Productivity growth is vital for the economy. Few companies actually create it

Eric Kutcher

Olivia White

<p>Chameleons change their color to blend in. The Great Wall can be seen from space. Productivity growth comes from thousands of firms adopting the latest technologies and processes. All sound plausible—and all are wrong.</p><div class="paywall-selector"></div><div class="paywall">



<p>The reality is that productivity growth comes from a small number of companies moving a mile—by finding new ways to create business value—rather than by many firms moving a few inches through imitation.</p>



<p>In the U.S., 5% of companies accounted for 80% of productivity growth in a sample examined in new <a href="https://fortune.com/company/mckinsey/" target="_blank">McKinsey</a> Global Institute research. The <a href="mck.co/powerofone">report</a> looked at the performance of 8,300 companies in Germany, the United Kingdom, and the United States from 2011–19, a period that helps us identify productivity patterns that may hold over time.</p>



<h2 class="wp-block-heading">Surges of innovation</h2>



<p>Such standout firms are critical to boosting U.S. productivity. And a productivity boost is more critical than ever, with the combination of aging workforces, tariffs on trade, reshoring manufacturing, and economic uncertainty writ large.</p>



<p>There are three important things to know about the productivity standouts. First, they are diverse, including firms across sectors and with different starting points in terms of performance and other metrics. Second, they change over time: A third of the cohort turned over between 2011-19 and 2019-23. Third, and perhaps counterintuitively, they are not necessarily the most efficient players. In general, they are not.</p>



<p>What sets the standouts apart was not that they did more with less but that they did things differently—making bold moves to create more productive business models. Think of <a href="https://fortune.com/company/nvidia/" target="_blank">Nvidia</a> with its innovations in graphics processing units or Germany&#8217;s Zeiss leaping ahead in extreme ultraviolet lithography. In many cases, such as retail, these surges of innovation then rippled through the sector, lifting productivity more broadly.</p>



<p>All this may sound interesting but theoretical. In fact, the implications are very real. For one thing, the findings go a long way toward explaining why U.S. productivity (2.1% a year) was so much higher than in either Germany (0.2%) or the U.K. (even less). The reason: The U.S. had three times as many standouts as stragglers, while Germany had more stragglers, and in Britain it was about equal. Just as important, the U.S. laggards were much quicker to restructure or exit.</p>



<p>None of this is to say that efficiency is unimportant, that gradual improvement is bad, or that things like regulation or workforce training are irrelevant. But it does suggest that many policies that are sold as ways to boost economic growth—helping small business, subsidies to specific industries, preferential trade rules, and the like—are beside the point when it comes to boosting productivity. And it is productivity that produces growth, not the other way around. If firms do not increase their productivity, then neither do countries—and growth stalls.</p>



<h2 class="wp-block-heading">The conditions for success</h2>



<p>The policy goal, then, should be to create the conditions for success, not to try to create success itself. In terms of productivity, that means that companies need to be able to execute the bold decisions that can make them standouts. Take computers and electronics: In the U.S., the financial, market, and regulatory structures have worked together to create a cluster of standout firms. Stragglers are culled.<br><br>This can be painful. But the ability of U.S. tech firms to readily shift labor and capital is a big part of their high productivity and global success. The same is true of other sectors, too, such as retail and mining, but is far from universal. In every country, sticky underperformers are a drag on growth. The lesson is that preserving weak companies is not a productivity strategy—and thus not an economic or jobs strategy, either.<br><br>In one sense, the conventional wisdom is right: Productivity is good for everyone, with consumers and employees benefiting greatly. In our research, the firms with the highest productivity growth also had the highest wage and profit growth. But it is wrong about how it is created. Knowing where productivity comes from can help firms perform better and economies create prosperity.</p>



<p><em>The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of </em>Fortune<em>.</em></p></div>

In the U.S., 5% of companies account for 80% of productivity growth, according to new research.

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