What does it mean for a company to perform well? Any definition must revolve around the notion of results that meet or exceed the expectations of shareholders. Yet when top managers speak with us privately, they often suggest that the gap between these expectations and management’s baseline earnings projections is widening. Shareholders tend to think that today’s earnings challenges are cyclical. Executives, who find themselves frustrated in their efforts to improve the performance of their companies no matter how hard they swim against the economic tide, increasingly see the problems as structural.

This anxiety is understandable. The overcapacity spawned by globalization shows no sign of easing in many industries, including manufacturing sectors such as aerospace, automotive, and high-tech equipment as well as service sectors such as telecommunications, media, retailing, and IT services. Combined with the increased price transparency provided by digital technology, this overcapacity has given customers greatly enhanced power to extract maximum value. The result—the ruthless price competition that rules today’s markets—has convinced many top managers that profits won’t rise dramatically even if demand picks up from the recession levels of recent years. In short, the performance challenge companies face isn’t cyclical; it will persist for years to...