The power of one: How standout firms grow national productivity

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The world needs robust productivity growth more than ever to address pressing global issues: inflated balance sheets, financing the transition to net zero, bridging empowerment gaps, and funding a demographic transition with more retirees and fewer workers.  And a fundamental unit of productivity growth is firms. If firms do not increase their productivity, economies don’t either.

This research finds that a relatively small number of firms making bold strategic moves generated the majority of productivity growth in the period studied, in powerful bursts rather than in a smooth trickle of gradual change, and through strategic moves, top-line growth, and portfolio shifts more than efficiency gains. This was a more concentrated, dynamic, and sporadic pattern than existing literature tends to highlight, with progress on productivity being defined by a few firms moving a mile rather than many firms moving an inch. Single firms can move the productivity needle for entire economies—the “power of one.”

This latest offering in decades of McKinsey Global Institute (MGI) research on productivity carves out new ground from typical treatments of the topic. Those have focused on broad economic factors, such as labor-market dynamics, technological advances, capital investments, and fiscal and monetary policy, rather than firm-level features. Or they have focused on productivity dispersion and diffusion patterns across millions of often-anonymous firms. This research zooms in on those firms that are most relevant for driving growth and enriches quantitative analysis with sector- and firm-specific case studies in line with MGI’s tradition of analyzing the “micro-to-macro” roots of productivity.

Fewer than 100 firms in the research sample of 8,300—a group that the authors have dubbed Standouts—accounted for about two-thirds of the positive productivity gains in each of the three country (US, Germany and UK in four sectors: retail, automotive and aerospace, travel and logistics, and computers and electronics) samples the authors analyzed. Standouts are defined as firms that added at least one basis point to their national sample’s productivity growth.  To give a sense of how important a single firm can be, just another dozen or so of the largest Standouts could have doubled productivity growth in their entire country.  The number of firms that were responsible for the largest drags (negative contributions of at least one basis point) on productivity growth—referred as Stragglers—was even smaller. Only 55 Stragglers accounted for 50 to 65 percent of the firm-level productivity drag in the three country samples.

The relationship between Standouts and sector growth is, of course, a symbiotic one. Standouts drive the growth of sectors, but some sectors also have the market dynamics, technology, regulation, and competitive setting that provide fertile ground for Standouts. There were more Standouts in sectors where firms could create new customer value and scale new business models than in sectors that were mostly about efficiency. For instance, the US computer and electronics sector came with many scalers and disruptors. Often when demand is faltering, other sectors are relative deserts, tending to produce more Stragglers or firms that restructure.

About 10 percent of firms accounted for 90 percent of productivity growth in the period studied. Looking at all firms, about 50 percent increased productivity faster than the sector average. Indeed, 20 percent of all firms increased productivity 1.5 times faster than the sector average while also increasing their employment share.

The millions of micro-, small, and medium-size enterprises (MSMEs) outside our sample collectively contributed up to 30 percent of productivity growth in the four sectors in the national statistics.8 Indeed, a handful of them may emerge as the Standouts of tomorrow.

Four types of Standouts ranked by size of contribution: Improvers—large firms that mainly contribute by advancing their productivity levels—made the largest contribution to productivity growth. Disruptors, or small firms that grew productivity and share very rapidly, actually made the smallest contribution. Scalers, which were already far above the sector’s average productivity and grew their share of employment, and therefore drove productivity growth mostly via employment reallocation, made the second-largest contribution.  Restructurers are less productive firms that made a positive contribution by losing market share and employment to more productive firms or exited altogether.  

Some Standouts remain Standouts over long periods, but many change over time. With a limited sample, about two-thirds of Standouts in 2011–19 remained Standouts in 2019–23.   The other one-third fell back, while new firms emerged as Standouts—including former Stragglers turning around.14 So, at any point in time, a few firms disproportionately matter, but these firms evolve. The story of productivity is highly dynamic.

Standouts share few common characteristics. They come from all sectors and all parts of the productivity curve, have vastly different starting points on common business metrics and past performance, and contribute to productivity growth in different ways. What they have in common is “doing things differently” more than “doing things more efficiently.”

What emerges from these case studies is that Standouts used a combination of five types of moves, often in combination. Four of these relate to scaling productive businesses or finding new ways to create value. Only one is primarily about efficiency and cost.   These strategies are:  Scaling more productive business models or technologies.  Shifting regional and product portfolios toward the most productive businesses or adjacencies.  Reshaping customer value propositions to grow revenue and value added.  Building scale and network effects. And transforming operations to raise labor efficiency and reduce external cost at scale.  These moves often trigger chain reactions that lead to bursts of productivity over specific periods and sectors in a pattern of “action and response” more than through the diffusion of practices.

Six shifts in the conventional wisdom on productivity growth emerge from this research findings.  A few firms driving productivity growth instead of the broad swath.  Incumbent improvers as much as superstars and disruptors.  Bold action and response more than imitation.  Strategy, portfolio shifts and value creation more than efficiency.  Scaling innovation more than creating new entrants.  And dynamic reallocation toward leading firms and business units as much as internal improvements.

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