Weekly Business Insights from Top Ten Business Magazines | Week 317 | Strategy & Business Model Section | 1

Extractive summaries and key takeaways from the articles curated from TOP TEN BUSINESS MAGAZINES to promote informed business decision-making | Since September 2017 | Week 317 | September October 6-12 , 2023

Five paths to TSR outperformance

By Pedro Catarino et al., | McKinsey & Company | October 9, 2023

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What does it take for large companies to decisively beat market total shareholder returns (TSR) over a decade? To analyze how top performers achieved their success, the authors studied the 1,000 largest corporations by market capitalization in the United States. In all, they found that long-term TSR outperformers took one of five distinct paths.

  1. Being in or moving to high-growth markets.  The widest path to significant TSR outperformance is growth. Many of the companies that took this path started with the good fortune of strong tailwinds, particularly those whose core businesses were in industries such as high tech or that competed in other sectors in which technology could make an outsize difference (as was the case for payment systems in financial institutions). Yet endowment is not destiny; for example, not every semiconductor company was a TSR outperformer. Across industries, the companies that did outperform by taking advantage of tailwinds both executed well in their core business and continued to invest in innovation and improving their business processes. Most important, they relentlessly sought out a high-growth “niche within the niche.”
  2. Offering new or enhanced products.  The second-biggest category of large companies that beat market TSR comprised companies that offered new or enhanced products. These companies could be  distinguished from “being in or moving to high-growth markets” because the major driver or drivers of outperformance was a small number of specific products (sometimes, only one product), rather than an uplift in a specific business as part of industry-wide trends.
  3. Refreshing the portfolio.  A third path to TSR outperformance is to refresh the corporation’s portfolio of businesses, tacking toward more value-creating businesses while at the same time not going too far beyond the organization’s core. Companies in this category proactively seek out faster-growing markets where they can build, or practicably acquire, a competitive advantage. Having a proven track record in a core business or businesses was typically a precondition to successfully expanding into new spaces and capturing new pockets of growth. 
  4. Achieving a successful turnaround.  A small number of large companies—fewer than 20 percent in each ten-year period (and in the last period studied, fewer than 5 percent)—beat market TSR by more than 5 percent by achieving a successful turnaround. These companies came from a diverse range of industries. Several of them generated large improvements in ROIC through efficiency upgrades and economies of scale. Typically, the turnarounds were extremely rigorous, going far beyond the superficial to substantially improve core operations. 
  5. Managing your business better than your peers.  Finally, one additional path presented itself for large corporations: superb execution. As hard as it is for a company in a traditional, steady-state industry to gain market share, continue to outperform peers, and, as a result, beat long-term TSR by 5 percent or more, a handful of large caps did just that. 

3 key takeaways from the article

  1. What does it take for large companies to decisively beat market total shareholder returns (TSR) over a decade? 
  2. In all, a study found that long-term TSR outperformers took one of five distinct paths: (1) being in or moving to high-growth markets (or segments of markets), (2) offering new or enhanced products, (3) refreshing their business portfolio, (4) conducting a successful turnaround, or (5) managing their business better than their peers. 
  3. Some of these paths were more likely to best market TSR outperformance—and being in or moving to growth provided the widest path of all. But growth wasn’t the only way to beat long-term market TSR. Strikingly, the same five paths were apparent not only over each of the three decade-long periods the study analyzed.

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Topics:  Strategy, Business Model, Total Shareholder Returns

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