$2.8 Billion Later…
What did we learn from our innovation obsession?
Over the last decade, New Zealand threw $2.8 billion at "innovation".
Callaghan Innovation made $1.7 billion in grants to companies. Another $1 billion was spent to run the agency itself. The result? It’s difficult to see the impact. Productivity per capita went backwards. R&D investment as a percentage of GDP fell further behind the OECD average - from 1.25% in 2010 to just 1.47% in 2022, while the OECD average grew from 2.24% to 2.73%. The companies that succeeded? Many were the ones too busy executing to fill out grant applications.
The government finally pulled the plug on Callaghan Innovation earlier this year. But the myth that created it lives on - the same story politicians have been selling us for years. They promise that innovation drives economic growth, that funding fresh thinking will transform our economy, that being first matters more than being best. Every election cycle brings new promises about how government-backed innovation will finally unlock our prosperity.
In this excerpt from How To Be Wrong, I suggest the opposite might be closer to the truth. Using examples from Apple to Amazon, from Google to Xero, I show how the world's most successful companies weren't first at anything. They didn't out-innovate their competition. They out-executed them. Understanding that changes how we should think about building businesses.
While we spent so much money chasing the next big thing, we ignored the boring, unglamorous reality of what actually creates value: Getting thousands of little things right. Repeatedly. Consistently. Often without fanfare.
This isn't just contrarian thinking - it's $2.8 billion worth of evidence that our approach to building an ecosystem of successful technology companies is backwards.
What did we actually learn from this experiment? Read on, or press play to listen to the corresponding chapter from the audiobook above…
PS Know somebody who would like to read the whole book? Use the discount code LOVEUDAD this week to get free shipping, and go into the draw to win a special edition Ctrl-Z t-shirt - they’re available in all the sizes: Small, Medium, Large, and Dad-Bod!
One of the things that nearly everybody thinking about building a technology ecosystem seems to agree on is the need to be innovative. But innovation means different things to different people.
A definition of innovation I like is: “fresh thinking, applied to create value”. But, again, when we reach for anything more specific than that it is elusive. The OECD uses the Oslo Manual, which has a particular definition of innovation used to ensure consistency of government data collection. One of their criteria for being an innovative company is having more than five FTEs. The reasons why are not explained, but perhaps it’s a reflection of a steady-state mindset (that is, small companies are likely to stay small). Either way, that’s bad news for nearly every early-stage company who likes to consider themselves “innovative”. You’re not counted.
Often we get stuck on the “fresh thinking” part of the definition and never get to the “creating value” part. That is to say we conflate innovation and invention. Remember, often the person who invents something and the person who works out what that thing is for are different people. An inventor has an idea. A company executes an idea.
An innovative idea is like an algorithm that has been written on a whiteboard but never run on an actual computer. What matters is how well it executes.1 The likelihood that any non-trivial software works first time as intended is infinitesimally small. That is the art of software development. And, if we extend the metaphor, the challenge of creating a successful business. We need to get beyond ideas.
Ideas require getting one new thing right. Execution requires getting thousands of little things right, and repeating them over and over. Ideas appear in the “a-ha!” moment of inspiration, when the lightbulb goes on. Execution is perspiration – putting our head down and doing the mahi. Ideas are new and shiny and exciting and recognised with awards. Execution is exhausting and mostly far away from the spotlight (until a company that has executed consistently is sold and then everybody scratches their head and wonders how a business that didn’t seem very innovative managed to become so valuable). Ideas are the denominator. Execution is the numerator. Ideas are R&D (usually more R than D) and so are often eligible for generous government support. Execution is operating expenses, and so needs to be funded entirely by investors or customers. Ideas are smiling people in stock photos wearing white lab coats. Execution is rent and payroll, distribution, logistics and sales. Ideas require us to dream big. Execution insists that we find the right size – meaning, the scale of the business that can be maintained. Ideas ask “can we make it?” Execution asks “should we?” Ideas are about being the first. Execution is about being the best.
What is more important: being innovative or executing well? The noise about innovation is mostly focused on “new and different”, but what about those companies that do “familiar but better” – take an existing idea and deliver it in a way that means many more people will be enticed to buy it? Look at the most successful companies. We see that pattern repeated again and again:
Apple was not the first to produce any of the products they are most famous for (they didn’t invent desktop or laptop computers, they didn’t invent portable music players, they didn’t invent smartphones, and so on).
Google was not the first search engine.
Facebook was not the first social network.
Amazon was not the first online store.
Netflix was not the first streaming video service (in fact, in the beginning Netflix wasn’t even itself a streaming video service, but that’s another story).
Zoom was not the first video conferencing tool, by a long way.
The list is long. The thing all those companies have in common is that they were each massively successful in convincing people to use and buy the products and services they make and sell. They were often the first to work out what these things were _really_ for, and as a result how a wider audience could be made to desire those things. And that underpins their financial success. Now they all spend millions of dollars each year on R&D, but that’s not necessarily what got them there.
Sometimes the innovative thing isn’t the product at all, but the distribution channel or revenue model. For example, Xero took the existing and familiar (and, let’s be honest, pretty low-tech) category of accounting software and built a massive company by providing free tools (and a lot of love) to accountants; using them to reach a large potential market of small business customers; and charging a small monthly subscription rather than an up-front fee, in the process proving there was still a lot of value to be captured in that existing accounting software category.
So, is product innovation just a distraction? No, not at all. There are startups that have invented something and executed well, and in the process created a big success. In other words, occasionally the people who invent things and the people who work out what they are for are the same people. But the invention isn’t the multiplier in that equation, it’s table stakes. It’s a sometimes ingredient, not a leading indicator or prerequisite. A great product is important, but great product distribution is much more important. This means it’s not enough to say that a company is innovative. Or that it isn’t. That doesn’t tell us much.
One of the reasons why innovation is given so much prominence is that it’s easier to measure. It’s simple to calculate the amount spent on R&D. It’s much more difficult to determine the return on investment (ROI). Plus, the amount invested is immediately obvious whereas we often have to wait a long time to understand the potential returns, and the milestones along the way can be subtle if we don’t know what we’re looking for.
Inventors are a distraction. When we try to pick individual companies that are potential future winners, what we’re really looking for is something much less common, much more difficult and unfortunately much more boring: who can execute well, and do it repeatedly? Maybe when we named a government agency after Sir Paul we should have called it Callaghan Execution.2
How To Be Wrong is available now in paperback, audiobook or ebook.
Check out the website for links to all of the places you can find it - in store and online.
Enjoy!
Header image by Alan Bowman on Unsplash
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