March 3 2008: 7:57 AM EST
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Innovation rules

Apple's ability to innovate is legendary. But the other companies that make the grade in our 26th annual ranking have hatched plenty of their own brilliant ideas. The payoff? It keeps them strong in good times and bad.

By Anne Fisher, senior writer

NEW YORK (Fortune) -- It's an impressive hat trick: Apple not only takes the No. 1 slot on this year's list of America's Most Admired Companies but also tops the global survey - and wins the highest marks for innovation too. That's probably no coincidence. In an industry that changes every nanosecond, the 32-year-old company has time and again innovated its way out of the doldrums. Rivals always seem to be playing catch-up.

The 19 other companies on our Top 20 list are no slouches at creating new markets and disrupting old ones either. Of course, many of the innovations that the Most Admired bring to market are incremental - small, steady improvements that take a product that is already good and make it better. "With $100-a-barrel crude oil and a looming recession, we have to innovate to survive," notes Bob Jordan, head of technology and strategy at Southwest Airlines (No. 12). So in 2007 the carrier streamlined its boarding procedures and added a deluxe program to keep high-revenue business travelers coming back. Southwest is also adding onboard wireless Internet access and putting efficiency-boosting winglets on its aircraft to cut fuel use. Or look at FedEx (No. 7 in the U.S., No. 6 worldwide), which last year introduced its Smart Package. Used for transporting delicate goods like human organs, the package is wired so that both shipper and recipient can track its location at all times, gauge its temperature and humidity, and get an alert if it's damaged.

High-tech innovations often grab the limelight, but some nifty new ideas are downright prosaic. Consider the humble rotisserie chicken. A few years ago an employee at Costco Wholesale (COST, Fortune 500) (tied at No. 14, and a newcomer to the list) noticed that most supermarkets were selling 2 3/4-pound rotisserie chickens for $7.99. "We thought we could do better," says CFO Richard Galanti. So store buyers met with farmers and persuaded them to grow bigger chickens. (State-of-the-art bioengineering? "No," explains Galanti. "You just let them live longer, so they eat more." Oh.) Last year Costco unveiled its 3 1/4-pound rotisserie chicken at $4.99 - and sold more than 40 million.

Sounds simple enough, but it isn't. One common error is to mistake invention for innovation; they are not the same thing. Invention is the creation of something new. Innovation is the creation of something new that makes money; it finds a pathway to the consumer. The problem: You can't just ask consumers what they want or need, because they often have only the foggiest idea. To get around that conundrum, 3M (No. 19) sends its 9,000 technical employees into customers' workplaces in 34 countries to work alongside people and see what their problems are. Procter & Gamble (PG, Fortune 500) (No. 8) does something similar. Others take their cue from customers' complaints; sometimes those customers also happen to be employees. An engineer at Google (GOOG, Fortune 500) (No. 4) got fed up with the volume of e-mail in his in-box and designed a couple of ways to get a grip on it. One, sorting the messages by thread, lets users easily put all messages on a single topic together. The other allows for unlimited storage of old e-mails so they're out of the way now but can be searched later. Turns out that lots of customers were yearning to tame their e-mail: Since the introduction of Gmail, those two features have proved the most popular.

A big, game-changing innovation can seem silly at first. Toyota (TM) (No. 3 on the global list and No. 5 in the U.S.) has weathered such skepticism - and ended up in front of the pack. "Gasoline cost only about $1.30 a gallon when we launched the Prius in the U.S. in 2000," recalls Toyota president Katsuaki Watanabe. "A lot of observers questioned whether Americans would buy a car whose main selling points were fuel economy and low emissions." Although Honda (No. 18 on the global list) was the first to market with a hybrid, Toyota has had the most success, selling 1.8 million Priuses to date.

If the disparate companies on our lists have one thing to teach less admired companies, it's to keep right on investing in innovation even when times are tough. Goldman Sachs (GS, Fortune 500) (No. 10) doesn't produce a tangible product, but wherever there's money to be made - no matter what mood the economy is in - the company finds a way to be there.

"A difficult economic environment argues for the need to innovate more, not pull back," says American Express CEO Ken Chenault. A few months ago he established a $50 million innovation fund to finance "employees' ideas for how to transform our business long term. We want great ideas to come from all over the company, not just the chain of command," Chenault says. AmEx (AXP, Fortune 500) (No. 13) has a venerable history of making risky moves during downturns. Back in 1958, despite a slumping economy, the company launched a little thing called the American Express card. "When I first came here, I saw a copy of a letter from an analyst that earnestly explained to our then chairman why the card was a terrible idea and how it would cannibalize our traveler's check business," says Chenault. "It was an impeccably logical argument - that couldn't have been more wrong." To top of page

Company Price Change % Change
Facebook Inc 60.85 -0.51 -0.83%
Bank of America Corp... 16.31 -0.06 -0.37%
Apple Inc 562.40 37.64 7.17%
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Qualcomm Inc 77.73 -2.98 -3.69%
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