The economy broke records in 2018 – two companies, Amazon and Apple, became the first corporations with a $1 trillion market value. The Dow Jones Industrial Average hit new heights, although it has since cooled off considerably.
It appears we are living in an age of “superstar” firms, sectors, and cities, at least according to a recent report by McKinsey & Company, the iconic American management consulting firm.
Entitled “Superstars: The Dynamics of Firms, Sectors, and Cities leading the Global Economy,” the extensive report looks at a wide range of the most profitable companies, industries, and municipalities on earth.
“Though a variety of definitions exist, we define superstar to mean a firm, sector, or city that has a substantially greater share of income than peers and is pulling away from those peers over time,” the report says.
The firm created the report because they found that the rapid growth of these companies is causing gaps in our knowledge regarding broader trends in our supercharged global economy.
One of the more fundamental discoveries of the report is that not only are there superstar companies like Apple, but industries and whole cities can be superstars as well.
Superstar companies are bigger than ever
The report’s authors looked at data from 6,000 of the biggest companies around the globe, both public and private. Each company had yearly revenues of at least $1 billion. Cumulatively, these firms make up about 2/3 of worldwide corporate earnings before taxation.
Just like rising inequality exists elsewhere in the economy, the authors noticed there was growing inequality even amongst these huge companies. The top 10% of these companies take in 80% of the total profit earned by all 6,000. The firm gave the label of “superstar” to the companies in this lofty 10%.
The report also states that the gap between the superstar firms and the bottom 90% has widened since the 1990s. Today’s superstar companies earn about 60% more profit than firms 20 years ago once inflation is taken into account.
With the excitement around Silicon Valley, most people might assume the ranks of superstar companies are dominated by tech favorites like Google, Facebook, and Apple. The researchers found this isn’t the case – the pantheon of superstar companies are more diverse regarding both geography and sector than 20 years ago.
Though most superstar firms are based in the United States, Canada, and Western Europe, there is a growing number of superstar companies from Latin America and Asia, especially China.
Superstar companies work in a wide range of over 20 different sectors, especially tech, healthcare, banking, and food products. However, there are superstar hotel, insurance, automobile, construction, and apparel companies, too.
The group of superstars is not firm, either. The researchers calculated that about 50% of superstar companies leave the top 10% range within every business cycle (about 10 years). Many of these companies fall all the way down to the bottom 10% of the 6,000 biggest companies, which showcases how much disruption occurs on a cyclical basis.
Only a handful of companies have remained superstars for over 20 years, including Coca-Cola, Johnson & Johnson, Merck, Microsoft, Toyota, and Walmart.
Although it may go against popular wisdom, the report finds the biggest companies actually lead the way toward a more innovative and globalized future.
“Superstar firms are larger, more profitable, more innovative, more globalized, and more productive than their peers,” the analysts said, adding that “relative to their number, superstar firms make disproportionate investments in intangible assets such as intellectual property, software, and brand value. Large firms make up the majority of private-sector R&D spending, and their share has increased over the past two decades.”
Superstar sectors are growing more diverse
The researchers divided the number of industries in the world into 24 distinct sectors. They found that the most significant gains are being made in a small handful of industries for most major global economies.
The analysts came up with different metrics for what defines a superstar sector – they looked at what sectors were the biggest in terms of growth in gross operating surplus across advanced and emerging global economies.
Unsurprisingly, internet, media, and software industries saw the most positive change in gross value added between 1995 and 2017. The pharmaceutical sector is another superstar industry, as is financial services including banking, insurance, and asset management. The short list of superstar sectors is rounded out by the professional services industry and the real estate sector.
Some shared qualities of the superstar sectors became apparent.
“We find that superstar sectors tend to share some combination of the following attributes: low capital intensity; greater intensity of R&D, of selling, general, and administrative expenses, and of skill; and higher levels of digital adoption,” the analysts wrote.
In researching the various industries, the authors took a broader chronological view. They found that growth is more concentrated in a small number of superstar sectors relative to previous generations. In the 1980s and early 1990s, wide global economic gains meant there were few superstar sectors at all, and the ones that existed were only growing slightly faster than other industries.
Today, most of the gains of superstar sectors go back to capital, not workers. The increased income seems to accrue to gross operating surplus, which then moves to groups like debt holders, homeowners, and business proprietors. Generally, most of the gains do not appear to go to workers and, when the gains do get passed on to labor, it is usually for high-skilled workers. This trend is observed not just in the U.S., but across many nations.
Additionally, the superstar sectors are most often located in the biggest cities on earth.
“Superstar sectors have significantly greater geographic concentration in the largest urban areas,” the report’s authors say. “In contrast, the activities of declining sectors are spread over a wider geographic footprint encompassing large and small cities and rural areas. The ability of other cities and towns to participate in superstar sectors’ gains is limited, because superstar sectors have a small geographic footprint in terms of sector specialization.”
In the U.S., for example, gains from the internet sector are seen mainly in Silicon Valley in the San Francisco Bay area, while gains from the financial sector are concentrated in urban areas like New York City.
A new age of superstar cities
Partly because the superstar sectors are so concentrated in urban areas, the researchers were able to create a list of superstar cities defined by metrics including gross domestic product (GDP) and personal income per capita.
Many of these cities are legendary leaders in global commerce, like New York City, San Francisco, Los Angeles, London, Paris, Beijing, and Tokyo.
The report suggests other superstar cities will become the icons of the next generation of the global economy, like Manila, Moscow, Jakarta, and Cairo.
Clearly, the U.S. and China have a disproportionate number of superstar cities. The U.S. has 11 superstar cities, while China has 10.
These top 50 cities represent 21% of global GDP but just 8% of the worldwide population. The McKinsey report believes these superstars are pulling away from other global cities in terms of GDP growth per capita as well as overall share of global GDP.
There are additional shared characteristics of the superstar cities – many are hubs of government, finance, and innovation. Some 44% of superstar cities are national capitals, while 52% are hubs of finance like Singapore and New York.
Many of these superstars are trade hubs, too.
“Superstar cities also play a critical role in connecting the global web of economic activity, serving as gateways of cross-border trade, finance, people, and data flows,” the report explains. “Among the world’s 20 busiest container ports by volume, for instance, more than half are in global superstar cities.”
Is there a “Superstar Ecosystem”?
The interplay between superstar companies, sectors, and cities led the report’s authors to ponder the idea of a superstar economic ecosystem. The authors noted further research is needed, but they observed several patterns.
Because the gains from the growth of superstar sectors mostly go back to corporations, there seems to be a link to how superstar companies can accelerate their expansion.
Also, because many superstar sectors and companies are headquartered in superstar cities, the gains appear to be often concentrated in these cities. These effects can reverberate throughout a superstar city – the authors point to evidence that real estate prices are skyrocketing in many of these urban areas.
Because of the superstar trend, the report suggests many people could be left behind as the superstars entrench their lead. Still, many superstar companies and sectors source from far beyond the borders of superstar cities, suggesting the gains can be passed on to smaller firms outside the supposed superstar ecosystem.
Implications of the Age of Superstars
Pouring over their data, the analysts noted a few implications for business and policy leaders.
First, the age of superstars is an age of competitive churn, especially for companies. The authors believe value creation is becoming more important than mere size, and that superstar firms and sectors are succeeding partly because they invest money into intangibles like research. Finally, the report suggests geography matters, but it can be overcome.