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Put Money on Firms With Innovative CEOs

Amazon and Apple show that CEOs who think outside the box can change the world and, as a result, become hugely successful.
Author:

Mitch Free is founder and CEO of MFG.com, a global-sourcing marketplace for manufacturers. He writes about manufacturing, trade, globalization, outsourcing, turning a venture into a global business, angel investing and more. Free has given presentations to the Kellogg School of Business at Northwestern University, Harvard Business School, Wharton and the Society of Manufacturing Engineers.

NEW YORK (

TheStreet

) -- Henry Ford once said: "If I had asked the market what they wanted, they would have said a faster horse." Asking customers what they want will almost certainly lead to improved iterations of current products and services. But truly great companies surprise us with products that we didn't know we needed or wanted. They don't just iterate. They innovate.

Before Henry Ford's innovations --

Ford's

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Model T, the modern assembly line -- people didn't know they needed an automobile. Fast forward to the information age, and the market didn't ask Jeff Bezos and

Amazon

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for a Kindle any more than they asked Steve Jobs and

Apple

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for an iPod.

As I was thinking about innovation and how to identify such companies, it occurred to me that the common thread is having a founder of the company still engaged in, and passionate about, product development. Those companies often can perform better than those operated by professional managers.

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Entrepreneurial founders have an ability to see around corners and listen to the market in a different way, not for product ideas but rather product opportunities. A founder understands the unique assets and strong points of their company better than anyone. They can look at those assets, emerging technologies and layer in customer needs to create products that surprise and delight.

That phenomenon is the underlying reason why truly innovative companies can become "me too" operations. Specifically, as companies mature and the founders check out, professional managers check in, and they find the path to innovation no longer comes from within, but through acquisitions of young, entrepreneurial companies.

Take

Dell

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, for example. Michael Dell was the innovation force that propelled Dell to greatness with a hyper-efficient supply chain uniquely capable of quickly bringing to market the latest technologies at an excellent value. When the founder took his hands off the controls, Dell lost what made it so special. Companies like

Hewlett-Packard

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learned how to become just as efficient and were quicker to see the market need for more laptops than desktop PCs. Michael Dell returned and has been trying to turn the ship with stylish laptops and an appetite for acquisitions, but changing direction is a daunting task.

The same story is playing out at

Starbucks

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. Howard Schultz stepped away, and the company lost what made it so special. Now he, too, is back. The odds are stacked against Michael Dell and Howard Schultz of ever bringing their companies back to their former greatness, but it can be done. Case in point: Steve Jobs' return to Apple.

To be sure, professional managers provide expertise and a discipline that entrepreneurial founders usually don't have or find boring. The key is to find a way for founders and professional managers to coexist, an environment in which the founder can continue to contribute his genius and managers can operate the company and execute on bringing the innovations to market.

All too often a board of directors, whose members typically come from the professional-manager ranks or financial backgrounds, ends up at odds with a founder and asks him to step aside. That can result in a significant loss of shareholder value. The directors have the best intentions in this scenario, but the reality is they just can't hear the music. And to those who can't hear the music, the dancers appear insane.

Founders do listen to the market and see opportunities differently. That's why I'll continue to place my bets on companies in which a founder is driving innovation, and I'll take my chips off the table when the founder leaves.