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What is ‘Vitality’ and Which Businesses Have What’s Required for ‘Breakout Growth’?

We previously introduced the Fortune Future 50, a new ranking of companies best positioned for breakout growth.

The index was produced in partnership with the Boston Consulting Group and is divided into two lists: the 25 Leaders (companies with a market value above $20 billion) and the 25 Challengers (those below $20 billion when the ranking was done).

But what is “vitality” and how can business leaders determine if their companies have what’s required for “breakout growth?”

Martin Reeves, Senior Partner at BCG and Director of the BCG Henderson Institute, writes:

If you’re looking for a model of a big company that retains the dynamism of a startup, is a good place to start. Why? In part because, as the quote above suggests, founder and CEO Jeff Bezos knows that successful companies must nourish and retain one characteristic above all: vitality. At BCG, we define vitality as the capacity of a company to explore new options, renew its strategy, and grow sustainably. Preserving past advantages and position is not sufficient to thrive in today’s complex and dynamic business environment. In a fast-changing world, only the vital will survive.

Declining vitality is making large companies increasingly vulnerable to change, according to our research. A 2015 BCG study, for example, found that just 7% of companies that are market share leaders in their industries are also profit leaders. Many are merely hanging on. Loss of vitality stems in part from the natural life cycle of companies: The high growth rates typical of younger companies are hard to sustain. But in the long run, the majority of returns for shareholders are driven by revenue growth. For companies to prosper and deliver for investors well past the startup stage, they must learn the secrets of staying vital.

Today, most business decisions are still informed using backward-looking financial metrics, with the implicit assumption that past success is predictive of future success. But the high rate of change and uncertainty driven by technology, business model innovation, and other factors make this assumption increasingly untenable and demand new metrics and approaches. We believe the Fortune Future index, based on the idea of vitality, can help fill this gap. Many businesses will use methods like sensitivity analysis using intelligent financial modeling software to assist them in moving forward into an uncertain future and ultimately towards success. All this allows for confidence in both analysis and boardroom presentations and helps to illuminate the best path forward.

The result of a two-year research effort, the Future 50 ranks U.S.-listed companies with the best prospects for growth. The index has two pillars: 1) a market view of growth potential and 2) an assessment of the firm’s actual capacity to deliver that growth, based on four dimensions: strategy, technology and investments, people, and structure (click here for more on methodology). The result is a composite score that represents both a new metric and new perspective for business analysis.

The scoring system “leverages nonfinancial data to achieve this forward-looking view, giving insights on predictive factors which are not visible from financial data alone.” In addition, the team uses “machine learning to leverage unstructured data and tease out predictive patterns.”

For example: “It turns out that you can learn a lot about a company from what it says about itself. BCG used its natural language processing to analyze 200,000 earnings calls and 70,000 10-Ks-specifically Item 7 in the annual reports, where the company’s management lays out its strategy. BCG’s algorithm then scored each company on different factors, including long-term orientation. The algorithm rewarded companies for using words like ­’invest’ and ­’vision,’ as opposed to phrases such as ‘current’ or ‘short term.'”