Accelerating performance in a winner-takes-most world

What we did—and why

To better understand what’s behind top performance we needed to define performance. For purposes of this research, we used two measures: profit margin and revenue growth. Using both measures allowed us to account for important differences in how companies grow profits. Consider, for example, how two companies with identical profit margins but different rates of revenue growth will have profits with very different growth trajectories.

Meanwhile, we also needed to account for the fact that some industries are growing faster than others. We did this by factoring into the analysis both the industry median profit margins and the industry median growth rates. This allowed us to level the playing field and make respondent-by-respondent (as a proxy for company-by-company) comparisons. In all cases, the time frame for our analysis was the respondents’ last fiscal year.

The result was a so-called performance premium—or the combined effect of profit margin and revenue growth in industry-adjusted terms—which we calculated for each of the 2,006 respondents to our survey.

Next—and separately—we constructed an index from the survey results associated with the 40 areas of management practice and company investment that we’d set out to study: for instance, leadership characteristics; investment in business and operating model transformation; the use of technology; and the use of service partnerships, or managed services. Dividing the index into quintiles showed us the degree to which the respondents’ companies were following the 40 practices themselves.

Finally, we linked the respondents’ position on the index to the performance premium we’d calculated earlier—essentially revealing the performance premium associated with various degrees of adherence to the management initiatives and practices.

The resulting shape of the distribution was decidedly nonlinear, which led us to name the performers in the top quintile “quadratic companies.” What are the benefits of achieving this title? Quadratic companies earned an average performance premium of 44% in their last fiscal year. By contrast, the next-best performers (those in the fourth quintile) earned just 9%.

To put it another way, consider the performance of two hypothetical competitors. Both start with revenues of $100. After one year, the quadratic company would have $44 of profit over what would have been earned if the company had achieved the industry medians for profit margin and revenue growth. By contrast, the fourth-quintile company would have earned just $9 of profit over those industry medians.