(FORTUNE Magazine) – Try this thought exercise: What are the most significant innovations of the past 50 years? A lot of us would rattle off a list that included the integrated circuit, the VCR, the personal computer, genetically engineered medicine, telecom satellites, fiber optics, cellphones, and, of course, the Internet. You might also throw in a few wildcards, like the ATM, the bar code, the airbag, diet soda, the microwave oven, the cardiac stent, or mutual funds. All those have unquestionably and universally altered our lives, usually for the better.

But an innovation that doesn't come so readily to mind is the one that has brought us most of those miracles: the modern corporation. We mean companies like Wal-Mart, GE, Intel, Citigroup, Pfizer, Microsoft, IBM, GM--almost the entire FORTUNE 500. Without them and their proven ability to marshal and allocate resources, organize and harness the ingenuity of people, respond to commercial and social environments, and meet the ever more elaborate challenge of producing and distributing goods and providing services on a global scale, we would have far less innovation--and less wealth. Indeed, any major company that's an industry leader has gotten there in large part by advancing the state of the art in managing people and resources. That makes the corporation the latest jewel in the crown of human endeavor.

"Some of the most amazing inventions in history are not technology or products; they're social inventions," says Jim Collins, the management guru and author of the bestsellers Built to Last and Good to Great. "Imagine inventing the idea of the U.S. Constitution or of currency or of market mechanisms. Those were some of the greatest inventions of all time. The modern corporation, which is a product of the 20th century, is in that league, not so much because it is a font of technological innovation, but because it is the bridge between market mechanisms and democracy. It is the key to the triumph of capitalist democracy."

Celebrating the corporation may sound facile at a time when a presidential candidate is calling CEOs and companies "Benedict Arnolds" for supposedly shipping scads of American jobs overseas, and when judges and juries are dispatching business celebs to prison for lying, cheating, and stealing. The corporation, like any human institution, can be corrupted and abused. But as our thought exercise demonstrates, it's all too easy to overlook the genuine creativity required to design and run an organization employing tens of thousands of people to consistently and efficiently develop, improve, manufacture, and deliver a new microprocessor, say, or a jumbo jet, or even something as mundane as disposable diapers. Deep within American corporations amazing things are happening every day, all because these companies are so big and so well oiled and, above all, so adaptable.

Peter Drucker, often called the father of modern management, contends that the modern corporation first came into its own in the 1920s and 1930s, as professional managers replaced founders and the scions of founders at the helms of large firms. The institution has evolved rapidly ever since, says Drucker, who at 94 has witnessed it all, including the current wave of transformation made possible by infotech. What fascinates him about the Internet in particular is that it doesn't merely automate existing business processes like accounting; it has the power to fundamentally change the way companies do things and the markets in which they compete.

"It makes every supplier appear 'local,' even if it is half a world away," Drucker says. "And it makes all suppliers, whether they be the product's actual manufacturer or a mere broker or distributor, equally prominent and accessible. Like any new distribution channel, this not only changes the way customers buy, but also changes what they buy, which, in turn, alters the marketplace dramatically. The consequence is that the process of marketing and selling products is being separated once and for all from manufacturing, delivery, and service. A good many companies are finding that very difficult to reconcile." Witness, for example, the struggle of Pfizer, Lilly, and other pharmaceutical giants to cope with cut-rate sales of their medicines via Canadian websites.

Brian Arthur, the iconoclastic economist who popularized the notion of "increasing returns" to explain how tech companies like Microsoft and Oracle establish dominance, says companies are reinventing the basic models of manufacturing, distribution, and the providing of services. "When FORTUNE first published the 500 in 1955," he says, "most companies followed the traditional industrial model--namely, optimizing the mass production of discrete products with long lifespans. The biggest challenge for management was forecasting demand in relatively slow-moving markets."

Not anymore, says Arthur. Corporations have learned to focus on coming up with products and services that combine technologies and processes to meet more fleeting market opportunities. What's more, in a fast-moving economy, immense rewards often await the first company to stake out a market. Consequently, he says, "companies are constantly creating temporary, product-oriented configurations, often with outside partners involved to supply key components or do assembly. It's much like making a movie--production partners coalesce to make a film and then disperse, and another collection comes together to make the next one. Outsourcing is a manifestation of this."

The primary reason Apple Computer was able to get to market so fast with its iPod portable music player and iTunes online music store, now runaway market leaders, was its ability to line up partners. To build the iPod, Apple persuaded a little-known Silicon Valley startup to provide and customize key software and worked with Toshiba to come up with a tiny but capacious hard disk. The product, which contractors assemble in Taiwan, came together in less than nine months. As for the online music store, the company parlayed its relative neutrality in the music industry to persuade all the major record labels to set aside their fears and rivalries and make their music available for download. Apple's payoff for being the first mover: The iPod claims the lion's share of all the revenues generated by sales of MP3 players worldwide, and the iTunes music store now accounts for nearly two-thirds of all legal music downloads.

So the best metaphor for the corporation is a lithe, constantly reconfiguring network, says Arthur, not an imposing, self-contained, command-and-control pyramid. One of the best examples of this new form isn't even on our list--yet. Internet sensation Google is a billion-dollar-a-year, privately held company whose products and organization, asserts Arthur, "barely even exist physically." The products are the hundreds of technological features of the Google online search service, such as smarter algorithms for specific subjects, the company's "placement engine" for context-sensitive ads, its Froogle shopping service, its automatic foreign-language translation, and so on.

Such features, for the most part, are developed by dozens of three-person teams that strive to take them from conception to deployment in a matter of months. There is no rigid architecture for building the overall Google service, in contrast with, say, Microsoft's Windows operating system. Instead, the pieces add up to a better, broader service by accretion, and are constantly improved. In that sense Google's service is an emergent phenomenon that is perpetually changing in piecemeal fashion, thanks mainly to how CEO Eric Schmidt has organized the place.

"I know it sounds like an ad for the Saturn, but it really is true that we're creating a new kind of company," says Schmidt, "Google is a technology company that benefits enormously from what Intel and Microsoft and everyone else in the IT food chain does. But basically we're taking the traditional corporate model and bringing it into the Internet Age."

Say what you like about the stunning growth, immense profits, and magical inventions of IT juggernauts like Intel or Microsoft or Cisco--what makes such companies truly special is their leaders' organizational ingenuity. One of the smartest things Bill Gates ever did at Microsoft was adopt the Procter &Gamble product-manager method to organize product development and marketing. He put his own spin on it, though, by having software engineers rather than MBAs be the product managers; subordinate geeks respond better to other geeks.

But what about the older, more traditional companies that make more "ordinary" products? No fewer than 71 of the FORTUNE 500 have been on the list from the beginning; a handful, notably Procter & Gamble and GE, are well over 100 years old. (For more, see "Amazing Facts!" on page 152.) Is there a historical lineage of organizational genius and inspired adaptation that explains their ability to endure and grow far beyond the lifetimes of individual leaders?

Parse the very first edition of the FORTUNE 500 list, says Jim Collins, and the pattern that emerges is "actually a negative correlation. Businesses that pioneered a great technology or entrepreneurial idea tended not to become great companies. Burroughs had a great start in life as maker of business machines and early computers, but it didn't become IBM. Westinghouse had a better start in electricity than GE. 3M started out as a failed mining company."

So what about long-lived giants like GM and P&G? Can they attribute their success primarily to managerial inventions, or do they mostly owe it to luck, bigness, and organizational inertia? "Let's go through the list and see," Collins says, flipping through the 1955 edition.

No. 1: General Motors. "Alfred Sloan invented the modern, decentralized business unit when he broke up the company into the different car lines. That was genuinely new, and was widely copied."

No. 4: General Electric. "They were the first company to establish a formal industrial R&D organization. More important, they invented the idea of systematic management development, which is why they've never had a bad CEO. Thomas Edison, the founder, might have been the worst."

No. 27: Procter & Gamble. "We take it so for granted now, because most consumer goods and high-tech companies are organized this way, but P&G was the company that invented and perfected the product-manager model of organization."

No. 61: IBM. "Thomas Watson Sr. was the first to recognize that an almost cultlike corporate culture, based on religiously held values, could be the source of competitive advantage."

No. 212: Merck. "The pharmaceutical giant was the first to recognize that supporting pure science could drive commerce. In the 1940s it put in place labs that rivaled those at Harvard and gave its scientists freedom to do pure research. IBM did the same thing a decade later under Thomas Watson Jr."

There is an overarching point Collins is trying to make. Even as he turns his attention to more recent editions of the FORTUNE 500 and relative arrivistes like Southwest Airlines, Wal-Mart, and Dell Computer--companies known for fanatical, cost-cutting cultures--or Starbucks and Microsoft--companies that invented whole industries seemingly out of thin air--the thought remains, Organizational innovation is the key. Take Intel, he says: "It is an exception in that it began with a great technology and ended up as a great company. But I would say that the greatest creation of [founders] Gordon Moore and Robert Noyce and Andy Grove was the highly adaptive and disciplined organization that is, in its own way, more fantastic than the integrated circuit. Intel itself is the ultimate microprocessor."

None of that comes as news to Bill Gates, the primary architect of Microsoft's meteoric rise to mega-status. He contends that the "modern corporation is one of the most effective means to allocate resources we've ever seen. It transforms great ideas into customer benefits on an unimaginably large scale." So strongly does Gates believe in the corporate approach to problem solving that he's installing mechanisms he devised at Microsoft in the organization of the Bill and Melinda Gates Foundation, and he's trying to introduce something akin to market incentives to hasten large-scale efforts by corporations and nongovernment organizations to eliminate infectious diseases in the Third World.

Drucker and Collins, likewise, think school systems, police departments, churches, charities, arts organizations, hospitals, medical research efforts, and other governmental agencies and nonprofits would benefit if they learned to behave more like corporations. It's the focus of most of Drucker's consulting now, and Collins hopes to follow in his footsteps. Collins says, "Now that we are really beginning to understand what makes organizations great in the business world, we might actually provide some DNA to the whole social system."

Whether or not the ever-evolving modern corporation can be a panacea for the ills and dysfunctions of other kinds of institutions, there's no question that it is peerless at creating wealth and providing meaningful employment for tens of millions of people.

It also helps keep life interesting, as the stories in the pages of this issue will attest. In the following story, writer Jerry Useem explores the quintessential case of corporate adaptability. Since its founding in 1892, GE has had fewer CEOs than the Vatican has had Popes; each has taken the company in a sharply different direction, and all of its CEOs have ranked among the foremost industrialists of their day. Jeff Immelt, who is as even-keeled as Jack Welch was mercurial, is but the latest example. His blueprint for GE--articulated with increasing clarity and forcefulness--might be headlined "Jack Who?" But the shifts should come as no surprise, given Welch's instructions to Immelt: Blow it up.

A great business leader shares his thinking in "The Most Underrated CEO Ever," an interview with ex-Wal-Mart chief David Glass. He describes how he and Sam Walton repeatedly turned obstacles into competitive advantages. Case in point: Unlike Kmart and other big retailers, Wal-Mart didn't have access to wholesaler networks. So David and Sam did what they had to do: They bought their wares directly from manufacturers, passed along the savings to customers--and in the process revolutionized the world of retail.

Adaptability is a recurrent theme in the stories of four corporations hustling to reinvent themselves. After decades of decline, mighty General Motors has decisively changed its ways, reports Alex Taylor in "General Motors Gets Its Act Together. Finally." Its secret: It now looks a lot more like Toyota. In "Can Moto Find Its Mojo?" Adam Lashinsky explores the efforts of Ed Zander at the once great, now perennially struggling Motorola to untangle the organization and unleash its high-tech genius. Meanwhile, PepsiCo, threatened by the war on obesity, tries to morph from a junk-food king into a purveyor of healthy snacks in Patricia Sellers's "The Brand King's Challenge." In "Putting the Muscle Back in the Bull," David Rynecki explains why Merrill Lynch is lucky to find itself in the transformative grip of a sharecropper's son who may be the toughest--some say most ruthless--CEO in America. And for the cautionary tale of a giant that couldn't or wouldn't adapt, see Carol Loomis's brilliant and chilling business autopsy, "The Sinking of Bethlehem Steel."

Perhaps the ultimate testament to adaptability is the FORTUNE 500 itself. To maintain the list as the best snapshot of American business, we've had to reinvent it again and again. It started as a tabulation entirely of industrial companies. Within a year of its founding, we supplemented the 500 with annual listings of banks, insurers, transportation firms, retailers, and other service businesses, categories that combined as the FORTUNE Service 500 starting in 1983. Eventually, in 1995, that list and the FORTUNE 500 merged into the list before you today. No doubt we'll tweak the 500 further--probably much sooner than the year 2054, when it will celebrate its centennial. For an advance look at how big business may have transformed itself by then, see futurist Peter Schwartz's provocative, entertaining profile of the top ten FORTUNE 500 corporations in 2054. (Hint: No. 1 is a company called AmazonBay.)

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