2019. and leveraging AI may help businesses emerge from the current market environment at an accelerated pace.

Nordic companies can also look to fortify resilience in business operations. In eight out of 11 industries, the Nordics have a more resilient starting point in terms of TSR. But with more than 45 percent of GDP originating from exports, Nordic countries are highly dependent on the new geopolitical climate not deteriorating business opportunities.9 Globalization is finding a new shape, and in a world of increasing uncertainty, supply chain resilience will be critical.

Lead the green transition

As we’ve written about before,10Playing offense to create Nordic sustainability champions,” McKinsey, September 1, 2022. Nordic countries have the know-how, strategic position, and willing capital to lead the green transition while spurring growth.

From now to 2050, the world must invest $9.2 trillion per year to meet global decarbonization goals. Previous McKinsey research shows that Nordic companies could capture up to $140 billion in GDP and create nearly one million new jobs through this transition.11Playing offense to create Nordic sustainability champions,” McKinsey, September 1, 2022. In several industries, the Nordics are already leading the race and developing zero-carbon products, such as green vessels in shipping, water sanitation, and the agenda on power-to-x. Indeed, Nordic companies have an opportunity to look beyond their own decarbonization challenges and play offense, developing knowledge and solutions to help the world decarbonize.

Part of this effort could be building green business ventures. Between now and 2050, Nordic companies can tap into large global value pools by playing offense in the green transition and capitalizing on the largest redeployment of capital since the Second World War. This effort will require overcoming some challenges, such as reluctance among some companies to go green before their customers are ready. However, if companies, investors, and policy makers set clear goals for capturing critical new value pools, Nordic countries could create global sustainability champions.

In essence, the Nordic corporate landscape, with its unique strengths and challenges, offers immense potential. Nordic companies have delivered superior performance over the past 20 years and can continue to do so, with a focus over the next decade on both differentiation and growth.

Explore a career with us