Once upon a time, high-performing businesses could expect to keep succeeding for the foreseeable future. In the mid-20th century, for instance, 77% of industry-leading companies were still on top five years later. Based on US industry leaders by operating income in 69 industries. But today that figure has fallen to 44%. Furthermore, over multiyear timeframes, companies that have had above-average TSR (total shareholder return) in the past are no more likely to continue outperforming in the future.Among all US companies with a market capitalization of $5 billion or more, there is a positive correlation between past TSR and future TSR on a 6- to 12-month horizon, but the correlation is … Continue reading
What happened? The business environment has become much more dynamic, which means the requirements for tomorrow’s successful companies will likely be different from those for today’s. Instead of relying on current performance to continue, businesses must now continuously innovate and reinvent themselves.
As companies age and grow, however, reinvention becomes harder: business and organizational models become entrenched, running the day-to-day business requires more focus, and complexity builds up and becomes a barrier to change. As a result, at a time when companies need to explore new options more than ever, many are instead increasingly dependent on legacy business models. In other words, many incumbents are at risk of losing vitality.
Winning the Next Decade Requires Forward-Looking Metrics
As leaders start to plan for the next decade, maintaining vitality — the capacity to explore new opportunities, renew strategy, and grow sustainably — is more important than ever. The competitive landscape of the 2020s will look very different from today’s as powerful trends continue to unfold, including the rise of artificial intelligence, the changing nature of the company-employee relationship, and new balances of economic and geopolitical power.
Traditional ways of measuring business performance do not reflect this new reality. Revenue growth, profitability, and financial returns are all inherently backward-looking, so they tend to promote a focus on optimizing today’s business model instead of envisioning tomorrow’s. To survive and thrive in the next decade, leaders must be able to measure, revive, and sustain their companies’ vitality.
To help fill this gap, we created the Fortune Future 50 index. Developed with Fortune magazine, the index is forward-looking — it is based on the factors that predict future revenue growth, which drives the majority of high performers’ shareholder returns in the long run. It provides a perspective and tool for leaders to assess and manage the vitality of their enterprises. (See the sidebar.) It is focused on forward-looking considerations such as the following:
- Do we have a sufficient pipeline of “future bets” with high growth potential?
- Does our strategy balance short-term exploitation with long-term exploration?
- Are we developing sufficient capabilities in the technologies that are transforming how businesses work?
- Do we have a culture that promotes cognitive diversity and a competition of ideas?
- Are we willing and able to challenge our incumbent approaches and beliefs?
From this index, we identified outperformers — established companies that have best maintained vitality. We call this group the Future 50.
When we created the first version of the index, last year, it was limited to only US public companies. This year, we have expanded our analysis to cover corporations around the globe. Our index assesses the vitality of more than 1,000 of the largest global firms (those with at least $10 billion sales or a $20 billion market capitalization).Sales and market cap thresholds for inclusion as of year-end 2017; excludes energy, mining and metals, and commodity chemicals (industries in which growth is highly dependent on exogenous commodity … Continue reading