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Features/Cover Stories/Most Admired
America's Most Admired Companies: We tell you why the two new companies in the top ten, Dell and Wal-Mart, are just alike--sort of.
Eryn Brown Reporter Associate Len A. Costa
03/01/99
Fortune Magazine
Time Inc.
Page 68+
(Copyright Time Inc. 1999)
Every year we survey thousands of business people to compile our list of America's Most Admired Companies. And every year the companies that rise to the top exemplify precisely the qualities that people have come to admire in business: Ingenuity. Profitability. Laserlike focus. The willingness to work hard, work harder, and then work just a little bit harder.
Many of the survey's perennial favorites seem to dig in as they age. For the second year in a row, General Electric is FORTUNE's most admired company, winning praise for its value as a long-term investment and, naturally, for the quality of its management under CEO Jack Welch. No. 2 Coca-Cola and No. 3 Microsoft continue to amaze competitors with their financial stability, their use of corporate assets, and their ability to attract capable employees. Only two companies dropped out of the top ten. Hewlett-Packard, No. 5 last year, fell to No. 18, and Johnson & Johnson went from No. 9 to No. 12. Their replacements, Dell and Wal-Mart, have achieved impressive growth and killer shareholder returns through the expert use of technology.
In the industry rankings, companies that stand to profit from the Internet scored especially well. America Online, which has solidified its position as the preeminent power on the net, moved up four places, to No. 2, in the computer and data-services group. Sprint, the new No. 1 among telecommunications companies, was the first major long-distance player to announce it would combine voice and data services on the same network. Equipment maker Lucent Technologies landed with a splash in its industry rankings, debuting at No. 2.
In the financial sector, "merger" is still the magic word. J.P. Morgan, the No. 1 commercial bank every year since FORTUNE began its Most Admired survey in 1982, finally lost its title this year to Citicorp, which merged with Travelers Group. And Travelers itself moved up three slots within the securities industry. The No. 2 commercial bank, Chase Manhattan, has been advancing steadily over the past five years, in part because of its successful combination with Chemical Bank; it also came through the Asian financial crises relatively unscathed. Morgan Stanley Dean Witter, another merger winner, jumped four places in the securities group. NationsBank advanced this year, although its new sibling, BankAmerica, took a hit, the result of significant losses overseas and the messy dismissal of CEO David Coulter.
Companies that made news--good or bad--made waves in the rankings. Viagra propelled Pfizer to the No. 1 pharmaceuticals spot, where it unseated Merck, the longtime category leader. Apple, with Steve Jobs at the helm and candy-colored iMacs flying off shelves, greatly improved its score, though it still lags behind IBM and Dell. Northwest Airlines, hurt by a pilots' strike, fell from No. 5 to No. 8. Boeing, long king of its category, plunged in the wake of massive layoffs.
Among the losers, a physicians' practice management company, Medpartners, saw its score fall 40.53%, more than any other. Trump Hotels & Casinos, Oxford Health Plans, and Shoney's joined it in the basement, scoring poorly on financial soundness, use of corporate assets, keeping talent, and community and environmental responsibility.
Predictable? Sure. But the companies that lead our list really do have the sharpest managers, the best-run operations, the coolest products, the happiest shareholders. They remind us that doing things well does reap rewards. Who would want it any other way?
This year's newcomers don't appear to have much in common. No. 4 Dell manufactures a limited number of customized products to sell online and over the phone, mostly to large companies. Dell is sleek, high tech, and virtual, with no stores. You can't see it when you drive down the street.
No. 6 Wal-Mart, on the other hand, sells millions of items to millions of people: everything from African violets to zippers, everywhere from California to Germany. With more than 3,000 stores, it's literally, physically, everywhere. There's nothing spare about it. Folksy to the core, Wal-Mart executives are as likely to lead employees in the company cheer as they are to cite sales figures or operational details.
But a closer look at the two companies reveals similarities. Both have famous CEO-founders. Both have killer stocks. Dell, which has gained 87,000% since 1990, is already legendary. Wal-Mart has rebounded nicely from an early '90s slowdown, adding 290% to its stock price over the past two years. Most of all, both companies are operational superstars, obsessed with quick product delivery. Keenly focused on their customers, they measure performance in minutes and seconds, rather than days and hours. And they force suppliers to keep pace. By maintaining low inventories and streamlining processes, they cut costs and pass the savings along to customers. Both companies steep employees in this philosophy. Dell bases bonuses largely on the company's return on invested capital--that is, how efficiently it operates. At Wal-Mart, every employee is expected to read and understand endless printouts of sales and inventory data.
Technology makes all this possible. But while Dell and Wal-Mart spend scads on computers and do amazing things with them, their executives bristle when asked to talk tech. All those fancy systems are just tools, they say. The means to an end. It's that attitude-- unwillingness to get mired in technology for technology's sake--that keeps both companies ahead of the pack.
At Dell everyone talks about the direct model, the company's practice of eliminating middlemen and selling PCs directly to customers. "Our only religion is the direct model," says vice chairman Kevin Rollins. CEO Michael Dell's new book is called Direct From Dell; a company-customer powwow scheduled for this summer will be called Direct to Dell. Ask an executive what it's like working with the Chinese government, one of Dell's newest customers, and he says approvingly, "They really understand the direct model." Everything is direct, direct, direct. "Analysts complain that we say the same thing over and over," says vice chairman Mort Topfer. The repetition may grate, but being direct has made Dell a powerhouse by putting it in constant touch with customers, enabling it to respond almost immediately to problems, and giving it constant, actionable feedback.
In the 15 years since Michael Dell began selling computers from his University of Texas dorm room, his company has grown into an $18- billion-a-year business that sells more PCs to medium-sized and large U.S. companies than giants like IBM, Hewlett-Packard, and Compaq. Dell is gunning for other parts of its rivals' business too, such as servers and high-margin storage products; it now sells almost 20% of the PC servers bought in the U.S., according to Roger Kay, an analyst at International Data Corp. Dell is also expanding internationally. Michael Dell says he eventually hopes to control 20% to 25% of the global PC market and aims to unseat leader Compaq (which has a 14.8% market share worldwide) in every region it serves.
Dell executives are confident that technology will help them capture those new customers. "We're always looking to see what we can do to make our customers' lives easier or save them money," says Michael Dell. "It pervades every part of the company. It might be a design challenge; it might be a manufacturing and distribution challenge." Take manufacturing. Dell makes its OptiPlex desktop computers at a 250,000-square-foot facility called Metric 12 in Austin, Texas. Bar-code readers flicker incessantly as they follow each PC on its journey down the line. A steady stream of trucks drops off raw materials from suppliers and picks up finished computers.
A Dell employee walks along the production line to show where the company's engineers have sped up production, bit by tiny bit (collectively, Dell engineers have more than 200 process-related patents). Workers used to touch a computer 130 times in the process of assembling it; that number is down to 60. At one station near the beginning of the line, workers attach motherboards and power-supply units to a computer's chassis. This effort, which once required six screws, now takes one. Farther down, a forklift-like tool called the stacker moves piled PCs in groups of five; workers used to move them one at a time. Near the end of the line, almost-finished computers sit on racks, ready for software installation. Employees plug the computers in to special adapters to download the software, which takes 45 to 90 minutes. Dell engineers are working on an automatic installation system that will reduce that time to 20 minutes. Even now, Dell can assemble OptiPlex computers in five hours or less.
Dell is equally single-minded about electronic commerce, which causes so much confusion for so many companies. Dell does about 20% of its business online ($10 million a day) and expects that eventually half its sales will be through the Internet. "Michael says the Internet is the ultimate direct model," explains Topfer. In 1997 the company created Premier Pages, Websites that enable a customer's authorized employees to research, configure, and price the PCs they plan to buy. To minimize processing errors, all information specific to the customer--system preferences, support details, inventory management policies--is included on the web page. Like the manufacturing improvements in Metric 12, Premier Pages save money. Ford Motor cut procurement costs by $2 million when it moved its Dell business online. Dell saved money on the Ford deal too, because it didn't have to hire as many order-entry people.
The Net is transforming Dell's sales to small businesses as well. It used to be that the small fry couldn't dream of getting the sort of service Dell gave its FORTUNE 500 customers. Now they (almost) can. "Our goal is to take all the expensive things we do for large accounts and make them happen for small ones," says senior vice president Paul Bell. Michael Dell isn't likely to drop in on a customer who works from home, but he might talk to her through one of the "Breakfast with Dell" seminars broadcast over the Net. "We stand to benefit quite a bit from {the Internet}," says Dell. "A lot of our competitors are going to be challenged, because they're stuck with an old model."
Direct from Austin, Dell has loudly proclaimed itself the new model.
Five hundred miles north, at Wal-Mart Store No. 1 in Rogers, Ark., a man leans over a freezer full of boneless, skinless chicken breasts. He swipes a hand-held computer over a bar code near the freezer. Within seconds, computers in the home office download a pile of statistics: how much the Rogers store makes selling chicken breasts, how many packages it has on hand, how many are on their way to the store, how many are sitting in freezers within a 150-mile radius.
Wal-Mart's computers track everything there is to know about everything the company sells. They know how much an item costs; the time a checkout person needs to to scan it at the register; other items customers tend to buy along with it; and how many more the supplier has on hand. And Wal-Mart's executives know exactly how to use that data to keep the company's merchandisers in sync with its stores, its stores in sync with its distribution centers, its distribution centers in sync with its suppliers. If Dell is all about being direct, Wal-Mart is all about being exact.
Wal-Mart made its first top-ten appearance on FORTUNE's Most Admired list in 1987, when it had revenues of $12 billion. Then as now, the world's largest mass-market retailer was admired for its relentless customer focus, its sophisticated distribution, and its superior information systems. But Wal-Mart fell out of the top ten in 1993, shortly after Sam Walton's death from bone cancer. While sales remained strong, executives had begun to believe that sustaining consistent earnings growth year over year depended on developing new markets. "It had become clear that we needed to reposition ourselves," says CEO David Glass. Wal-Mart began investing what would eventually become nearly $20 billion to open new stores abroad and to build Supercenters, combined grocery and general merchandise stores. Wall Street began to wonder if the company had lost its focus; the stock languished. Wal-Mart insisted it would post $100 billion in annual revenues by the end of the decade, just as Mr. Sam had promised. But observers--including FORTUNE--were skeptical.
They--and we--were wrong. Wal-Mart will soon report fiscal 1999 revenues of $137 billion. Its stock is back too; investors got a return of 107.6% last year.
The Bentonville, Ark., headquarters has a low-tech ambiance. Wal- Mart lore has it that Walton used to print out computerized reports, copy them in longhand, and tack them to a wall in his office. CEO Glass doesn't even have a computer in his office; neither does senior vice chairman Don Soderquist. "Sam never liked technology," Glass says. "He thought 'damn computer' was one word."
Yet Walton allowed Glass to computerize Wal-Mart. In 1976, Glass supervised construction of a satellite network that enabled stores to communicate with the central office (think of it as a proto- intranet). He also computerized the company's distribution systems, which he says were shockingly antiquated in 1978: "We were way behind. But being way behind was the best thing that ever happened to us." Because of its isolation from most technology and distribution centers, Glass explains, Wal-Mart was able to design and build its systems from the ground up.
Most companies these days are discarding homegrown computer systems in favor of cheaper, prewritten programs they buy off the shelf. But more than 90% of Wal-Mart's software is still written in- house by 1,000 full-time developers. Explains CIO Randy Mott, who as a young programmer helped write the 1978 distribution software: "We study off-the-shelf software to make sure we're not missing anything. But those programs tend to be very broad. We try to make our software very specific to our business. With the volume we're dealing with, it makes sense for us to know how to do this."
In other words, aw-shucks mythology notwithstanding, Wal-Mart has made technology a core competency. At the same time, the company spends less on technology, as a percentage of sales, than other retailers--0.5% last year, vs. 1.43% for the industry. Wal-Mart can do this because of its size. "They reap economies of scale from being so large," says Kurt Potter, a research analyst with the Gartner Group. Wal-Mart's computer centers in Bentonville and Tulsa can store 43 terabytes of data--more than any other corporation's. In an interesting turnabout, Amazon .com has hired away several Wal-Mart IT executives, and Wal-Mart is now suing the online book company for stealing its intellectual property and trade secrets. "What we've built here doesn't exist anywhere else," says Mott. "They've replicated things that are proprietary. All their ideas about retail distribution come from here. It's targeted raiding." (Wal-Mart, by the way, sells hardly anything online. "We'll be there to take advantage at the right time, and in the right way," says Mott. "First, we need to find a profitable business model. A legitimate retailer makes a profit," he adds, in another dig at Amazon .com.)
Wal-Mart is nothing if not legitimate and profitable. Even its big-ticket investments are beginning to pay off. The company has more than 500 Supercenters, and Glass plans to open 150 new ones every year. Wal-Mart is also introducing smaller grocery stores it calls Neighborhood Markets, aimed at shoppers who don't have the time (or the inclination) to wander through 200,000 square feet looking for peanut butter.
Abroad, a Wal-Mart outpost opens every week. Point-of-sale data flowing back to Bentonville reveal unexpected market trends. Mexicans, it turns out, love bagels. "We can't make enough of them!" says Bobby Martin, who runs Wal-Mart's international business. Smoke detectors are a surprise hit in Brazil. Puerto Ricans buy house paints in the winter. Even the corny Wal-Mart culture seems to be a successful export. Police dispatched to check out a racket behind a Frankfurt-area Wal-Mart found 35 employees practicing the company cheer. "Everyone said there was no way we'd get people in Germany to do the cheer," says Martin. "Honest story."
CEO Glass, at age 63, says he will now work to "really develop the next generation of management." He and the board of directors recently promoted Lee Scott, 49, to COO. That makes Scott, a distribution and logistics expert, Glass' heir apparent. "I like things that challenge conventional thinking," says Scott. Like damncomputers? Scott, a reader of Wired magazine, points to a monitor in the corner. "Well," he grins, "you've got to have a PC."
All ten companies at the top of our list have a single-minded focus. Wal-Mart is intent on quickly moving merchandise to 3,000 stores. GE homes in on shareholder value to create strategies for growth. Microsoft hires brilliant workers--and uses incentives to keep them--to create and market its software. Southwest Airlines promotes a culture that impels employees to deliver topnotch service on the ground and in the air. In every case, it's a matter of nurturing that unique, essential core.
REPORTER ASSOCIATE Len A. Costa
{BOX}
THE TOP TEN
1 General Electric
2 Coca-Cola
3 Microsoft
4 Dell Computer
5 Berkshire Hathaway
6 Wal-Mart Stores
7 Southwest Airlines
8 Intel
9 Merck
10 Walt Disney
{BOX}
THE BOTTOM TEN
460 Foundation Health
461 Fruit of the Loom
462 Viad
463 Olsten
464 U.S. Industries
465 Stone Container
466 Oxford Health Plans
467 MedPartners
468 Shoney's
469 Trump Hotels & Casinos
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EIGHT KEY ATTRIBUTES OF REPUTATION
Cisco ranked 14th overall, yet it appears more often than any other top-ranked company in the categories below. Repeat winners this year include Du Pont and Herman Miller (social responsibility) and Enron (innovation).
INNOVATIVENESS
MOST ADMIRED SCORE
Enron 9.18
Mirage Resorts 8.50
Herman Miller 8.43
LEAST ADMIRED SCORE Trump Hotels & Casinos 3.83 Fruit of the Loom 3.81 Shoney's 3.51
QUALITY OF MANAGEMENT
MOST ADMIRED SCORE
Philip Morris 9.12
General Electric 9.09
Cisco Systems 8.89
LEAST ADMIRED SCORE Oxford Health Plans 3.92 Cabletron Systems 3.42 Trump Hotels & Casinos 3.25
EMPLOYEE TALENT
MOST ADMIRED SCORE
Microsoft 8.59
Cisco Systems 8.58
Coca-Cola 8.33
LEAST ADMIRED SCORE MedPartners 3.41 Shoney's 3.40 Trump Hotels & Casinos 2.87
QUALITY OF PRODUCTS/SERVICES
MOST ADMIRED SCORE
Mirage Resorts 8.84
Corning 8.78
Toyota Motor Sales U.S.A. 8.72
LEAST ADMIRED SCORE
Viad 4.31
U.S. Industries 4.24
Shoney's 3.99
LONG-TERM INVESTMENT VALUE
MOST ADMIRED SCORE
General Electric 8.79
Coca-Cola 8.77
Cisco Systems 8.63
LEAST ADMIRED SCORE Shoney's 3.16 MedPartners 3.07 Trump Hotels & Casinos 2.42
FINANCIAL SOUNDNESS
MOST ADMIRED SCORE
Microsoft 9.56
Intel 9.46
Cisco Systems 9.42
LEAST ADMIRED SCORE MedPartners 2.60 Trump Hotels & Casinos 2.40 Oxford Health Plans 2.19
SOCIAL RESPONSIBILITY
MOST ADMIRED SCORE
Corning 8.56
Du Pont 8.09
Herman Miller 8.04
LEAST ADMIRED SCORE Shoney's 3.76 MedPartners 3.74 Trump Hotels & Casinos 3.50
USE OF CORPORATE ASSETS
MOST ADMIRED SCORE
Cisco Systems 8.63
Berkshire Hathaway 8.45
Coca-Cola 8.34
LEAST ADMIRED SCORE MedPartners 3.41 Oxford Health Plans 3.15 Trump Hotels & Casinos 2.75
FORTUNE TABLE
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HOW THEY DO FOR SHAREHOLDERS
Dell turned in an amazing year; Coca-Cola and Disney disappointed with meager returns, but still get plenty of admiration.
THE MOST ADMIRED
TOTAL RETURN COMPANY 1998 1993-98*
General Electric 41.0% 34.2%
Coca-Cola 1.3% 26.1%
Microsoft 114.6% 68.9%
Dell Computer 248.5% 152.9%
Berkshire Hathaway 52.2% 33.8%
Wal-Mart Stores 107.6% 27.6%
Southwest Airlines 38.4% 6.6%
Intel 69.0% 50.6%
Merck 41.3% 37.0%
Walt Disney -8.5% 16.9%
Top ten average 70.5% 45.4%
S&P 500 27.1% 23.5%
THE LEAST ADMIRED
TOTAL RETURN COMPANY 1998 1993-98*
Trump Hotels & Casinos -43.9% N.A. Shoney's -57.7% -43.1% MedPartners -76.5% N.A. Oxford Health Plans -4.4% 2.3% Stone Container** 36.2% 5.8% U.S. Industries -38.4% N.A.
Olsten -49.9% -16.7%
Viad 59.4% 27.0%
Fruit of the Loom -46.1% -10.6%
Foundation Health Systems -46.6% N.A. Bottom ten average -26.8% -5.9% S&P 500 27.1% 23.5%
N.A. Not available. *Compound annual rate. **Company was acquired Nov. 18, 1998; returns are calculated through that date.
FORTUNE TABLE
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HOW THE LIST WAS CREATED
FORTUNE's list of Most Admired Companies is the definitive report card on corporate reputations. To rank the top ten, we asked Clark Martire & Bartolomeo (CM&B) to survey more than 10,000 executives, directors, and securities analysts. They were told to choose the companies they admire most, regardless of industry. To create the 55 industry lists, FORTUNE relied solely on the insiders. CM&B asked ballot recipients to rank companies in their own industry on eight criteria, ranging from long-term investment value to social responsibility. The result, backed by 17 years of experience, is an industry-by-industry guide to corporate America's shiniest reputations.
COLOR PHOTO: SCULPTURES BY ROBERT GROSSMAN; PHOTOGRAPH BY JAMES WORRELL COVER AMERICA'S MOST ADMIRED COMPANIES THE TOP TEN 1. General Electric 2. Coca-Cola 3. Microsoft 4. Dell Computer 5. Berkshire Hathaway 6. Wal-Mart 7. Southwest Airlines 8. Intel 9. Merck 10. Disney WELCH IVESTER GATES DELL BUFFETT COLOR PHOTO: SCULPTURE BY ROBERT GROSSMAN/PHOTOGRAPHED BY JAMES WORRELL Jack Welch COLOR PHOTO: PHOTOGRAPHS BY BRIAN COATS Getting to the customer on time: Dell can make and deliver a computer within 24 hours of receiving the order. COLOR PHOTO: SCULPTURE BY ROBERT GROSSMAN/PHOTOGRAPHED BY JAMES WORRELL Michael Dell COLOR PHOTO: PHOTOGRAPHS BY BRIAN COATS This kid will find more than just balloons inside: Wal-Mart's new Supercenters sell groceries as well as discount wares. COLOR PHOTO: SCULPTURE BY ROBERT GROSSMAN/PHOTOGRAPHED BY JAMES WORRELL flip page to see more |
