2 Most Innovative Companies

09/13/2011 10:06 am EST

Focus: STOCKS

Rich Karlgaard

Editor-at-Large, Forbes

It’s hardly a surprise that the best places to work are also often considered the most innovative and adaptable companies, as Rich Karlgaard of Forbes says in this exclusive interview with MoneyShow.com. But he sees a couple of stock picks among these innovators as well.

You’ve got such a great perspective to share with us from your Silicon Valley perch as the publisher of Forbes magazine covering thousands and thousands of companies. Some of the comments that you made recently about the culture of companies and the culture of discovery, perhaps you could elaborate on that?
Recently, Forbes put out an issue called The World’s Most Innovative Companies. We used a methodology created by Harvard Business School professor Clayton Christensen, best known for his book The Innovator’s Dilemma.

The idea is, what makes an innovative company? Because as an investor, you want to invest in the companies that are constantly renewing themselves and are not making themselves vulnerable to changes in the marketplace or disruption from below.

So, what makes an innovative company? Core to being an innovative company is that you’re able to discover the things that are working inside your company. What are those things coming out of your R&D that frankly might surprise you more than you had thought, and are worth backing and taking to the marketplace? What are your sales people telling you about things that are working and not working?

Great companies communicate extremely well, and that’s how they discover the ideas that are working. Well it turns out that this process of discovery correlates very well with the kinds of companies that are routinely listed as the best places to work.

Now, I don’t think there used to be this correlation, because "best places to work" can also mean a place that has become fat and happy and maybe people are mailing it in and having a good time. You know, those are good places to work too.

But today, to get to that process of discovery, you have to have a good, honestly intentioned argument among people who are making decisions. Let’s do this versus that. Well why? Well I disagree. What do you think? Let’s look at the numbers. My interpretation is that. Well my interpretation is that.

Now in healthy companies these kinds of arguments take place for the betterment of the company, and in unhealthy companies they take place for the betterment of somebody’s ego...and that is the key distinction. Good companies fight internally and they argue, but they do it for wholly different reasons than bad companies.

So, companies that are the best places to work are now aligned with the companies that are doing the most innovative work; that’s probably the biggest thing that I’ve learned this year in my discovery around Silicon Valley talking to CEOs.

And so you want to make that correlation. If you’re thinking about an investment and looking at a company, also look where it stands on these rankings of best places to work.

That’s The Innovator’s Dilemma, the dilemma that the author is referring to?
Well, The Innovator’s Dilemma is that you can be a successful company and then miss a turn in the marketplace.

You can be a minicomputer company that by your success means you fail to see. You become so in love with your own success that you fail to see personal computers, and so the innovator is the previous innovator now and has the dilemma of missing the new wave of innovation.

But now it can be done and it can be done by way of having a corporate culture that is honest, that says guys, we may have been successful, but this new wave is coming up. How are we going to deal with it?

And, only in companies where you get that kind of honest discussion are you going to find companies that are able to adapt. So this honest discussion is the hallmark of a great place to work, and it’s the hallmark of a place that’s going to be innovative in the future too.

Without generalizing or hyper-focusing, any companies that fit that role as examples?
Well, there are two in Silicon Valley I like. They’re not mega companies but they’re both goodly sized companies.

One is NetApp (NTAP), the network storage company I had mentioned previously. It’s on a $6 billion a year revenue rate. It was ranked high on Clayton Christensen’s World’s Most Innovative Companies at number 34, and it routinely ranks in the best places to work, which is a survey a number of publications do.

The second one would be Juniper Networks (JNPR). It ranked high on Clayton Christensen’s World’s Most Innovative Companies list at number 42, and it routinely ranks high on the best places to work list.

So you’re seeing this emerging correlation. You see it at Google (GOOG). You see it at Apple (AAPL). The best places to work are also the most innovative companies.

Related Reading:

Related Articles on STOCKS