By Rick Wartzman and Kelly Tang
As you digest the Management Top 250 for 2020, seeing which
companies landed where on the list, our heads are already off in a
different place: thinking about the rankings for 2021.
As soon as we put things to bed, we begin to contemplate
modifications for the next year to the Drucker Institute's gauge of
corporate effectiveness, which is grounded in the teachings of the
late management scholar Peter Drucker and serves as the basis of
the Management Top 250. We define "effectiveness" as Mr. Drucker
did: doing the right things well.
For our 2020 analysis, we examined 886 major corporations in
all, using 33 indicators across five categories: customer
satisfaction, employee engagement and development, innovation,
social responsibility and financial strength. Corporations are
compared in each of these areas, as well as in their overall
effectiveness, through standardized scores with a typical range of
0 to 100 and a mean of 50.
Sometimes, the adjustments we make to our statistical model are
substantial. In 2019, for example, we revamped the way that we
determine financial strength by adding to our mix of metrics
"economic value added, " or EVA, which takes stock of a company's
operating efficiency, asset management, capital discipline and
profitable growth.
Other times, we make smaller tweaks, such as when we eliminated
a few indicators in 2018 to prevent the possible overweighting of
data from the same provider.
In either case, our aim is the same: to better reflect Mr.
Drucker's core principles, which underlie the rankings, and to
bolster the model's empirical validity. (Our data sources,
methodology and other details going back to 2017, when our model
was introduced, can be found at
drucker.institute/programs/company-rankings.)
This year, we undertook several revisions that were relatively
minor -- but that still affected how a number of prominent
companies fared.
For starters, we fine-tuned what's included in the
customer-satisfaction category, ascribing far less importance to
certain indicators that track how marketing professionals assess a
business's brand reputation and whether a company has a data
privacy and security policy or program. The reason: Neither really
captures a consumer's experience (as opposed to what some experts
think or what a company says it's going to do but may not deliver
on).
We also honed our approach in the innovation category. In this
arena, how a company stacks up on a variety of different indicators
is calculated relative to the industry average. That way, we aren't
comparing how many patents are filed by a software firm with those
from, say, a retailer or an insurer.
The trouble is that companies don't always reveal the activity
they're engaged in. This is particularly true when it comes to
investments in research and development, where many firms fail to
report any R&D expenditures. Previously in our model, this
would register as $0, pulling down the industry average and, in
turn, giving those that did disclose their spending an artificially
high score. To correct for that, we now derive the industry average
only from those companies that supply data.
In addition, this year for the first time we evaluated the
extent of a company's cutting-edge job postings -- for positions in
artificial intelligence, robotics, blockchain and so forth -- and
R&D-related job postings in the context of its total
hiring.
For some in our rankings, these alterations had a notable
impact.
For instance, largely because of how we reworked our formula,
Amazon.com Inc.'s innovation score fell by more than 76 points from
2019 to 2020 -- though it still ranked No. 1 in the category this
year with an off-the-charts mark of 135.9.
Meanwhile, Facebook Inc.'s customer-satisfaction score declined
from 41.6 in 2019 to an abysmal 26.3 this year, as Clorox Co. --
which has seen a surge in sales of coronavirus-killing cleaning
products amid the pandemic -- leapt from an already impressive 67.1
in that category to a sky-high 72.5. The movements for both
companies were caused, in no small part, by how we changed the
composition of our model.
And yet, while it can be kind of exciting to follow who is up
and who is down from year to year, that is never our focus. What
guides us is the data -- not the drama -- and a commitment to
ensuring that the entire model is sound from a statistical
standpoint.
To that end, the correlation between customer satisfaction and
overall effectiveness increased to 0.58 in 2020 from 0.48 in 2019,
while the correlation for the innovation category climbed to 0.77
from 0.71. Correlations of this type range from zero (signaling
that the model explains nothing) to 1.0 (whereby the model explains
everything).
As we look to 2021, we will continue to try to find that sweet
spot: improving the model that we've built without going so far
that we obscure the actual performance of the companies we
cover.
Mr. Wartzman is the head of the KH Moon Center for a Functioning
Society, a part of the Drucker Institute, and Ms. Tang is the
institute's senior director of research. Email them at
reports@wsj.com.
(END) Dow Jones Newswires
December 12, 2020 10:27 ET (15:27 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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