The power of one: How standout firms grow national productivity

The power of one: How standout firms grow national productivity

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At a glance

• When firms become more productive, so do economies. Increasing the value each worker creates also promotes rising wages for workers and profits for firms. These facts are well known to economists. Our other findings are not.
• A small number of firms contribute the lion’s share of productivity growth. Fewer than 100 productivity “Standouts” account for two-thirds of growth in our sample of 8,300 large firms in Germany, the United Kingdom, and the United States. Many others also play a role: the majority of firms contribute positively.
• Productivity grows in powerful bursts as firms find new ways to create and scale new value. Think Apple expanding into services, easyJet shaping the discount airline trend, and Zalando pioneering apparel e-commerce. This is not the efficiency transformation nor the gradual diffusion described by conventional wisdom.
• In the United States, the most productive firms expanded and unproductive firms restructured or exited. This contributed half of US sample productivity growth while sticky underperformers dragged down growth in Germany and the United Kingdom.
• This fresh view of productivity growth calls for a new playbook. It suggests focus on the power of the few more than the broad swath, on value creation more than efficiency, and on reallocation of resources to leading businesses.

For more on Standouts and their contribution to productivity growth

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The world needs robust productivity growth more than ever to address pressing global issues: inflated balance sheets, financing the transition to net zero, bridging empowerment gaps, and funding a demographic transition with more retirees and fewer workers.¹For challenges related to the global balance sheet, see “The rise and rise of the global balance sheet: How productively are we using our wealth?,” McKinsey Global Institute, November 2021; “Global balance sheet 2022: Enter volatility,” McKinsey Global Institute, December 2022; and “The future of wealth and growth hangs in the balance,”McKinsey Global Institute, May 2023. For financing for net zero, see “The net-zero transition: What it would cost, what it could bring,” McKinsey Global Institute, January 2022. For empowerment gaps, see “A better life everyone can afford: Lifting a quarter billion people to economic empowerment,” McKinsey Global Institute, May 2024; and “From poverty to empowerment: Raising the bar for sustainable and inclusive growth,” September 2023. For the demographic transition, see “Dependency and depopulation? Confronting the consequences of a new demographic reality,” McKinsey Global Institute, January 2025. And a fundamental unit of productivity growth is firms. If firms do not increase their productivity, economies don’t either.

Firms themselves benefit from productivity growth, or growth in value added per worker. In view of long-term demographic shifts and the tight labor markets of today, labor productivity is a strategic imperative.²“Dependency and depopulation? Confronting the consequences of a new demographic reality,” McKinsey Global Institute, January 2025. And productivity growth is the only way for businesses to serve all their stakeholders, delivering rising wages for their workers, increased customer surplus, and profit. Customers and employees are typically the biggest and most immediate beneficiaries of productivity growth. Productivity growth is a win-win for all.

This research finds that a relatively small number of firms making bold strategic moves generated the majority of productivity growth in the period we studied, in powerful bursts rather than in a smooth trickle of gradual change, and through strategic moves, top-line growth, and portfolio shifts more than efficiency gains. This was a more concentrated, dynamic, and sporadic pattern than existing literature tends to highlight, with progress on productivity being defined by a few firms moving a mile rather than many firms moving an inch. Single firms can move the productivity needle for entire economies—the “power of one.”

This latest offering in decades of McKinsey Global Institute (MGI) research on productivity carves out new ground from typical treatments of the topic. Those have focused on broad economic factors, such as labor-market dynamics, technological advances, capital investments, and fiscal and monetary policy, rather than firm-level features. Or they have focused on productivity dispersion and diffusion patterns across millions of often-anonymous firms. This research zooms in on those firms that are most relevant for driving growth and enriches quantitative analysis with sector- and firm-specific case studies in line with MGI’s tradition of analyzing the “micro-to-macro” roots of productivity. In the 1990s, for instance, MGI coined the term “the Walmart effect” to show the disproportionate impact of the US retailer’s growth not only on its own sector but on the entire US economy.³MGI has written extensively about productivity. For more on the Walmart effect, see, for instance, William W. Lewis, Vincent Palmade, Baudouin Regout, and Allen P. Webb, “What’s right with the US economy,” McKinsey Quarterly, February 1, 2002. For recent analyses, see the MGI reports “Rekindling US productivity for a new era,” February 2023; “Accelerating Europe: Competitiveness for a new era,” January 2024; “Investing in productivity growth,” March 2024; and “A microscope on small businesses: Spotting opportunities to boost productivity,” May 2024. This work also builds on MGI’s long-standing tradition of understanding how companies and their contributions advance global economic and social progress.⁴See, for instance, the MGI reports “Outperformers: High-growth emerging economies and the companies that propel them,” September 2018; “‘Superstars’: The dynamics of firms, sectors, and cities leading the global economy,” October 2018; “Latin America’s missing middle of midsize firms and middle-class spending power,” May 2019; and “A new look at how corporations impact the economy and households,” May 2021.

We apply the economic definition of labor productivity as real gross value added (GVA) per worker, which is very different from profitability or efficiency and includes the impact of employees moving across firms. Our methodology comes with strengths and weaknesses (see sidebar “A new firm-by-firm lens on productivity growth”). First, we look at 8,300 large firms covering two-thirds of GVA in four sectors—retail, automotive and aerospace, travel and logistics, and computers and electronics—in three countries: Germany, the United Kingdom, and the United States.⁵From a sample of about 8,300 firms, 900 are in the US sample, about 3,000 in the German sample, and some 4,400 in the UK sample. These are not complete samples of each country’s economy and also include multinationals. Second, we look at 2011–19, a period that may miss more recent market trends but that helps us identify productivity patterns that may hold over time. We have, if you like, constructed a “lab economy” for this research in a bid to discern what drives productivity and economic growth. Our findings prove robust under a gamut of tests.

A few firms shape the lion’s share of an economy’s productivity growth

The prevailing view is that productivity growth emerges gradually through the incremental improvements of many firms, trickling down as best practices diffuse from leaders to the rest.⁶Dan Andrews, Chiara Criscuolo, and Dirk Pilat, “The future of productivity: Improving the diffusion of technology and knowledge,” Digiworld Economic Journal, number 100, fourth quarter, 2015. In our lab economy, a very limited number of firms drove the lion’s share of productivity growth in powerful bursts.

Approaching this topic from a distinct analytical angle led us to develop a specific terminology for certain firms in our sample. To help readers navigate what follows, we begin with a brief overview of these definitions (see sidebar “Glossary of firm descriptions”).

Productivity advances one firm at a time

Fewer than 100 firms in our sample of 8,300—a group that we have dubbed Standouts—accounted for about two-thirds of the positive productivity gains in each of the three country samples we analyzed. Standouts are defined as firms that added at least one basis point to their national sample’s productivity growth.

To give a sense of how important a single firm can be, just another dozen or so of the largest Standouts could have doubled productivity growth in their entire country.

The number of firms that were responsible for the largest drags (negative contributions of at least one basis point) on productivity growth—we call them Stragglers—was even smaller. Only 55 Stragglers accounted for 50 to 65 percent of the firm-level productivity drag in the three country samples (Exhibit 1).

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A series of stacked bar charts displays the contribution of firms to productivity growth in the United States, Germany, and the United Kingdom. The charts show that a small number of firms—the Standouts and Stragglers—accounted for a disproportionate share of productivity growth and degrowth. In the United States, 5 firms (Standouts) accounted for 78 percent of positive growth, while two firms (Stragglers) accounted for 57 percent of negative growth. In Germany, a very small number of Standouts contributed 65 percent of the positive growth and Stragglers contributed 66 percent of the negative growth. Finally, in the United Kingdom, the very few Standouts accounted for 45 percent of positive growth, while Stragglers accounted for 48 percent of negative growth. The exhibit highlights that a small percentage of firms had a significant impact on overall productivity growth. The chart also shows Standouts and Stragglers made a significantly larger contribution to employment than other firms in the sample.

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In the United States, for instance, 44 Standouts—5 percent of sample firms, accounting for 23 percent of employment share—generated 78 percent of positive productivity growth. And 14 Stragglers—2 percent of sample firms, accounting for 10 percent of employment—were responsible for 57 percent of negative growth (Exhibit 2). US Standouts included household names like Apple, Amazon, The Home Depot, and United Airlines.

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A step chart displays the contribution of firms to the US sample’s productivity growth from 2011–19. The chart shows that 44 Standout firms (5 percent of the sample) account for nearly 80 percent of the positive productivity growth, while 507 firms (55 percent) account for the rest of the positive growth. Fourteen Straggler firms accounted for 57 percent of negative growth, with 349 firms contributing the rest. The overall country sample productivity growth was +2.1 percentage points.

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Standouts shape sector dynamics, and vice versa

The same patterns appear when we look at subsectors. The ratio of Standouts (and their contribution) to Stragglers (and their drag) was the clearest factor in driving fast productivity growth. In almost all subsectors experiencing rapid productivity growth (defined as 2 percent per year or more), Standouts drove the bulk of that growth, and there was less drag from Stragglers (Exhibit 3).

High growth

The US computers subsector posted the most productivity growth of any in our sample and it came from Standouts. The relationship between healthy productivity growth and the presence of Standouts was also evident in US semiconductors and electronic equipment.

Low growth

In comparison, productivity growth in the German electronic equipment and semiconductors subsectors was limited. There were fewer Standouts and more Stragglers.

Negative growth

In these subsectors, there were many Stragglers and each imposed a significant drag on productivity growth. Examples are German travel and UK other transport manufacturing.

Exhibit 3

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A table displays subsector productivity growth and contribution by Standouts and Stragglers in the United States, Germany and the United Kingdom. The data shows that a healthy contribution from Standouts and less from Stragglers mattered for subsectors’ productivity growth. The table is shown in three parts. The first one focuses on subsectors with high productivity growth. For example, the US Computers subsector shows 8 percent productivity growth and an 8.1 percentage point contribution from only five Standouts. The table shows the number of firms contributing positively or negatively, as well as the ratio of Standouts to Stragglers for each subsector.

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The second part of the table shows subsectors with low productivity growth. It includes grocers and apparel firms for the three countries, among other subsectors.

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The last part of the table shows subsectors with negative productivity growth, where Stragglers contribution to negative growth outweighs the positive impact of Standouts. Travel in Germany and other transport manufacturing in the United Kingdom have the most negative growth.

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The relationship between Standouts and sector growth is, of course, a symbiotic one. Standouts drive the growth of sectors, but some sectors also have the market dynamics, technology, regulation, and competitive setting that provide fertile ground for Standouts. There were more Standouts in sectors where firms could create new customer value and scale new business models than in sectors that were mostly about efficiency. For instance, the US computer and electronics sector came with many scalers and disruptors. Often when demand is faltering, other sectors are relative deserts, tending to produce more Stragglers or firms that restructure.⁷For more on external, sector-level factors that can drive within-firm productivity differences, see Chad Syverson, “What determines productivity?” Journal of Economic Literature, volume 49, number 2, June 2011. For detail on how contexts with limited technology diffusion can undermine aggregate productivity growth, see Bernado Mottironi, Labour market power and aggregate productivity, POID Research Seminars, November 2014.

The thousands of firms that are neither Standouts nor Stragglers also matter collectively

About 10 percent of firms accounted for 90 percent of productivity growth in the period studied. Looking at all firms, about 50 percent increased productivity faster than the sector average. Indeed, 20 percent of all firms increased productivity 1.5 times faster than the sector average while also increasing their employment share.

The millions of micro-, small, and medium-size enterprises (MSMEs) outside our sample collectively contributed up to 30 percent of productivity growth in the four sectors in the national statistics.⁸MSMEs account for 30 percent of US and UK productivity growth (positive in the United States, negative in the United Kingdom, and near zero in Germany for the four sectors analyzed). Sectors with notable shares of MSME contribution are US retail and UK computers, as well as German and UK travel and logistics, where MSME GVA shares are significantly higher. Contributions were calculated using OECD firm splits by business size for Germany and the United Kingdom, and census data for the United States, applied to OECD productivity growth rates. Indeed, a handful of them may emerge as the Standouts of tomorrow.⁹For more on the importance of young firms and innovation to labor productivity, see, for instance, Ryan A. Decker et al., “Changing business dynamism and productivity: Shocks versus responsiveness,” American Economic Review, volume 110, number 12, December 2020; John Haltiwanger et al., “High growth young firms: Contribution to job, output, and productivity growth,” in John Haltiwanger et al., eds., Measuring entrepreneurial businesses, Studies in Income and Wealth, volume 75, National Bureau of Economic Research, September 2017; and Daron Acemoglu et al., “Innovation, reallocation, and growth,” American Economic Review, volume 108, number 11, November 2018.

Standouts are sufficiently large, and make meaningful enough advances in productivity or scale, to shape national growth

Standouts tend to have sufficient size and either rapid productivity gains or sizable increases in employment share from an above-average position, which makes them able to drive economy-wide growth. However, it is notable that, in general, Standouts are neither the most productive firms nor the firms that are growing productivity the fastest.¹⁰This finding is in line with existing literature, which holds that firms from different percentiles of the productivity distribution can contribute meaningfully to productivity growth. See, for instance, Trends in UK business dynamism and productivity: 2024, Office for National Statistics, December 3, 2024; and Bart van Ark and Mary O’Mahony, The UK’s productivity challenge: People, firms, and places, The Productivity Institute and Economic and Social Research Council, November 2023. In both cases, firms tend to be smaller and more niche and do not contribute an oversize amount to sector-level growth. These firms are also hard to replicate. In retail, for instance, firms with the top productivity levels are online game distribution platforms and distributors of manufacturers’ captive brands.¹¹We compared Standouts with the top 5 percent of firms by productivity level and growth, which are often identified in the productivity dispersion and diffusion literature, and found virtually no overlap.

Let us now look at the four types of Standouts, which we describe here ranked by size of contribution. Improvers—large firms that mainly contribute by advancing their productivity levels—made the largest contribution to productivity growth. Disruptors, or small firms that grew productivity and share very rapidly, actually made the smallest contribution. Scalers, which were already far above the sector’s average productivity and grew their share of employment, and therefore drove productivity growth mostly via employment reallocation, made the second-largest contribution.¹²To get to firms in the frontier, we first rank all firms by productivity per employee, then select, from most to least productive, the ones that collectively employ 20 percent of employees in our sample. For instance, consider an economy made up of only five firms and 100 workers. Firms are ranked from most to least productive. Firm 1 is the most productive, Firm 2 is second, and so on until Firm 5, the least productive. Once ranked by productivity, firms’ employment share according to their productivity rank is 2, 8, 10, 20 and 60 percent. In this case, firms 1 to 3 are the most productive and account for up to 20 percent of the economy’s employment share. Therefore, firms 1 to 3 are inside the frontier, Firm 3 defines the frontier’s productivity threshold, and all firms less productive than Firm 3 are outside it. Restructurers are less productive firms that made a positive contribution by losing market share and employment to more productive firms or exited altogether.

Being large helps, but size alone is not sufficient to be a Standout. Large firms did not make an outsize contribution for their employment share. For example, in the United States, the top 10 percent of firms by size that made positive contributions had 54 percent of the employment share but accounted for only 68 percent of positive productivity growth. Meanwhile, US Standouts had a 23 percent share of employment but accounted for 78 percent of positive growth. In fact, large firms are as likely to be Stragglers as Standouts, which explains this pattern.

Including MSMEs would not have changed the disproportionate impact or identity of Standouts in our sample, partly because each individual MSME is too small. In the national statistics for the sectors in our scope, MSMEs collectively accounted for less than one-third of productivity growth. In short, in our sample, a handful of Standouts out of a million firms would account for more than half of productivity growth. This is a much more extreme concentration than commonly appreciated.

Some Standouts remain Standouts over long periods, but many change over time. With a limited sample, we find that about two-thirds of Standouts in 2011–19 remained Standouts in 2019–23.¹³Our 2019–23 analysis compiles data from a variety of sources, including McKinsey Value Intelligence, S&P Global Market Intelligence, national statistics databases, IHS Markit, OECD, and the International Labour Organization. The subset of 114 firms was selected based on data availability for the 2019–23 period and consistency of data quality when compared with the 2011–19 database. A manual review of firms was conducted where firms showing variation from the 2019–23 data set to the 2011–19 database were validated and updated where required using published financial statement data. Country- and sector-level productivity growth from 2019 to 2023 was calculated using publicly available data from national statistics for deflators, wage data, and real GVA. We acknowledge that our sample does not analyze the full population of top Standouts and Stragglers. However, we note that by analyzing the subset of firms for which data is consistent across both periods and using the same source of data for 2019 and 2023, we are confident that our findings are sufficiently robust to compare productivity performance over both periods. The other one-third fell back, while new firms emerged as Standouts—including former Stragglers turning around.¹⁴Note that our 2019–23 analysis was performed on only 114 2011–19 firms for which data was readily available, and not the whole population of firms. So, at any point in time, a few firms disproportionately matter, but these firms evolve. The story of productivity is highly dynamic.

Standouts trigger productivity bursts with top-line growth and business shifts more than efficiency

Standouts share few common characteristics. They come from all sectors and all parts of the productivity curve, have vastly different starting points on common business metrics and past performance, and contribute to productivity growth in different ways. What they have in common is “doing things differently” more than “doing things more efficiently.”¹⁵Inflation follows a similar pattern of idiosyncratic bursts rather than being driven by macroeconomic shocks. See, for instance, Santiago Alvarez-Blaser et al., The granular origins of inflation, BIS working paper number 1240, January 2025.

We conducted detailed case studies of all the Standouts in our sample sectors (retail, automotive and aerospace, travel and logistics, and computers and electronics). What emerges from these case studies is that Standouts used a combination of five types of moves, often in combination. Four of these relate to scaling productive businesses or finding new ways to create value. Only one is primarily about efficiency and cost.¹⁶Marcela Eslava and John C. Haltiwanger, The size and life-cycle growth of plants: The role of productivity, demand and wedges, National Bureau of Economic Research working paper number 27184, May 2020. To help illustrate these strategies and how they are used, we offer the following examples:

• Scaling more productive business models or technologies. Examples include Apple shaping the mobile internet wave, Amazon shaping e-commerce, Zalando successfully scaling e-commerce in apparel, and easyJet helping to set the low-cost carrier trend.
• Shifting regional and product portfolios toward the most productive businesses or adjacencies. Examples include doubling down on product lines that have higher customer value relative to the hours needed, such as Nissan expanding electric vehicle (EV) offerings in automotive, and other players doing likewise for SUVs; Apple and Broadcom shifting their product portfolios to higher-margin services; General Motors exiting unprofitable geographies; and Amazon venturing into cloud computing through Amazon Web Services (AWS).
• Reshaping customer value propositions to grow revenue and value added. This strategy can be effective in both high-end niche segments and mass markets, and it often comes in response to trends or competitive attack. Examples in mass markets include US retailer The Home Depot improving customer experience both in-store, with a wider assortment and denser network, and online, integrating buying online and picking up in-store; and UK supermarket chain Tesco responding to pressure from hard discounters in addition to cost reduction, portfolio adjustments, and price reductions by improving the premium assortment offering and fully leveraging its convenient locations. US airlines including Delta and American Airlines provided distinct value propositions and value-added services to loyalty customers. In niche segments, examples include Nvidia building a winning value proposition for graphics processing units (GPUs) and scaling it up; Zeiss providing cutting-edge tech in extreme ultraviolet (EUV) lithography; and Danaher in high-tech life sciences.
• Building scale and network effects. Examples of firms offering more for less include Amazon scaling its fulfillment capabilities to make them available to more shoppers and partner retailers; logistics conglomerate Hapag-Lloyd driving growth through acquisitions and geographic expansion; and US airlines improving route networks and aircraft capacity utilization, including through mergers.
• Transforming operations to raise labor efficiency and reduce external cost at scale. Examples include Tesco’s multibillion-pound cost-reduction program (in addition to competing on price and quality with discounters) and easyJet’s fleet modernization to reduce operating cost (alongside shaping a winning customer value proposition). While this is the lever most commonly associated with productivity growth—at least among businesses—it was very rarely the most important one in our case studies.

These moves often trigger chain reactions that lead to bursts of productivity over specific periods and sectors in a pattern of “action and response” more than through the diffusion of practices. For instance, the entrance of digital players and discounters in the UK retail sector not only directly boosted productivity in that economy but also prompted responses from other firms, one instance being Tesco enhancing its own offering with a stronger online channel and deeper customer relationships through loyalty and personalized offers.

Firms in different parts of the productivity curve made bold strategic moves, which help to explain their movements along that curve. Take the retail sector as an illustration (Exhibit 4). In US retail, firms such as Amazon, Costco, and The Home Depot were Standouts in the productivity frontier. In German retail, Standouts carried out bold strategic moves and transitioned to the frontier. Examples include Zalando, which scaled up its e-commerce business from negative productivity levels and traveled all the way to the frontier, and REWE, which launched and scaled digital offerings even while expanding its brick-and-mortar business. In UK retail, contributions also came from Standouts outside the frontier, one instance being Tesco.

In US retail, Standouts tended to be in the productivity frontier in both 2011 and 2019.

In German retail, Standouts carried out bold strategic moves and transitioned to the frontier by 2019.

In UK retail, contributions also came from Standouts persistently outside the frontier.

Exhibit 4

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A series of three exhibits shows the productivity, measured in real value added per employee, of sample retail firms in the United States, Germany, and the United Kingdom from 2011–19. It also shows employment share of each firm as a percentage of the sample’s total in its country. The first part of the exhibit shows retail firm productivity in the United States, based on a sector sample of about 200 firms. In 2011, the sector’s average productivity per employee was $39,000, and in 2019 it was $44,000. Overall, retail in the United States was led by a vibrant frontier of e-commerce and traditional retailers.

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The second part of the exhibit part shows retail firm productivity in Germany from 2011–19, based on a sector sample of about 800 firms. In 2011, the sector’s average productivity per employee was €40,000, and in 2019 it was €43,000. Overall, German retail benefited from a notable increase in productivity levels among traditional grocers and e-commerce leaders.

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The third and last part of the exhibit part shows retail firm productivity in the United Kingdom from 2011–19, based on a sector sample of about 1,700 firms. In 2011, the sector’s average productivity per employee was £34,000, and in 2019 it was £32,000. Overall, retail in the United Kingdom experienced traditional grocers and retailers contributing from outside the frontier.

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Leading firms and the dynamic reallocation of employees toward them matter for growth

Beyond the presence of Standouts and absence of Stragglers, the following patterns characterized subsectors and countries that posted rapid productivity growth:

• Frontier firms contributed disproportionately. In the highest-growth subsectors, the primary pathway to productivity growth was firms contributing from the frontier, followed by firms transitioning to it.¹⁷A frontier firm is defined as being in the employment-weighted top quintile of the firm’s sector. To get to firms in the frontier, we first rank all firms by productivity per employee, then select, from most to least productive, the ones that collectively employ 20 percent of employees in our sample. For instance, consider an economy made up of only five firms and 100 workers. Firms are ranked from most to least productive. Firm 1 is the most productive, Firm 2 is second, and so on until Firm 5, the least productive. Once ranked by productivity, firms’ employment share according to their productivity ranks is 2, 8, 10, 20, and 60 percent. In this case, firms 1 to 3 are the most productive and make up to 20 percent of the economy’s employment share. Therefore, firms 1 to 3 are inside the frontier, Firm 3 defines the frontier’s productivity threshold, and all firms less productive than Firm 3 are outside it.
• Leaders pulling ahead drove rapid subsector growth as often as laggards catching up. A common view is that productivity growth is particularly strong when the broad swath of middling or lagging firms catches up or converges with innovative leaders as best practices and technologies cascade down. Such convergence appeared in four out of nine subsectors with fast growth. In the other five, rapid growth came from frontier firms pulling further ahead—divergence.¹⁸We assessed convergence by looking at how the productivity of nonfrontier firms grew relative to the productivity of frontier firms in 2011–19. Our approach is in line with methodology used by Min Zhu, Longmei Zhang, and Daoju Peng, China’s growth potential—A stocktaking and sectoral approach, International Monetary Fund, November 2019. Others calculate country convergence by comparing the gap between countries that at time t were in the frontier and not in the frontier. See Daron Acemoglu, Philippe Aghion, and Fabrizio Zilibottu, “Distance to frontier, selection and economic growth,” Journal of the European Economic Association, volume 4, number 1, March 2006; and Michael Kremer, Jack Wills and Yang You, Converging to convergence, National Bureau of Economic Research working paper number 29484, November 2021. Firms in our sample move in and out of the frontier in 2011 versus 2019, whereas in the latter methodology, country status is fixed across the periods of comparison. If we were to fix firm frontier status as per 2011 and compare the productivity of those firms with firms that were nonfrontier in 2011, we would see a lot more convergence across the subsectors. This is because many firms that were in the frontier in 2011 reduced productivity and were replaced by other firms pulling in from outside the frontier. However, that fails to illustrate the change in the gap of productivity of leaders versus laggards. For that, comparison of frontier versus nonfrontier productivity is required, as we have done.
• Employment reallocation from lagging to leading firms mattered nearly as much as productivity advances within firms and more than new entries or exits. In almost all subsectors, both productivity advances and employment reallocation played a role. In eight of 21 subsectors with positive productivity growth, reallocation of employees from less to more productive firms dominated. In the others, productivity increases by individual firms mattered more.¹⁹Note that this split is sensitive to where we draw the line. The reallocation effect becomes bigger when we aggregate subsectors into sectors, because it then captures more of the impact of sector mix. The importance of the reallocation effect is in line with previous research. According to Chad Syverson in “What determines productivity?” Journal of Economic Literature, volume 49, number 2, June 2011, aggregate productivity growth in US retail happens mostly through the exit of less efficient single-store firms and reallocation to more efficient chain store affiliates. For detail, see Lucia Foster, John Haltiwanger, and C. J. Krizan, “Market selection, reallocation, and restructuring in the U.S. retail trade sector in the 1990s,” The Review of Economics and Statistics, volume 88, issue 4, 2006. Firms leaving or entering the market—traditional creative destruction—mattered less. It is notable that, in virtually all positive-growth subsectors, exits added to growth, sometimes substantially, while in almost half of these subsectors, entries detracted from growth. New entrants proved too small or unproductive to leave a mark during the 2011–19 snapshot period.²⁰In our sample, Standouts were, on average, 58 years old (since incorporation) and the youngest firm (not the result of a merger or spin-off) was 11 years old in 2019. Over a longer period, every Standout will have been a new entrant at some point, but the youngest firm in our eight-year sample was 11 years old, and the average was 58.

US sample firms led on productivity growth with more Standouts, fewer Stragglers, and more reallocation

US productivity growth from 2011 to 2019 was faster than that of the other countries in our sample at 2.1 percent, compared with 0.2 percent in Germany and close to zero in the United Kingdom. Two patterns help explain this difference, as follows:

• The US sample had three times more Standouts than Stragglers, while the German and UK samples had almost even numbers. This was largely due to the strong US computer and electronics sector, which accounted for about half the Standouts in the United States and most of the difference in the total number compared with Germany and the United Kingdom. This could reflect the more vibrant US innovation ecosystem—the market is less fragmented, regulation is more innovation- and investment-friendly, and the risk-capital system is well developed. But even beyond this special sector, the same pattern is present.²¹Excluding the computer and electronics sector, the United States had 1.3 times more Standouts than Stragglers, while both Germany and the United Kingdom had more Stragglers than Standouts.
• Firms in the US sample had more reallocation of employees from less productive to more productive firms. Leaders grew faster, and underperforming firms more swiftly restructured or exited. In the United States, Standouts include scalers (firms far above average sector productivity that contribute by gaining employees) and restructurers (firms with below-average sector productivity that contribute by losing employees). In Germany and the United Kingdom, this was not the case. Rather, these countries preserved underperforming firms as Stragglers. Frontier firms scaling and gaining share added 0.6 percentage point to productivity growth in the United States, and unproductive firms exiting contributed an additional 0.5 percentage point. Overall, dynamic reallocation, including reallocation across subsector boundaries, added 0.9 of 2.1 percentage points—slightly less than half—to productivity growth in the US sample.²²This analysis differs from examining individual subsectors as we did above, because it also captures the impact of movement across them. We look at our lab economy only and do not know the impact of employees leaving or entering firms outside the sample. In contrast, the contribution of reallocation was negligible in Germany and the United Kingdom (Exhibit 5). This may be explained by the fact that the United States has highly dynamic factor markets, allowing for quick entry and exit as well as fast scale-up and restructuring.

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An exhibit shows a horizontal waterfall chart showing firm contribution to the national sample productivity growth in the United States, Germany, and the United Kingdom from 2011–19. The chart breaks down productivity growth into firm productivity effect and reallocation effect. Each country's contribution is further broken down by the source of the impact: contribute from the frontier, contribute from outside the frontier, transition to frontier, transition from frontier, entry, and exit. For the United States, the firm productivity effect contributed 1.2 percentage points to the national sample’s total productivity growth, while the reallocation effect contributed an additional 0.9 percentage points, resulting in 2.1 percentage points of total productivity growth. The sample size for the United States was 914 firms. Germany's total productivity growth was 0.2 percentage points, comprised of 0.3 percentage points from the reallocation effect and –0.1 from the firm productivity effect; its sample size was 2,970 firms. In the United Kingdom, total productivity growth was 0, with the reallocation effect contributing 0.2 percentage points and the firm productivity effect contributing –0.2; its sample size was 4,408 firms. A major takeaway from the exhibit is that reallocation from exiting firms to the frontier played a big role in the US.

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A new productivity growth playbook emerges

Business leaders and policymakers should focus on productivity growth because it is a win-win for all, and achieving it requires a micro-to-macro, firm-level approach. This research both builds on and diverges from the large body of work on productivity in important ways.

Firms boosting productivity deliver a win-win for employees, customers, shareholders, and economies

Firms rightfully focus on revenue, economic profit, and shareholder value, but they should also care about productivity growth for the following three reasons:

• For long-term success, firms need to serve customers, pay workers, and reward shareholders well, and productivity growth is one of the only ways to achieve that in combination. Indeed, this research shows that firms with the highest productivity growth can not only afford—and award—the fastest wage growth and have the largest profits upside (Exhibit 6).²³There are good business reasons for productivity and profitability growth to move in different directions in the short term. One is that companies may opt to engage in lower-productivity activities because they enhance profits or strengthen strategic positioning, even if the impact on the productivity of the firm is negative. For instance, a shipping company that acquires a trucking business might boost its market position and resilience but would reduce its average productivity level. Consider, too, that firms that invest heavily in growth initiatives can experience a temporary drag on productivity. Scaling those operations can lower productivity in the short term but sets the company up for higher productivity over the longer run. Outsourcing may also affect productivity levels differently, depending on the productivity of the functions outsourced. Sectors with the fastest productivity growth also generate the highest consumer surplus.
• Economic growth is a key ingredient in business expansion and success. This research shows that just a handful of Standouts can create that growth rather than just react to it.
• Given long-term demographic shifts and today’s tight labor markets, growing labor productivity is a strategic imperative. Doing so can create more value from a scarce workforce and enable the higher wages needed to attract the best talent, thus underpinning growth and gains in market share.²⁴“Help wanted: Charting the challenge of tight labor markets in advanced economies,” McKinsey Global Institute, June 2024; and “Dependency and depopulation? Confronting the consequences of the new demographic reality,” McKinsey Global Institute, January 2025.

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A bar chart displays the compound annual growth rate (CAGR) of productivity, nominal wages, and nominal profits per employee from 2011-19, categorized by firm type in Germany and the United Kingdom. The chart highlights that firms in the top quintile of productivity growth experienced significantly higher growth in both wages (7.8 percent) and profits (15.7 percent) compared to the average (2.8 and 2.3 percent, respectively). Conversely, firms in the bottom quintile showed negative growth across all three metrics (–6.3, –0.8, and –7.8 percent respectively). The data supports the assertion that higher productivity growth correlates with stronger wage and profit growth.

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Our findings prompt new ways of thinking on how to unlock productivity growth

Six shifts in the conventional wisdom on productivity growth emerge from our findings (Exhibit 7). Some of them challenge prevailing views—for example, the shift from seeing productivity generated through improvements within the broad swath of companies through the diffusion of practices to seeing productivity arising from the bursts of just a few firms. Others add renewed emphasis or nuance, such as the importance of dynamic reallocation mostly toward well-established leading firms as well as entries and exits.

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An exhibit presents six paradigm shifts in thinking about productivity growth, each accompanied by an illustration and an overarching question. The first shift highlights that productivity growth is driven by a few firms rather than a broad swath. The second focuses on the importance of incumbent improvers alongside superstars and disruptors. Thirdly, the need for bold action, and response instead of mere imitation is emphasized. The fourth shift highlights the importance of strategy, portfolio shifts, and value creation over efficiency. Fifth, the exhibit notes that scaling existing innovation is more crucial than creating new entrants. Finally, it emphasizes reallocation of resources to leading businesses as much as internal improvements. Each shift is accompanied by a corresponding overarching question probing the conditions necessary for success in each area.

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Each of the shifts in thinking raises the following critical questions for business and policy leaders:

• A few firms driving productivity growth instead of the broad swath. Policies designed to boost productivity growth have tended to focus on a mix of foundational enablers, rooted in the view that a wide range of firms gradually enhance productivity. They also tend to include specific policies supporting smaller firms in the adoption of better practices. But the significant role of Standouts may call for an asymmetric approach that matches the asymmetric contributions of firms.²⁵We acknowledge the potential risks associated with firms that accumulate potential unfair market and monopsony power and the longer-term concerns around market dominance stifling competition and innovation. Approaches to boosting Standouts need to be balanced against this. In what sectors are there too few Standouts or too many Stragglers, and what can be done? What tailored approaches could help firms remain or become Standouts, and which barriers could be removed?
• Incumbent improvers as much as superstars and disruptors. Our analysis suggests that there is a diversity of ways to become a Standout, and all are needed for national (or sector) productivity growth. The majority of Standouts are large incumbents achieving productivity gains over time (improvers) like Tesco and United Airlines. Only about 20 percent are scalers that lead from the front (these scalers could be most similar to superstars, which are often defined as firms with the greatest share of economic profit) like Amazon and Apple.²⁶For common descriptions and analyses of superstar firms, see “‘Superstars’: The dynamics of firms, sectors, and cities leading the global economy,” McKinsey Global Institute, October 2018, which defines superstar firms as the ones with the greatest share of economic profit; and David Autor et al., “The fall of the labor share and the rise of superstar firms,” The Quarterly Journal of Economics, volume 135, issue 2, May 2020. Some definitions of superstar firms are that they (1) have the largest revenue market share or profit pool share; (2) achieve the greatest gains in market share or marginal improvements in productivity; or (3) leverage their size to propel productivity growth, driving down marginal costs of expansion and gaining even more market share in the process. An additional 10 percent of Standouts are smaller disruptors (which are still far larger than any MSME) like Zalando. How can large incumbents remain agile and innovative enough to remain or become Standouts?
• Bold action and response more than imitation. Some imitation and diffusion of best practices from leaders to laggards occur, but the real engine of productivity growth is bold, idiosyncratic strategic moves to which competitors then respond. To better shape or respond to newly emerging technologies and business models, what can firms do, and what is the role of policy? What talent strategies and educational policies can nurture technology and innovation capabilities as well as managerial leaders who can make bold strategic moves?
• Strategy, portfolio shifts and value creation more than efficiency. Operational efficiency matters, but firm-level productivity growth largely comes from strategic moves that unlock more productive business models and portfolios, customer value, or innovation at scale. How can firms reinvent business models and customer value as they seek productivity advances from new technology, including artificial intelligence? Where and how can M&A play a role?
• Scaling innovation more than creating new entrants. Innovation by young companies that then grow fills the funnel of future Standouts, but it is Standouts scaling innovations that power productivity growth in the medium term. Businesses need to have the right strategy and deploy at scale. What is the right policy balance between preventing excessive market concentration and encouraging leading firms that can move the needle for their home economies? Could there be more proactive approaches to support innovative MSMEs or startups that could scale and contribute to growth while triggering consolidation of others? How can businesses strengthen the capabilities and ecosystems needed to deploy innovation at scale?
• Dynamic reallocation toward leading firms and business units as much as internal improvements. Firms increasing their productivity level matters for growth, but an equally important channel is the exit of unproductive firms and moves of employees (and capital as well as customers) from less productive to more productive enterprises. Within firms, too, shifting resources to higher-value activities is key. Can business leaders rethink their governance to allow decisive resource reallocation? What policies can support dynamic shifts in jobs to the most productive firms and help less productive ones turn around or restructure?

By looking through a firm-level lens with detailed case studies on the perennial issue of productivity, new insights and fresh ways of thinking about productivity growth have emerged. We hope that this research helps to advance understanding of productivity growth and suggests ways forward—and, certainly, areas for further debate and research.