144  Return on Invested Capital
faster growth of these sectors relative to the rest of the economy, these sectors’ 
generally higher margins and returns on capital, and increases in these sec-
tors’ margins and returns on capital. As a result, the life science and technol-
ogy sectors generate six percentage points of the total 16 percent return on 
capital for the U.S. economy as a whole, compared with only two percentage 
points of a 12 percent overall return in 1995 (see Exhibit 8.6).9
ROIC by Industry
To see how differences in ROIC across industries and companies relate to 
likely differences in drivers of competitive advantage, we examined varia-
tions in ROIC by industry over the past two decades. Our findings are in line 
with results from prior editions of this book, in which we tracked profitability 
going back to the 1960s. Exhibit 8.7 shows the median returns on invested 
9 The ROIC contribution is calculated as the total NOPAT of the life science and technology sectors 
divided by the invested capital of all sectors. Note that the aggregate ROIC for the total sample is close 
to the median ROIC of 12.4% in 1995, 16.7% in 2005, and 17.4% in 2017.
EXHIBIT 8.5  Disaggregating ROIC of U.S.-Based Nonfinancial Companies, 1995–2017
70
60
50
40
30
20
10
0
1995
2000
2005
2010
2015
25
20
15
10
5
0
1995
2000
2005
2010
2015
0.70
0.60
0.50
0.40
0.30
0.20
0.10
0
1995
2000
2005
2010
2015
NOPAT/sales, %
ROIC excluding goodwill, %
Invested capital excluding goodwill/sales
Life sciences and technology1
Total
x
Note: ROIC, NOPAT/sales, and invested capital/sales are aggregate metrics.
1 Life sciences and techonology sectors comprise pharmaceuticals, biotechnology, health-care equipment and supplies, information services and software, and 
technology hardware, storage, and peripherals.
Source: Corporate Performance Analytics by McKinsey.

An Empirical Analysis of Returns on Invested Capital  145
capital for a range of industries during the periods 1995–1999 and 2013–2017. 
The exhibit reveals large differences in median ROIC across industries. Not 
surprisingly, industries with the highest returns, such as pharmaceuticals, 
health-care equipment, and technology-related businesses, are those with 
sustainable competitive advantages. In the case of pharmaceuticals and 
health-care equipment, this is due to patent-protected innovation. In technol-
ogy-related businesses, advantage typically flows from increasing returns to 
scale and customer lock-in. The branded consumer goods and luxury goods 
sectors have high returns thanks to customer loyalty based on brand strength. 
The industries at the bottom of the chart tend to be those where it is difficult 
to achieve a price premium or cost advantage—often commodity-based in-
dustries, including oil, gas, metals, and mining.
Industries typically recognized for having higher returns have often been 
the ones that also deliver the clearest improvements in ROIC over time. The 
reasons vary by sector. For example, leading aerospace and defense compa-
nies tend to focus on government contracts that include advance payments. 
This keeps the companies’ invested capital at low levels relative to revenues. 
The biotechnology sector matured over the past 20 years with large companies 
such as Amgen and Gilead generating outstanding returns from the successful 
development and marketing of innovative blockbuster drugs. Finally, technol-
ogy players benefited from growth and innovation in hardware (via semicon-
ductors, servers, and smartphones) and in software and services. As markets 
became increasingly global, the shift to more scalable online software and in-
formation services also contributed to higher margins and returns; consider 
Facebook’s and YouTube’s growth in social media or Microsoft and Oracle in 
software. One outlier from this high-return club: the airline sector, which has 
EXHIBIT 8.6  Contribution of Life Sciences and Technology Industries to the Broader 
Economy, 1995–2017
Contribution to aggregate ROIC excluding goodwill for total sample, %
1995
9.5
Life sciences and technology
Total aggregate ROIC for sample, %
Other
11.7
16.6
16.2
2.2
2005
12.7
3.9
2017
10.0
6.2
Source: Corporate Performance Analytics by McKinsey.