I’ve just scratched the surface in my quest to better understand Paul Romer’s insight into growth. Romer won the 2018 Nobel Memorial Prize in Economic Sciences — shared the win, actually.
One of Romer’s central themes is that resources are fixed and innovation is unlimited. You can’t create anything of a physical nature; you can only rearrange components and make them act differently. Red wine, sugar and heat are transformed into a reduction sauce. The red wine was created by reorganizing sunshine, rain, grapes and yeast. You get the picture. …
One cool thing about Romer’s work as it applies to business is that if you continue to encourage innovation, growth doesn’t have to decline. New ideas applied to the same resources can create new “stuff,” which can meet current or newly identified needs. Satisfying needs is how you trade your stuff for money. And if you take in more money than you spend creating stuff, you produce income, which can reward those who shared their energy and innovation, encouraging them to do it again! Capitalism in a nutshell.
So why do businesses fail?
Largely because of thermodynamics, specifically entropy — the gradual decline of things into disorder. In other words, what’s valued today may not be valued tomorrow. It’s the buggy whip problem.
Execution becomes the mantra for many CEOs once they have a viable product or service, as it should. A business with a valued product or service can fail for poor execution. However, if you execute buggy whip manufacturing perfectly and hire a brilliantly talented sales force, you still won’t make a dime unless you focus on museums.
Execution must not come at the expense of innovation — new products and services. Almost 90 percent of the Fortune 500 companies from 1955 are gone. Some by merger, but many by failure to innovate.
Karl Marx correctly said that creative destruction was uncontrollable, like the genie out of the bottle. However, he was wrong about its impact. It is, as Joseph Schumpeter later realized, a creative force for good. Marx, however, isn’t the only one to rue its existence. Management teams lacking innovation also hate it.
Comrades, shed your communist tendencies! Embrace Romer’s understanding that innovation (and some good execution) is the key to longevity.