What does it take for large companies to decisively beat market total shareholder returns (TSR) over a decade? To analyze how top performers achieved their success, we studied the 1,000 largest corporations by market capitalization in the United States. In all, we found that long-term TSR outperformers took one of five distinct paths: (1) being in or moving to high-growth markets (or segments of markets), (2) offering new or enhanced products, (3) refreshing their business portfolio, (4) conducting a successful turnaround, or (5) managing their business better than their peers. Some of these paths were more likely to best market TSR outperformance—and being in or moving to growth provided the widest path of all. But growth wasn’t the only way to beat long-term market TSR. Strikingly, the same five paths were apparent over each of the three decade-long periods we analyzed.
Methodology: The importance of realistic expectations
To quantify and more clearly frame long-term TSR outperformance, we conducted two analyses. First, we looked at the 1,000 largest corporations in the United States by market capitalization, examining how many reached the top decile of ten-year TSR performance over any of three different ten-year periods.1 Doing so meant beating market TSR by about 20 percent. During those periods, only 11, 15, and 18 percent, respectively, of the top-decile TSR performers were “very large” companies—that is, among the 250 largest companies by market capitalization.
Because so few of the largest companies were among the high-TSR performers, we conducted a second analysis, identical to the one for the 1,000 largest companies, that focused just on the 250 largest publicly traded US companies. Knowing that very few could best long-term market TSR by about 20 percent, we gave them a lower bar—to beat ten-year market TSR by 5 percent or more. Very few large companies reached even that mark.
The first lesson, therefore, is one of setting expectations. It’s not unusual for senior executives of very large corporations, particularly managers who are new to their roles, to pronounce mandates such as “this company will beat market TSR by 10 percent”—or sometimes by an even greater margin. Realistically, however, that goal is rarely attainable. There’s a limit, after all, to how much market size a company can ultimately capture, and smaller companies have a lot more room left to grow. When the market or segment in which a company competes isn’t growing, smaller companies have much better odds of long-term TSR outperformance: the smaller a company’s initial market share, the greater the likelihood that it can beat and keep beating investor expectations.
The five paths to outperformance
Merely beating market-average TSR by more than 5 percent over a decade still puts large corporations on an extraordinary list: only 23, 28, and 37, respectively, of the 250 largest companies were able to do so in the ten-year periods ending 2012, 2017, and 2022. As well, over the past decade, about 10 percent of large companies that bested market TSR by 5 percent or more were in cyclical industries such as oil and gas or aerospace and defense; decades of research show that cyclical companies will not reliably beat the broader markets when their industry cycles inevitably turn down.
Still, whether or not one considers cyclicality (we conducted both analyses), the results remained stark: there were five distinct paths to substantially beat market TSR (exhibit).
1. Being in or moving to high-growth markets
The widest path to significant TSR outperformance is growth. Many of the companies that took this path started with the good fortune of strong tailwinds, particularly those whose core businesses were in industries such as high tech or that competed in other sectors in which technology could make an outsize difference (as was the case for payment systems in financial institutions). Yet endowment is not destiny; for example, not every semiconductor company was a TSR outperformer. Across industries, the companies that did outperform by taking advantage of tailwinds both executed well in their core business and continued to invest in innovation and improving their business processes. Most important, they relentlessly sought out a high-growth “niche within the niche.” For example, rather than settling for providing technology support, one services firm took advantage of a surging demand for cybersecurity. Similarly, while the pharmaceutical sector has generated strong returns for decades, pharmaceutical suppliers have recently been a growth dynamo within the broader life sciences industry.
2. Offering new or enhanced products
The second-biggest category of large companies that beat market TSR comprised companies that offered new or enhanced products. We distinguish this second category from “being in or moving to high-growth markets” because the major driver or drivers of outperformance were a small number of specific products (sometimes, only one product) rather than an uplift in a specific business as part of industry-wide trends. Here again, companies in the pharmaceutical industry, along with the biotechnology sector, are instructive. Several companies in these industries introduced breakthrough medicines (for example, for autoimmune diseases or diabetes) for which there were large, eager markets; these new products enabled these large corporations to meaningfully beat broader market TSR.
3. Refreshing the portfolio
A third path to TSR outperformance is to refresh the corporation’s portfolio of businesses, tacking toward more value-creating businesses while at the same time not going too far beyond the organization’s core. Companies in this category proactively seek out faster-growing markets where they can build, or practicably acquire, a competitive advantage. It’s a narrow path; over the last decade-long period we studied, only nine of the 250 largest companies were able to succeed in beating market TSR by 5 percent or more by refreshing their portfolios. Having a proven track record in a core business or businesses was typically a precondition to successfully expanding into new spaces and capturing new pockets of growth. One outperformer, for example, had operated significant publishing and education businesses while also providing financial research. Recognizing emerging trends and businesses for which it was and was not the best owner, the company divested its publishing and education divisions and allocated more resources toward financial research and analytics, which then played an outsize role in value creation. Another prominent example is Microsoft. In 2007, it was the third-largest US company by market capitalization; many of its core products, including Office, Windows, and Xbox, were household names. Yet the company still committed to refreshing its portfolio. In 2008, it began to develop its cloud business; in 2014, new CEO Satya Nadella made clear that the cloud was among the company’s highest priorities; and by 2022, Microsoft’s “Intelligent Cloud” was firmly in the lead as its largest and most profitable division—and still its fastest growing—as the company moved up to become the second-largest US corporation.
4. Achieving a successful turnaround
A small number of large companies—fewer than 20 percent in each ten-year period (and in the last period studied, fewer than 5 percent)—beat market TSR by more than 5 percent by achieving a successful turnaround. These companies came from a diverse range of industries. Several of them generated large improvements in ROIC through efficiency upgrades and economies of scale. Typically, the turnarounds were extremely rigorous, going far beyond the superficial to substantially improve core operations. Best Buy, for example, ended its European operations and Best Buy Mobile stores and focused on dramatically growing revenue from its US stores and operations, including through initiatives such as the “Geek Squad” for in-home support and repair and by more seamlessly matching its online- and physical-store offerings. Or consider a large manufacturer of technology products. The company dramatically upgraded its manufacturing process, shifting from a labor-intensive model to one that was faster, more automated, and highly digitized; by year-end 2022, it had exceeded ten-year market TSR by more than 6 percent.
5. Managing your business better than your peers
Finally, one additional path presented itself for large corporations: superb execution. As hard as it is for a company in a traditional, steady-state industry to gain market share, continue to outperform peers, and, as a result, beat long-term TSR by 5 percent or more, a handful of large caps did just that. Consider the retailer Costco and the insurer Progressive. Neither could avail itself of an industry growth wave, and neither substantially changed its business portfolio. But they managed their businesses superbly. Execution brought exceptional strategy and distinctive capabilities to life, as reflected by their long-term TSR performance. During the ten-year period ended December 31, 2022, these companies delivered an excess TSR of about 6 and 11 percent, respectively. Over the last ten years, Costco grew almost four percentage points faster than the median for large-cap retail companies. Progressive, for its part, outgrew the insurance industry median by about 5.5 percentage points, continually investing in advanced institutional capabilities such as analytics, consumer experience, and others. Both companies also expanded internationally and benefited from strong customer retention. Indeed, “managing your business better than your peers” was the second- or third-largest category of TSR outperformers among each of the ten-year periods. Even so, there were more than twice as many TSR outperformers from a high-growth sector in each period.
An examination of three decade-long periods reveals that there are five paths to beating long-term market TSR. Growth is the widest path, though none of the approaches ensure success, and strong strategy and exceptional management are always essential. Indeed, even when everything breaks right, companies should be realistic about the level of sustained TSR outperformance that’s attainable. For the largest corporations, beating market TSR over a ten-year time frame by more than 5 percent is a significant achievement indeed.
