It's usually pretty straightforward to figure out how "smart" someone is. For children, we might look at their standardized test scores and academic records. For our friends, we might consider how well they speak, the breadth of their interests and the depths of their insights. For our business associates, it's simpler still: If they make a lot of money, prestothey're smart.
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In truth, a person's wallet isn't a bad proxy for his business smarts. And the same can be said for the collections of people that comprise companies. A company's total value is a reflection of its individual workers' smarts. Wouldn't that be a good thing to measure?
For the second straight year, Baseline has undertaken that effort with the goal of identifying the smartest American companies. The 100 companies that appear in the list that starts on this page came out of an analysis we did of more than 4,200 organizations. The methodology is the brainchild of Paul A. Strassmann, who spent years as a technology executive (Xerox, General Foods, Kraft) and was the Pentagon's first chief information officer. His formula (which is spelled out here) provides a way of figuring out the average value that has been created by a company's workerseveryone from the chief executive through middle managers to the lowest-paid staffers. Baseline's underlying assumption is that the smartest companies must necessarily be skilled at managing information.
To even be considered, a company had to meet a few criteria. It had to be publicly traded, so we could see the market value that investors were placing on it. It had to have been public for at least three years, so we could take averages and avoid giving too much credit to a new company that might be the temporary object of Wall Street's ardor.
It would be nice if dumb luck had nothing to do with the appearance on our list of any of these 100 companies. But the heavy representation of real-estate investment trusts and energy companiestwo sectors that have done extremely well on Wall Street in recent yearssuggests that isn't the case. So, what's instructive is to look at differences in per-employee value between companies in these industries. Why, for instance, does Host Hotels, the No. 1 company on our list, have a knowledge value per employee that's more than half again as high as last year's and 23% higher than No. 2-ranked Alexander's? One reason is that Host Hotels, a real-estate investment trust that owns 70 Marriotts, has been improving its operations with the help of business intelligence software that it put in place in mid-2003. (Click here for more on Host Hotels' business intelligence system.)
Indeed, the effective use of technologyeither internally or as a product or serviceaccounts for the appearance of many of the companies on our list. Chicago Mercantile Exchange Holdings, the 38th-ranked company, has become a huge success as the rise of electronic trading has prompted investment banks and hedge funds to speculate in pork bellies and other contracts that were once the exclusive domain of floor traders shouting out buy and sell orders in crowded pits. The company has a $90 million capital budget that it uses partly to support 3,500 Linux servers, 12 Hewlett-Packard Itanium systems and more than a half-dozen optical communications hubs in cities such as London, Singapore and New York. "We compete on our ability to bring a lot of customers together," says chief information officer James Krause. "It sounds fairly simple, but the two most important things for customer satisfaction are speed and reliability."
Like the Merc, the two Internet companies on our list, eBay (No. 31) and Yahoo (No. 43), have found ways of making money from other people's interactions. EBay and Yahoo have turned data and software into online locations that have become second homes to many users. These companies have no warehouses to speak of, no inventory, no manufacturing processesthey're platforms. But they've reaped billions in profits as consumers have flocked to them for entertainment or to transact business. (Google doesn't appear on our list because it does not yet have three years of history as a publicly traded company. If it were, based on available data, it would be in the Top 10.)
It isn't only Web companies that enjoy the benefits of leverage. Stun-gun manufacturer Taser International (No. 82 on our list) is evidence that some non-digital products can be developed on the cheap. Taser spent a mere $1 million to develop the Taser X26, a product that has produced about $150 million in sales with profit margins of 80%. "With a fairly small investment, you can get a huge return," says Rick Smith, Taser's chief executive. "But there's a high risk of a lot of these things failing completely."
Indeed, Taser has at least one doga shock-delivering steering wheel intended to discourage car thieves (consumers balked, perhaps out of fear that the device might malfunction).
And its line of stun guns has brought Taser headaches. It has been named in more than 50 lawsuits, alleging wrongful death or personal injury incidents involving Taser devices. Some lawsuits are ongoing, but many have been dismissed.
"We pride ourselves as [a] company that is dynamically turning the corner on controversy and committed to defending the company from unwarranted and baseless attacks," Steve Tuttle, vice president of communications at Taser, wrote in an e-mail to Baseline. "None of the litigants have been able to prove any defect in the Taser system or that it was the proximate cause of any injury or death."
In 2005, the SEC investigated Taser's representations of product safety; the company's sales fell 30% that year. The SEC dropped its investigation last year without recommending any enforcement action, and since then sales have rebounded. Among the company's next possible hit products: a remote-area denial weapon that soldiers could detonate from a distance, stopping suspected suicide bombers with an electrical shock instead of lethal force.
R&D efforts with high risksand commensurately high returnsare common in the drug sector, which has a high representation in our list. Companies like the biotechnology giants Genentech (No. 17) and Amgen (No. 54) and the cancer-fighter Celgene (No. 20) have been exceptionally good at analyzing data and information to ease serious medical problems.
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