MCKINSEY: The 30-year golden age for corporate profits is coming to an end

Photo by Alex Menendez/Getty Images

The three-decade-long run of extraordinary profit growth for the world’s largest companies might be coming to end, according to the latest publication of the McKinsey Global Institute (MGI).

“For the past three decades, corporations have enjoyed record profit growth, new market opportunities, and declining costs. But this unprecedented run may be coming to an end. New rivals are putting industry leaders on notice as the business environment turns more uncertain and hypercompetitive,” the MGI said in its report “Playing to Win: The new global competition for corporate profits.

The report says that over the past three decades “across all global corporations, earnings before interest and taxes more than tripled in real terms from 1980 to 2013; net income after interest and taxes rose fivefold”. It also highlighted that companies from advanced economies earn more than two-thirds of global profits.

That’s seen profits rise from US$2 trillion dollars and 7.6% of global GDP in 1980 to US$7.2 trillion in profits and 9.8% of GDP by 2013. And it’s been driven largely by three key factors:

      1) New Consumers – between 1990 and 2010 the world added 1.2 billion consumers
      2) New investment
      3) Global supply chains

But, the report forecasts that while profits will still grow to US$8.6 trillion by 2025, that will represent a fall in the share of global GDP back to 7.9%. That would represent almost a full round trip toward where it was when the extraordinary run started in 1980.

SOURCE: MGI – Playing to Win: The new global competition for corporate profits

The report says that this decline is will stem from the competitive forces being “unleashed by two groups of hard-charging competitors”.

  • On one side is an enormous wave of companies based in emerging markets. The most prominent have been operating as industrial giants for decades, but over the past 10 to 15 years, they have reached massive scale in their home markets. Now they are expanding globally, just as their predecessors from Japan and South Korea did before them.
  • On the other side, high-tech firms are introducing new business models and striking into new sectors. And the tech (and tech-enabled) firms giants themselves are not the only threat. Powerful digital platforms such as Alibaba and Amazon serve as launching pads for thousands of small and medium-sized enterprises, giving them the reach and resources to challenge larger companies.

These challengers are become more numerous the report says while at the same time becoming more “formidable and more global”. Dangerously they appear to work in favour of customers and “some destroy more value for incumbents than they create for themselves”.

That’s important because while the new competitors are taking market share, driving prices down for customers (destroying more value than they create), MGI says that “some of the external factors that helped to drive profit growth in the past three decades, such as global labor arbitrage and falling interest rates, are reaching their limits”.

But all is not lost. The report says that companies that adapt quickly to the new realities “can capture enormous opportunities”.

That’s always true.

But the questions for company boards, managers and stock market investors is whether their company can rise to the challenge and what impact this changed landscape will have on their business and profitability.

That’s important, because MGI says:

Over the next decade, rising consumption in the emerging world will create new markets. Technology will spur new products and services. Startups will be able to tap global
investors, suppliers, and customers with little up-front investment. But companies will face intense pressure to grow, innovate, and become more productive—not only to seize these
opportunities but merely to survive.

Here’s MGI’s ready reckoner on what companies need to do in order to survive and thrive.

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