A Blog by Jonathan Low


Dec 19, 2017

The Most Effectively Managed US Companies and How They Got That Way

By addressing the interests of multiple stakeholders and acquiring the best people and systems to sustain that process. JL

Vanessa Fuhrmanns and Yoree Koh report in the Wall Street Journal:

It takes a holistic approach (to) how well a business does in customer satisfaction, employee engagement and development, innovation, social responsibility and financial strength. Tech companies at the top get high grades across all five categories. An activist investor has a shorter time frame than a company that looks over many stakeholders. "It is a combination of key capabilities that determine whether you win: superior products that delight consumers, technology that sustains that…and acquiring the best people.”
A nearly century-old timber company is an unsung management gem. Investor-favorite blue chips haven’t lost their luster in terms of how well they are run. And the tech giants shaping much of today’s society are the most effectively managed U.S. companies.
Those are among the many insights revealed in the inaugural Management Top 250, a landmark ranking marking the first time the ideals and teachings of the late business guru Peter Drucker have been used to analyze and compare the performance of major U.S. companies.
Hailed as the father of modern management, Mr. Drucker influenced generations of business leaders with his writings, including a regular column in The Wall Street Journal. His principles of what makes a well-managed organization have never before been translated into a quantitative model to measure how effectively a company is run.
The Management Top 250 does just that. The ranking—compiled by the Drucker Institute, founded in 2007 to advance the ideals of the management sage—differs from other “best of” lists in that it doesn’t measure any single aspect of a company’s prowess, such as profits or productivity. Rather it takes a holistic approach, examining how well a business does in five areas that reflect Mr. Drucker’s core principles: customer satisfaction, employee engagement and development, innovation, social responsibility and financial strength.
Amazon.com Inc. AMZN 0.97% tops the list of the nation’s most effectively managed businesses. On the online retail juggernaut’s heels are Apple Inc. AAPL 1.41% and Google parent Alphabet Inc . , in second and third place, respectively. Tech behemoths International Business Machines Corp. IBM 0.54% , Microsoft Corp. MSFT -0.54% and Cisco Systems Inc. CSCO 0.76% and Silicon Valley up-and-comer Nvidia Corp. NVDA 3.31% take four of the other top 10 spots. Rounding out the Top 10 are old-line stalwarts Johnson & Johnson JNJ -0.46% (No. 4), consumer-products giant Procter & Gamble Co. PG -0.01% (tied with Microsoft at No. 6) and 3M Co. MMM 0.18% (No. 8), the company behind Post-it Notes and Ace bandages.
To measure a business’s success in each dimension, the Drucker Institute—part of Claremont Graduate University outside of Los Angeles—scored how companies stacked up in 37 specific metrics, from market-share data to patent applications to employee ratings on the career-review site Glassdoor. The companies listed in the Management Top 250 are the highest scorers among 608 U.S. corporations studied that in the fall of 2016 belonged either to the S&P 500 stock index or Fortune 500 list or had a market value of more than $10 billion. The ranking methodology hasn’t been formally peer reviewed.
Tech success
Why do so many of the biggest names in tech—some of which didn’t even exist three decades ago—make the Management Top 250 list?
For the most part, the tech companies at the top get high grades across all five categories, landing in all but a few instances in the upper 15% to 20% of the more than 600 companies analyzed by the Drucker Institute.
Amazon, Apple and Alphabet are innovation and customer-satisfaction standouts because so many of their products—from cloud-computing platforms to smartphones to the burgeoning field of drones and driverless vehicles—are reshaping entire industries as well as social behavior.
Tech firms such as Alphabet and Microsoft also contract out much of their front-line work. The official staff that remain tend to be highly paid and enjoy generous perks, a likely factor in those companies’ high employee scores, says Rick Wartzman, director of the Drucker Institute’s KH Moon Center for a Functioning Society. “Their workforces are the winners of the knowledge economy,” he says.
An innovation powerhouse
There is more than one way to the top. No. 1 Amazon is actually one of the Management Top 250’s most uneven performers. Within the larger universe of analyzed companies, it scored in the bottom 20% on social responsibility. The lackluster grade comes after years of critical news reports about the working conditions of its warehouse workers and poor marks from activists for not being more transparent about its environmental record. Yet, its mighty innovation score—so high that it lies off the charts compared with other companies’ scores—catapulted it to first place.
Amazon, which has assembled a high-profile corporate-responsibility team over the past few years, declined to comment for this article.
The company’s $20.85 billion research-and-development spending in the 12 months through September outstripped all other U.S. companies, according to S&P Global Market Intelligence data. It has kept ahead despite its swelling size by moving quickly and sticking to its founding principle of starting with the customer, says Reid Greenberg, executive vice president of digital and e-commerce at research and consulting firm Kantar Retail.
Its agility, he says, comes from grouping workers in small teams. Chief Executive Jeff Bezos instituted the “two-pizza team” concept, where the ideal team size is one that can be fed on two pizzas. When it was instituted in the early 2000s, it was “really jarring,” says Eric Heller, CEO of Marketplace Ignition, a consulting firm for brands and retailers, and a former senior manager at Amazon. But by getting rid of bureaucratic layers, it fueled innovation. Each team owned projects as small as a single button on the website and was responsible for improvements.
The 250 Most Effectively Managed U.S. Companies—and How They Got That WayAt Amazon, potential product ideas get written up into dummy news releases that get marked up. Creators must answer questions such as the cost of the project, how much the product or service would sell for and the launch date.
It’s always day one for Amazon—”today we’re starting day one of the next five years or the next 10 years and we’re not dwelling in the past”—says Mr. Greenberg. “That’s really how the company thinks and breathes, and…that helps them maintain a competitive advantage.”
The company’s early emphasis on frugality led to creative ideas, the most impressive of which were rewarded with a highly coveted “door desk award,” a trophy that looked like a typical worker’s desk. Ideas ranged from how to better affix shipping labels to packages to how to save money on conference-room equipment.
Hidden strengths
In contrast to Amazon, six companies were particularly consistent in their strengths, scoring in the top 15% to 20% in all five categories: Apple, Alphabet, P&G, 3M, Nike Inc. NKE 0.03% and Colgate-Palmolive Co. CL -0.08%
The ranking and its approach can highlight strengths and weaknesses that might be otherwise harder to spot. While this is the first year the list has been published, the Drucker Institute calculated the performance for most companies back to 2012 to be able to identify potential trends. For instance, the score of Intel, ranked No. 14 overall, has steadily slipped over the past five years, weighed down by its customer-satisfaction grade as the chip maker has struggled to catch up to the mobile revolution. Intel has made big bets in artificial intelligence and autonomous driving as it moves into data-centric growth markets, but they have yet to bear fruit.
The ranking reveals a handful of hidden management champions that typically fly under the radar, such as Jack Daniel’s maker Brown-Forman Corp. , electrical-equipment maker Eaton Corp. ETN -0.30% and commercial real-estate firm Jones Lang LaSalle . JLL 1.58% And who knew that 17th-place Weyerhaeuser Co. WY 0.47% , a forest-products company with little public name recognition outside of the lumber and wood-products industry and its base in Washington state, would score in the top 1% of companies in terms of innovation?
Weyerhaeuser, which owns or controls about 13 million acres of timberland in the U.S. and manages additional timberland under licenses in Canada, stands out for the resources it continues to dedicate to research and development, says Mark Wilde, managing director at BMO Capital Markets. Unlike many other forestry companies, many of which rely on universities and other outside institutions for research, Weyerhaeuser spent $17 million on R&D last year, much of which goes toward forestry management and determining which trees and methods yield the most valuable timber growth where.
In the timber industry, “they are the last man standing in terms of their own independent forestry research,” Mr. Wilde says.
Insight into critiques
The Management Top 250 also provides both a counterpoint and insight into the critiques of activist investors who have targeted corporate stalwarts such as P&G and General Electric Co. GE -0.34% Both companies score high—P&G at No. 6 overall and GE in 20th place—despite coming under pressure from Nelson Peltz’s Trian Fund Management LP to revitalize profits.
P&G in particular scores in the top 2.5% of the more than 600 analyzed companies in terms of innovation and financial strength, the latter because brands such as Tide, Gillette and Tampax dominate so many consumer-product markets. Yet two of Mr. Peltz’s chief criticisms are that the company isn’t innovating enough and has let upstarts such as Dollar Shave Club cut into its market share.
Indeed, a closer look at the metrics behind P&G’s overall score affirm a slip in the company’s overall market dominance in recent years, but from a very large position to begin with. “Yes, there are some red flags,” Mr. Wartzman says of the data. But what you also see built into the ranking, he says, “is the excellence of their management over incredibly long periods of time.”
P&G CEO David Taylor argues the company has taken steps to accelerate innovation in the two years since he became CEO and has won customers with new products or enhancements to existing brands.
“The point of contention is the rate of progress—an activist investor often has a shorter time frame than a company that looks over many stakeholders,” Mr. Taylor says, echoing the holistic philosophy behind the Drucker model. Over time, he adds, “it is a combination of a few key capabilities that determine whether you win: superior products that delight consumers, technology that sustains that…and what underpins it all is acquiring the best people.”


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