Even good managers can be notoriously bad when it comes to understanding the limitations of size. We’ve heard many outstanding managers at large companies earnestly promise to double their share prices in five years or to beat market returns by percentage point gains that even small upstart competitors would envy. These executives’ intentions, such as setting high aspirations to encourage performance, are almost always the best. But outperforming markets poses special challenges for large companies—even those that already have strong market positions—and setting lofty goals can tempt them to make risky bets and demoralize employees charged with hitting unrealistic targets.

That’s why, in our experience, a solid understanding of what kind of performance a big company can really expect from its current business model is an essential starting point for setting performance aspirations in the most effective way. It’s not that large companies can’t do exceedingly well; our research on both US and global market leaders¹ reveals that among the top 25 companies by market capitalization, some do continue to outperform the S&P 500 by more than 5 percent (exhibit).

More telling, for the astute...