140  Return on Invested Capital Persistence of Competitive Advantage If a company cannot prevent competition from duplicating its business, high ROIC will be short-lived, and the company’s value will diminish. Consider two major cost improvements that airlines implemented over the past de- cade. The self-service kiosk and, more recently, the smartphone app allow passengers to purchase a ticket and to print or download a boarding pass from anywhere in the world without waiting in line. From the airlines’ per- spective, fewer ground personnel and equipment are needed to handle even more passengers. So why has this cost improvement not translated into high ROIC for the airlines?5 Since every company has access to the technology, any cost improvements are passed directly to the consumer in the form of lower prices. A similar example comes from robotic automation’s ongoing effect on productivity improvements in automotive manufacturing: all players adopt the new technology and pass on the cost reductions to customers. In general, advantages that arise from brand and quality on the price side and scalability on the cost side tend to have more staying power than those arising from more temporary sources of advantage, such as an innovation that will tend to be superseded by subsequent innovations. Potential for Product Renewal Few businesses or products have life cycles as long as Coca-Cola’s. Most com- panies need to find renewal businesses and products where they can leverage existing advantages or build new ones. This is an area where brands prove their value. Consumer goods companies excel at using their brands to launch new products: think of Apple’s success with the iPhone, Bulgari moving into fragrances, Mars entering the ice cream business, Netflix switching from DVD rentals by mail to video streaming online, John Deere offering information services to farmers, and Signify (the former Philips Lighting) developing con- nected lighting solutions such as Hue. Being good at innovation also helps companies renew products and businesses. Thus, pharmaceutical companies exist because they can discover new drugs, and semiconductor technology players such as ASML and Intel rely on their technology innovation to launch new products and stay ahead of competitors. Some companies, such as Procter & Gamble and Alphabet’s Google sub- sidiary, are able to maintain their primary product lines while simultaneously expanding into new markets. Google built new advertising and subscrip- tion businesses around, for example, YouTube and G Suite (which comprises Gmail, Calendar, and Google+) to complement the original advertising busi- ness that its search engine powers. Procter & Gamble has a strong record of 5 Although ROIC in the U.S. airline industry has increased over recent years, credit for this improvement goes not to cost reduction from new technology but to earnings gains from ongoing consolidation and lower fuel prices. An Empirical Analysis of Returns on Invested Capital  141 continuing to introduce successful new products, including Swiffer, Febreze, and Crest Whitestrips. It also anticipated the strong growth in beauty products in the early 2000s with a number of acquisitions that increased its revenues in the category from $7.3 billion to $20 billion from 1999 to 2013. Product de- velopment and renewal have enabled the company to advance from owning just a single billion-dollar brand (by sales) in 1999 to 23 such brands in 2013. Underlining its competitive strength in managing very large brands, Procter & Gamble announced in 2014 that it would discontinue or divest 90 to 100 smaller brands from a total of 180 brands in its portfolio. As the next section of this chapter indicates, empirical studies show that over the past five decades, companies have been generally successful in sus- taining their rates of ROIC. It appears that when companies have found a strategy that creates competitive advantages, they are often able to sustain and renew these advantages over many years. This also holds for the rela- tively new digital business models with which Amazon, Google, Microsoft, and others have retained and renewed their competitive advantages for two decades and more. While competition clearly plays a major role in driving down ROIC, managers can sustain a high rate of return by anticipating and responding to changes in the environment better than their competitors do. An Empirical Analysis of Returns on Invested Capital Several key findings concerning ROIC emerge from a study of 1963–2017 returns on invested capital at U.S.-based nonfinancial companies with (inflation-adjusted) revenues greater than $1 billion:6 • The median ROIC was stable at about 10 percent until the turn of the century and then increased to 17 percent after 2010, where it has re- mained since. Important drivers of this effect were a general increase in profitability across sectors, combined with a shift in the mix of U.S.- based companies to higher-returning sectors in life sciences and tech- nology. These sectors not only significantly increased their ROIC, but also grew faster. • Returns on invested capital differ by industry. Industries such as phar- maceuticals and branded consumer goods that rely on patents and brands for their sustainable competitive advantages tend to have high median ROIC, whereas companies in basic industries, such as oil and gas, mining, and utilities, tend to earn low ROIC. 6 The results come from Corporate Performance Analytics by McKinsey, which relies on financial data provided by Standard & Poor’s Compustat and Capital IQ. The number of companies in the sample varies from year to year and excludes financial institutions and industrial companies with significant financial businesses. In 2017, the sample included 1,095 companies.