This is how companies can compete in the 2020s

A simple, popular framework for business strategy is to focus on where to play (which industry or market to serve) and how to win (what it takes to outperform in that area). However, the “how” is now much more important than “where”: the reward for being a top performer is increasing across all industries. Unfortunately, these rewards are offset by an increasingly rapid regression to the mean.

As a new decade begins, all companies – regardless of their starting positions – will need to reinvent themselves for sustained success in the new competitive environment of the 2020s.

Over time, markets become commoditized: new competitors appear, products become more standardized, and consumers become better educated to choose between alternatives, forcing down prices to marginal cost and returns on the cost of capital. Strategy has always been about defying the powerful forces of commoditization by being exceptional relative to other players in some respect, such as scale, differentiation, speed, or capabilities.

Some industries are more attractive than others on average, but the spread of performance within industries is an order of magnitude greater than that across industries. In other words, how to play (and being exceptional relative to your peers) matters much more than where to play – and there is no such thing as a bad industry.

Entering the 2020s, the importance of defying the average is greater than ever. For one thing, the value of being exceptional has increased, for example, the difference in operating margin between the top and bottom quartile companies within each industry has nearly doubled in the past three decades. This is attributable in part to the rise of winner-take-all, platform-based business models, which have come to dominate the list of the world’s most valuable companies.

It’s also a bad time to be merely average. In the long run, growth drives returns, but growth rates have been trending downward. Demographic trends will further slow future growth in most major economies.

Even in acutely adverse circumstances, some companies compete and outperform. Our study of 5,000 US companies across the last four economic downturns showed that on average companies saw both revenue growth and profitability decline. However, 14% improved their performance in both dimensions, gaining a clear advantage over their peers across all industries.

Even if your company is beating the average today, you can’t rely on momentum alone to guarantee future success. Business has become increasingly dynamic, driven by rapid technological and social change. As a result, past performance has become a weaker indicator of future success and the ability to compete.

According to our analysis, top companies are falling faster: only 44% of industry leaders by operating income remain there five years later, down from 77% in the mid-20th century. Over the same time span, the rate at which companies drop out of the Fortune 100 has increased by 60%. In periods longer than one year, there is now no correlation between past and future total shareholder returns.

In other words, what it takes to succeed tomorrow will be different from what it takes to succeed today; advantage needs to be constantly renewed. The traditional metrics used to manage a business, such as sales, profitability and return on assets are backwards-looking and therefore less and less useful for indicating whether a company is set up for future success. Regardless of their starting position, leaders need to manage their organizations’ vitality – the capacity to reinvent themselves for the future – alongside running the business today.

Even if business leaders recognize the need to continually reinvent their organizations to compete, they still face the question of what specifically it will take to win in the next decade. Though we have no all-seeing crystal ball, many of the key forces that will reshape business in the 20s are already in plain sight:

These trends point to several competitive imperatives that will apply broadly across geographies and sectors and help companies defy the gravity of averageness in the next decade:

Regardless of where they play or their track record, all businesses face the challenge of defying the average in the 2020s. Leaders cannot rely on what has worked in the past; they must reinvent their strategies, organizations, people and mindsets in order to be exceptional tomorrow.