The pattern of adaptation Exxon exhibited is not typical of most large companies. It represents an unusual ability to successfully respond to and learn from external events, to innovate technically and organizationally, and to plan and execute new courses of action. In short, Exxon demonstrated a rare and distinctive ability to continually and successfully adapt to changing circumstances. We call this “agility.” Today, when every industry faces turbulent change as a matter of course, a company’s agility becomes the difference between sustaining performance and falling behind.
Agility and Performance
A closer look at the record of Exxon and other large, public companies, from a variety of industries, supports this link between agility and consistent high performance. We studied the financial performance of 243 large firms in 17 industries over the 30-year period from 1979 to 2009.
Like others before us, we concluded that stock prices and shareholder returns cannot tell a story about sustained performance. Equity markets are subject to fads, irrational exuberance, and misperceptions that have little to do with the quality of the business strategy, management insight, and organizational designs that produce profits. Exxon and ExxonMobil stock languished through the 1990s, for instance, despite exemplary performance during the dot-com craze.
Thus, instead of relying on total shareholder return (TSR) or its even more misleading cousin, cumulative shareholder return, we looked at return on assets (ROA)—a meaningful proxy for profitability in many companies and a better indicator of management’s effectiveness. (Only one of the 17 industries we studied—financial services and insurance—lacked any kind of reasonable asset base. For this industry, we used return on equity as a more relevant proxy for profitability.) In every industry we studied, there were two or three “outperformers”: companies that achieved above-average industry ROA performance more than 80 percent of the time. Altogether, this group made up 16 percent of the sample. Exxon was a member; between 1979 and 2009, its ROA exceeded the industry average 97 percent of the time.
Among the other companies, we found two common performance patterns. About 18 percent of the sample were “underperformers,” whose profitability was below the industry average 80 percent or more of the time. The remaining 66 percent of the sample were “thrashers”; their profitability oscillated between underperformance and outperformance relative to the industry average.
ExxonMobil is one of only two outperformers in the oil and gas industry. The other is Royal Dutch Shell PLC (see Exhibit 1). Outperformers in other industries include Campbell Soup, DaVita, GlaxoSmithKline, Honda, Johnson Controls, Limited Brands, Nike, Nokia, and Svenska Handelsbanken. Thrashers include BP, Procter & Gamble, IBM, Toyota, Pfizer, and Apple—all highly regarded companies that have received business accolades and spectacular press at times, but that tend to be admired for their peaks and forgiven for their valleys. Meanwhile, Exxon, Shell, and other outperformers, despite their occasional stumbles, more consistently deliver the goods.
To complete the link between agility and performance, we surveyed more than 4,700 directors and executives from 56 companies (including outperformers, underperformers, and thrashers), 34 of which were Fortune 500 firms included in the financial database. We asked about the way their organizations formulated strategy, designed their structures and processes, led their people, and changed and innovated. We also interviewed executives at 19 of the Fortune 500 firms.
When we compared our survey and interview data with the performance data, we observed a strong relationship between a company’s basic approach to management and its long-term profitability patterns. When markets and technologies changed rapidly and unpredictably—as they did in every industry over these 30 years—the outperformers had the capability to anticipate and respond to events, solve problems, and implement change better than thrashers. They successfully adapted. They were agile.