146 RetuRn on Invested CapItal delivered low ROIC historically but managed to increase returns in recent years, thanks to ongoing consolidation in the United States and signifi cantly lower fuel prices. To some extent, the increases in ROIC refl ect a trend across industries to lower capital intensity, as we observed in Exhibit 8.5 . This could be interpreted as U.S. companies simply reducing their capital base—for example, by out- sourcing operations without necessarily creating value. 10 This is not the case, however. Total economic profi t for our sample of the largest U.S. companies increased from $31 billion in 1995 to $560 billion in 2017. Moreover, economic profi t increased for most sectors over the same period, with similar patterns as for ROIC. EXHIBIT  8.7 ROIC by Industry, 1995–2017 ROIC excluding goodwill, median, % 0 10 30 20 40 50 60 70 80 90 100 Industry Biotechnology Info services and software Pharmaceuticals Health-care equipment and supplies Industrial conglomerates Branded consumer goods Media Technology hardware Luxury goods and apparel Commercial and professional services Aerospace and defense Airlines Machinery and equipment Household durables Automobiles and parts Retailing Chemicals Distributing and trading Hotels, restaurants, and leisure Materials and components Construction Telecommunication services Transportation and logistics Metals and mining Oil, gas, and consumable fuels Utilities and power producers Median 2013–2017 Median 1995–1999 Source: Corporate Performance Analytics by McKinsey. 10 A ROIC increase from a reduction in invested capital from outsourcing does not necessarily indicate value creation. As Chapter 24 notes, the change in economic profi t provides a reliable indication. An Empirical Analysis of Returns on Invested Capital  147 Differences in ROIC within industries can be considerable. Exhibit 8.8 shows the variation between the first and third quartiles for the same indus- tries. Note the wide range of returns in information services and software. Some of the companies in the sector earn low returns because they are capital intensive, and low margins because their business model is not scalable, as in the case of running data centers. Other companies provide services that are based on standardized and scalable software, where the incremental cost to serve a new customer is small, leading to high ROIC. In some industries, the largest players also generate the highest returns, and median ROIC does not reflect the aggregated ROIC for the sector as a whole (defined as NOPAT for the sector divided by its total invested capital). An example is the technology hardware sector, where players like Apple drive the aggregate ROIC to almost 70 percent, versus a median of 27 percent in 2015–2017. EXHIBIT 8.8  Variation in ROIC within Industries, 2015–2017 ROIC,1 excluding goodwill, % 0 20 10 30 40 50 60 70 80 90 100 Industry Biotechnology Info services and software Pharmaceuticals Health-care equipment and supplies Industrial conglomerates Branded consumer goods Media Technology hardware Luxury goods and apparel Commercial and professional services Aerospace and defense Airlines Machinery and equipment Household durables Automobiles and parts Retailing Chemicals Distribution and trading Hotels, restaurants, and leisure Materials and components Construction Telecommunication services Transportation and logistics Metals and mining Oil, gas, and consumable fuels Utilities and power producers 3rd quartile Median 1st quartile 1 Scale limited to 100% for presentation purposes. Source: Corporate Performance Analytics by McKinsey. 148  Return on Invested Capital This chart also shows that the best performers in a weaker or mediocre industry may outperform the median performer in a stronger industry. Con- sider, for example, retailing, shown in the bottom half of the chart. The stron- ger retailers (like Walmart) outperform the weaker companies in the media industry, which appears in the top half of the chart. Stability of ROIC While industries often exhibit variations in their respective ROIC, many indus- tries tend to remain fairly stable over time. We can see this by grouping the industry-level returns on invested capital according to whether they are rela- tively high, medium, or low. As shown in Exhibit 8.9, most industries stayed in the same group over the period we studied, starting in the early 1960s. In addition, some industries are cyclical, having high and low returns at different points in the cycle but demonstrating no clear trend up or down over time. Persistently high-return industries included household and personal products, beverages, pharmaceuticals, and information services and software. These industries have consistently high returns because they are scalable or are protected by brands or patents. Persistently low returns characterize paper and forest products, railroads, and utilities. These are industries in which price premiums are difficult to achieve because of, for example, low barriers to entry, commodity products, or regulated returns. Perhaps surprisingly, this group also includes department stores. Like commodity industries, depart- ment stores can achieve little price differentiation, so as a rule, they realize persistently low returns. EXHIBIT 8.9  Persistence of Industry ROIC Trending down • Trucking • Advertising (excluding online) • Health-care facilities • Automobiles Persistently high • Household and personal products • Beverages • Pharmaceuticals • Information services and software Persistently medium • Machinery • Auto components • Electrical equipment • Restaurants Cyclical • Chemicals • Semiconductors • Oil and gas • Metals and mining Persistently low • Paper and forest products • Railroads • Utilities • Department stores Trending up • Health-care equipment • Aerospace and defense • Airlines • Biotechnology • Technology hardware