America's Most Admired Companies
Falling prices. Squeezed margins. Brutal competition. For this elite set of corporations, it's the perfect time to do business. Here's why the best prevail.

(FORTUNE Magazine) – MURPHY HAD HIS LAW. HEISENBERG HAD A principle. And Warren Buffett has a saying: "When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is usually the reputation of the business that remains intact."

Far be it for us to challenge Mr. Buffett on this point, given his stature as the philosopher-king of American business and his penchant for good investment. But in examining this year's list of America's Most Admired Companies--which includes Buffett's Berkshire Hathaway at No. 7, by the way--we couldn't help but notice something: It's full of companies that flagrantly violate his dictum.

If your name is Southwest Airlines, for instance, you should be dying a slow death in the worst industry known to man. But instead, Southwest has just completed its 32nd consecutive year of profitability ... and it's one of only three airlines whose stock price actually rose last year ... and it looks perfectly comfy on that top ten above--just as it has for the past eight years.

If you're in the consumer products business, as Johnson & Johnson is, you're supposed to be sucking wind as store brands steal your shelf space and discounters take your lunch money. Yet there's J&J at No. 9. And there, just behind it, is Procter & Gamble.

Yes, if Buffett's Law were an actual law--and our Most Admired list were converted to a Most Wanted list--then post offices across America would be plastered with the boyish mug of Michael Dell. But then, his namesake company is thriving in an industry that may technically qualify as being in the poorest state in the Union. Its profits in this margin-squeezed business soared 15% in 2004, a feat that Dell makes look boringly routine. And now it's the first PC maker to hold the rank of America's Most Admired--since the original "PC" maker, IBM, logged off in 1986. (Check out the following story for some keen insights into how Dell continues to thrive.)

Is this a convergence of freak occurrences? Or do these uncommon companies have something in common?

You could employ all the usual adjectives and buzzwords and say that they're all smart and innovative. But there's something more remarkable going on here. What sets these companies apart--and connects them as a group--is their creative response to the phenomenon known as "commodity hell."

This next part should be read in a deep, eerie voice, preferably with an echo:

In commodity hell, everyone looks the same. Your products look the same, your margins look the same, and--wait a minute, where did those margins go? [Mad demonic laughter.] We hear they were spotted in Shanghai. [More mad laughter.]

"That is not a place I want to be," says a determined Jeff Immelt, CEO of General Electric, which earns bragging rights as the most globally admired franchise (and No. 2 on our American list). Immelt knows from experience. GE's light bulb business, for instance, went there around Edison's day and has yet to return. And Immelt doesn't plan on letting the company's other businesses go the same route. That's why he has been making big investments in frontier technologies--like nanometals, hydrogen power, and photovoltaics--where, to use Immelt's words, "very few can follow."

For P&G the road to commodity hell was paved with Prell shampoo--fading brands that could no longer command a premium on crowded superstore shelves. Its solution--cut 'em loose and circle the wagons around superbrands like Tide and Pampers (and soon, it hopes, Gillette razors)--has recharged its sway with consumers and challenged the encroachment of store labels.

So where is the encroacher-in-chief in all this? Where's Wal-Mart? Well, surprise, surprise--it's not trying to escape commodity hell so much as herd everyone else there with a pitchfork. It's the blue-vested boatman who is more than happy to give you a lift across the River Styx.

Not that Wal-Mart is alone in this strategy. Dell, too, loves the notion of commodity hell. In fact, it wants to turn its own product into a commodity. That would be crazy for a manufacturer of anything more complicated than a widget, perhaps. But Dell isn't really a manufacturer. In essence, it's a store--a store that assembles its wares at the last minute. The actual making of the products is left to suppliers.

Call it management judo: Don't resist the forces of commodification; use them to your advantage.

Gosh, this almost sounds easy. The problem is, once you've decided to rule commodity hell, you're in a permanent race to the bottom: You have to keep lowering your prices and somehow not go bust in the process. Your profit margins will often be slim; your margin for error will always be slimmer.

Gosh, this almost sounds impossible. And it nearly is--whether you're GE and P&G trying to gain pricing power or Wal-Mart and Dell trying to erase it. And that's why we admire all the corporations on this list. We admire what they do, to swipe a line from J.F.K., not because it is easy, but because it is hard.

Oh yeah, there's one more name on the list we forgot to mention--a company that sells a commodity. And we mean an actual commodity, whose futures are bought and sold at the New York Board of Trade. Its price has been dragging at historic lows--and yet you paid $3.55 for this morning's grande cappuccino.

Warren Buffett may still be the Oracle of Omaha. But if Starbucks proves anything, it's that industry isn't always destiny.