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Tuesday, March 31, 2009

Business Week 50: The Journal's Annual Listing Of Best American Companies
Originally Posted at BusinessWeek.com

As our 13th annual ranking of the BW 50 shows, innovation is still alive and well—vital, even—among America's largest companies

Nestled in the rolling hills just north of San Francisco, Autodesk is no Silicon Valley mover and shaker. The company is known mostly among engineers as the maker of the 3D software programs used by everyone from Hollywood animators to the architects designing the newest Manhattan skyscrapers. But Autodesk's bigger contribution to the U.S. economy may not be its role in such movies as Kung Fu Panda or the latest Indiana Jones epic. Rather, it's in helping manufacturers scattered across the Rust Belt compete against foreign rivals.

Consider the experience of Hardinge (HDNG), a machine tool maker in Elmira, N.Y. After watching many of its U.S. rivals go bankrupt—their equipment unbolted and shipped abroad for use by companies in Japan, Taiwan, and South Korea—Hardinge employed Autodesk as part of its survival plan. The software maker's engineers developed a customized set of 3D programs that enabled Hardinge to design and build a highly sophisticated lathe with 5,000 parts in as little as five months, roughly a third of what it took a decade earlier. That helped the $345 million company survive, turning a profit in four of the past five years. Autodesk's software "allows us to go from concept to finished machine much faster, and that's helped us stay competitive," says Richard L. Simons, Hardinge's president and chief executive.

Autodesk exemplifies many of the companies in this year's BusinessWeek 50, our 13th annual ranking of the best-performing companies in the Standard & Poor's 500-stock index. While each list invariably includes companies that rode the wave of powerful industry cycles—such as this year's four energy companies—many more, like Autodesk, earned their spot in the BW 50 as innovators. They created products or services dramatically better and cheaper than anything offered by rivals. "These companies are what I call the 'disrupters' of the economy," says Harvard Business School professor Clayton H. Christensen, an innovation expert. Autodesk training in the use of its cutting-edge design software, for example, have helped the makers of everything from appliances to cars to prosthetic limbs take on entrenched rivals with greater resources.

This year's BusinessWeek 50 is chock-full of companies that changed the rules of engagement in their industries. At Nucor (NUE) (No. 20), experimental technologies and cutting-edge compensation revolutionized steel manufacturing—and may help explain why the company is holding up despite tough times. IntercontinentalExchange (ICE) (No. 17) and its electronic futures market brought greater price transparency to energy trading, and the company is now blazing a new trail by launching one of the first clearinghouses for complex credit default swaps. Occidental Petroleum (OXY) (No. 43) has relied on advanced technology to wring more production out of its oil fields in Texas and is now doing the same in Libya. Laparoscopic tools from Intuitive Surgical (ISRG) (No. 41) have shortened the recovery period for many surgery patients and could in time dramatically reduce the number of beds the nation's surgical hospitals need. "This technology has potentially profound implications for the health-care system," says Intuitive Chairman and CEO Lonnie M. Smith.

And then there's this year's No. 1, Gilead Sciences (GILD). The Northern California biopharmaceutical company scored a huge success earlier this decade when it sensed an opening for HIV drugs that were simpler and cheaper than standard treatments, which required patients to pop dozens of different pills throughout the day. Gilead's researchers responded with a new manufacturing process allowing them to produce compounds of several drugs to be released into the bloodstream at different times. The result was a daily-dose pill that replaced the old drug cocktails for a fraction of the cost. Now the company is going after another big market: patient-friendly treatments for hepatitis C, a chronic liver disease that affects 170 million people worldwide.

Disruptive technologies and strategies may be a key tool for companies in periods of economic and industrial stress, like the current one. That's because recessions are historically times when companies make the biggest competitive strides—or fall behind. A 2002 survey by McKinsey of the performance of 1,000 companies during an 18-year period found that those that made the biggest leaps in profitability were often the ones that increased their spending on acquisitions and innovation the most amid recessions. It was during the 2001 recession, for example, that Apple began marketing its first iPod and IntercontinentalExchange expanded its energy trading platform with a key acquisition.


Given the carnage on Wall Street and in the economy, you might expect considerable turnover in the BusinessWeek 50. While some notable companies dropped off this year—for instance, UnitedHealth Group (UHH), No. 14 in 2008—the 2009 list includes a surprising number of return performers. Among the Class of 2009, 33 companies were repeats from last year's ranking, the largest number in the history of the BW 50.

The Class of 2009 also demonstrates that companies don't have to be startups to be innovative. Colgate-Palmolive (CL) (No. 5), Coca-Cola (KO) (No. 26), and Northern Trust (NTRS) (No. 49) stand out for their innovative spirit, even though their roots extend as far back as the 1800s. In most instances, these companies overcame difficult times by refreshing the values that made them great in the first place. In the case of Coca-Cola, that meant finally embracing the change in consumer tastes—and marketing niche brands, such as vitaminwater and its Dasani water, with the same commitment as it does its flagship cola. "Coke refutes the theory that all successful companies grow old and then disappear at some point," says management consultant Jim Collins. "They took their brand image—wholesomeness and friends and family—and applied it to new categories."

If there's another trait common among this year's BW 50 companies, it's that a good number have developed pay-for-performance cultures. At Nucor, IntercontinentalExchange, Fastenal (FAST) (No. 19), and Expeditors International of Washington (EXPD) (No. 28), employee salaries are nothing special—and in some instances they are below average for their sectors. But each of those companies supplements miserly salaries with generous incentives based on such metrics as profits and customer satisfaction.

Consider Fastenal, a distributor of nuts, bolts, and 49,000 other tools and parts used by industrial customers. Given the commodity nature of its products, Fastenal works hard to guarantee its costs are the industry's lowest. To encourage employees to act like owners and shave every penny possible out of its cost structure, Fastenal pours 10% of all profits above a preset level each year into bonuses and 401(k) contributions. That ensures managers don't grumble about the companywide ban on secretaries. Employees willingly share hotel rooms and forgo meal reimbursement on business trips because they know that part of the savings will flow back into their paychecks. "The benefit of this frugality is that it forces everyone to always look for ways to change, to improve every single thing you do," says Fastenal CEO Willard D. Oberton.

All these companies know there's no guarantee of success. Look through this year's rankings, and you'll see a number of current high achievers at risk of seeing their franchises disrupted by upstart rivals. For Starbucks (SBUX) (No. 32), the threat is coming from McDonald's (MCD) and Dunkin' Donuts, which are undercutting the coffee giant on price. For Microsoft (No. 8) (MSFT), the spread of cheap—or even free—Internet applications offered by Google (GOOG) (No. 35) is threatening its hegemony over the desktop computer. And Best Buy (No. 9) is seeing its CD and video franchise threatened by the digital downloading services run by the likes of Amazon and Apple. But these challenged companies have a history of rising to the occasion and may prove that they can be innovative—and disruptive—players once again.

See the full 50 Scorecard