The winner-takes-all economy

Across industries and nations, a select few companies are creating almost all of the new shareholder value. Atomization is driving their success.

A striking performance gap is appearing throughout global equity markets. In industry after industry, spanning both the new and the old economies, a small set of companies is creating almost all of the new shareholder value. Simultaneously, the value of their less successful competitors is actually declining, and to an unprecedented degree.
The polarization of winners and underperformers is intensifying. Once, a chief executive officer could claim that the performance of the industry, not the company, was the prime mover for stock prices. But with the advance of globalization and technology, companies whose products or service models have the slightest edge over the competition can quickly exploit that advantage. Investors are scrutinizing companies one by one, screening out those with merely average performance and investing the bulk of their money with the top one or two players in each arena. This phenomenon has created a "winner-takes-all" dynamic in which 5 to 10 percent of the companies in a given industry create all of the shareholder value.
In most industries, the new winners are "atomizers," which focus on narrow industry segments where they can achieve a dominant position, even though they may hold only a small fraction of the assets or revenues in their industries. Some of the atomizers are first-to-scale newcomers, which capitalize on wholly new markets that are usually created by technological discontinuities. Others are attackers, which extract value at the expense of industry incumbents. Both types of atomizer launch and expand focused businesses that capture returns highly disproportionate to their size.
This new model is, of course, in stark contrast to the old scale-driven notions of successful corporate strategy. But the evidence is compelling: size, scope, cost economies, and vertical integration are much less important than they used to be. In this brave new world, the evidence suggests, start-ups and attackers are capturing the lion's share of value. Nevertheless, several large incumbents, including Enron, IBM, Nokia, and Texas Instruments (TI), have transformed themselves and emerged as winners.