The World's Most Admired Companies How do you make the Most Admired list? Innovate, innovate, innovate. The winners on this year's list, compiled by the Hay Group consultancy, tell how they do it.
By Nicholas Stein

(FORTUNE Magazine) – When he chose the phrase "only the paranoid survive" for the title of his autobiography, Intel chairman Andy Grove was referring to the frenzied pace of the new economy, a place where dramatic innovations can transform an entire industry in less time than it takes Tiger Woods to break par. Even companies that successfully juggle the competing demands of customers, employees, and shareholders can suddenly find themselves on the brink of obsolescence, their products and services supplanted by the Next Big Thing. Those who reach the top of FORTUNE's annual list of the world's Most Admired Companies adhere to Grove's dictum. And the key to staying ahead of the pack is constant innovation.

Last February, FORTUNE published a list of America's Most Admired Companies. This list goes a step further, evaluating companies in 27 industries all over the world. To compile the rankings, executives and analysts grade companies according to nine attributes: quality of management; quality of products and services; innovativeness; long-term investment value; financial soundness; ability to attract, develop, and retain talent; community responsibility; use of corporate assets; and global business acumen. Companies are ranked within their industry, and the top 25--the All-Stars--are culled from across all industry groups.

Market conditions have been schizophrenic during the past year. Both the Dow and Nasdaq had their ups and downs, and markets in Europe and Asia were also unsettled. So it's not surprising that the Most Admired list looks different from last year's. The winners are the companies that demonstrated a new-economy-style growth strategy while maintaining an old-economy approach to fiscal responsibility. For the third straight year, GE, on the strength of its management team and innovative global strategy, ended up on top (see preceding story). Home Depot advanced from No. 20 to No. 9, Toyota from No. 16 to No. 10, and Citigroup from No. 25 to No. 18. Microsoft, battling government regulators on one flank and perceptions of a foundering Internet strategy on the other, slipped a little, from second to third. Cisco, the so-called plumber of the Net, moved up from eighth to take the second spot. Strong demand for Sony's flat-screen TVs, digital cameras, and PlayStation game consoles helped the company move up from No. 14 to No. 6. The newcomers to this year's All-Star list--Enron, Nokia, Charles Schwab, UPS, and Goldman Sachs--all embody business strategies that bridge the old and new economic worlds. Companies that lost their All-Star status--IBM, Hewlett-Packard, AT&T, Procter & Gamble, DaimlerChrysler--have had difficulties integrating new business concepts or absorbing acquisitions.

Many of the industry categories also experienced significant turnover. Among airline companies, last year Singapore Airlines didn't even make the list (perhaps because it was too small). This year it took the top spot from Southwest. British Airways, hobbled by internal conflict and heightened competition, fell from third to seventh.

Though Intel held on to the top ranking in the computer hardware and software category, Sun Microsystems rode the dot-com revolution to second place, up from sixth last year, while Dell, facing a wireless (and PC-less) future, fell from fifth to eighth. And in the white-hot network communications and Internet technology sector, All-Star list newcomer Nokia edged Cisco Systems for top billing.

"There is something new this year in how we perceive companies," says Hay Group global managing director Vicky Wright, who heads the company's global rewards practice. "It is the emphasis on how much companies are capable of looking forward. In a year where old-economy companies have not seen their share price perform, those that have managed to weather both the old- and new-economy storms will flourish."

No company illustrates the transformative power of innovation more dramatically than Enron. Over the past decade Enron's commitment to the invention--and later domination--of new business categories has taken it from a $200 million old-economy pipeline operator to a $40 billion new-economy trading powerhouse. In 1985, Enron recognized the opportunities wrought by natural gas deregulation and began to trade it like a commodity. Soon it was opening new markets trading electric power, pulp, paper--even broadband. Jeff Shenkman, the COO of Enron Global Markets, credits the company's culture for its success in building frontier markets. "Challenging conventional wisdom is something we push here," he says. "The way we do things today is different from how we will do it six months from now." For example, Louise Kitchen, a trader in Enron's London office, was able to attract a group of 350 people for a project to take the company's gas-trading operations online--before upper management even knew about it. Launched in November 1999, Enron Online has racked up $129 billion in transactions, making it one of the largest e-commerce sites in the world. "We didn't start it because the chairman said we needed an e-commerce strategy," says EVP Steve Kean. "The quality and strength of ideas are determined by how many employees support them--not by upper management. Good ideas are able to attract the resources they need to move forward freely."

By applying the same creative thinking to the financial services industry--not traditionally a hotbed of innovation--Charles Schwab transformed it. After launching the company in 1974, its eponymous founder became the first to offer free IRA accounts (1982), introduce a software-trading product (1985), and move his operation online (1996). Schwab credits his willingness to overlook mistakes--affectionately referred to within the company as "noble failures"--for the steady stream of initiatives that have sent his company to the head of the brokerage class. "To introduce new ideas, you have to be able to take a lot of ridicule," he says. "If you undermine the bad ideas, no one will ever want to come up with a good one. And if 50% of them work, that's pretty damn good."

In the high-tech arena, it is often difficult for large, complex organizations to innovate as fast as their smaller competitors. Cisco has found a solution to this dilemma: Buy them. In the past five years, the Silicon Valley company has done more than 60 acquisitions. The strategy seems to be working. Cisco has built itself into one of the world's most valuable--and admired--companies. But how do you integrate so many cultures into your own? Cisco's answer has been to turn its expertise as a networking company inward by building the most comprehensive internal communications network of any company on the planet. "We can check on our order flow, product mix, gross margin, and almost any other measurement instantaneously," says executive vice president Gary Daichendt, head of Cisco's worldwide operations. "We can literally close our books in 24 hours, which doesn't just mean fewer surprises for Wall Street; it means our employees have access to all the information all the time." Stellar internal communications also enables the company to adjust quickly to changes in the market, says CEO John Chambers. "What causes every successful tech or telecom company to get into trouble is that they get too far away from their customers or their employees," he says. "I learned that the hard way at IBM and Wang." According to Chambers, the constant communication among Cisco's executives, its employees, and its customers also means that the company is less likely to miss out on crucial transitions in the marketplace. "But if we do miss out on a transition," he says, "we can always move into an area with an acquisition."

In contrast to Cisco's practice, Finland's Nokia has chosen to innovate from within. The company that most of us identify with its funky mobile phones started off in the paper business and has since dabbled in rubber, cable, and electronics, finally divesting itself of its old-economy holdings in 1992 to focus on telecom. "Nokia has a long-standing history of embracing renewal and change," says CEO Jorma Ollila. "It's in our genes. And to do something new you have to stop doing something old." As simple as it sounds, an inability to embrace change has resulted in the death of many companies. In 1921, 12 Finnish companies (including Nokia) inaugurated the Helsinki stock exchange. Nokia is the only survivor.

To accept change gracefully and innovate successfully, companies have to have a strong sense of identity. No firm exemplifies this better than Toyota, which has become the world's most admired car company by focusing on what it does best: building durable, reliable cars. The company's introduction of the Prius, a hybrid car with an internal combustion engine and an electric motor, demonstrates Toyota's thoughtful approach to incremental innovation. The car's look, operation, cost, and servicing requirements are almost identical to traditional gas-powered cars, yet it gets better mileage than they do, while spewing 90% fewer emissions. "Customers feel comfortable driving and servicing a car that's just like a regular vehicle," says Toshiaki Taguchi, president of Toyota North America. "As a result, they can have many of the benefits of an electric vehicle without the inconvenience."

There is no single way to encourage innovation. But all of the All-Stars recognize its importance. "Innovation is at the heart of sustaining a company's competitive advantage," says Enron's Kean. "If you do it well, you will be successful in other areas. If it's not embedded in the organization and every employee who works there, how can you ever hope to execute on it?"