Why Strategic Copying > Innovation

Nearly all innovators fail. And almost always, innovation is a terrible strategy.

Many of us have been duped into thinking that innovation is what the smartest people do. It isn’t.

The most profitable new businesses to start, when classified by industry, are horrifically dull and bereft of innovation: law, accounting, medicine, insurance.

Most of us have heard the stories about how more than 90% of new businesses fail (as a lawyer who works with startups, my anecdotal experience suggests that estimate might be low). But most of us tend to think we’re above average, and failure won’t happen to us. But now there is a new book that provides mathematical support for why innovation is such a poor strategy.

Kevin Leland, author of Darwin’s Unfinished Symphony: How Culture Made the Human Mind, created a crowdsourced competition, based on the model of Robert Axelrod’s prisoner’s dilemma competition, to test the success of various evolutionary growth strategies.

The three basic strategies that were tested were “observe,” “exploit,” and “innovate.” To observe in the competition means to follow and copy the strategies of those around you. To exploit means to try to profit from the strategies that seem to be working. To innovate means to try to come up with a new strategy. The winners of the game were surprising:

The most successful strategies did not play learning moves often, but almost always played OBSERVE when they did. This seemingly straightforward relationship between copying and success, however, belied a degree of complexity that emerged only on closer inspection. Among the top-performing strategies that progressed to the melee, by and large, the more the strategy learned through OBSERVE rather than INNOVATE, the better it did. However, among the poorer performing strategies we actually witnessed the reverse relationship—the more they copied the worse they did. That told us something very interesting—copying was not universally beneficial. Copying only paid if it was done efficiently.

By contrast, innovation turned out to be a total loser strategy: The innovate-only strategy came in dead last!

To summarize, the strategy that produced the best results was “observe-exploit.” Learn how to make a living, and then make a living. Don’t oscillate unless forced to do so by your environment. The strategy that produced the worst results was the one that tried to invent the wheel every turn. Try to invent the wheel every turn, and you will almost invent nothing that anyone will value.

It might be hard at first to reconcile this with many of our romantic notions of innovation, but the companies and people we celebrate as great innovators often aren’t really that at all, but rather the best copiers and exploiters of recent innovation. It wasn’t John Englebart who profited from the mouse. It was Steve Jobs. It wasn’t Tim Berners-Lee who became a billionaire off the internet, it was Marc Andreeson.

Microsoft is one of the wealthiest companies in the world. But while their business involves technology, their historical business strategy has had little to do with innovation and is much more akin to the observe-exploit strategy. Almost all of their profits derive from an operating system that was copied from Apple (which was copied from Xerox), and then successfully exploited through licensing deals with all the major PC manufacturers. Bill Gates was undoubted an excellent programmer, but the success of Microsoft comes not from their stellar software, but rather from the shrewd licensing decisions it made at a pivotal point in the development of the personal computer.

Similarly, Apple did not invent the smartphone or the tablet. It just copied the best elements of what other people did, tweaked a few things, made it easier to use, and then has been exploiting the market ever since. To an extent those were innovations (again, not all innovations are a bad strategy—just too-frequent attempts at innovation), but each new iteration of the iPhone is slightly less original than the previous. Apple has made marginal, incremental improvements consistent with other manufacturers to stay up to date with the newest technology, but at a glance, an iPhone 6 is indistinguishable from an iPhone 7.

There are infrequent occasions when innovation is a good strategy. In rapidly changing environments, for example, some innovation may be essential to survival. As a society, we would be stagnant without innovators. But most innovations are simply failed mutations, doomed for the evolutionary dustbin. In most environments, the vast majority of players are better off observing the innovators to see who succeeds, and then copying their strategies, rather than trying to innovate themselves. In short, innovation is good for society but bad for most individuals who choose it as a strategy.

The vast majority of startup founders toil for years making less than market wages working on projects that will never go anywhere. There is a power law with startups where a small fraction makes all the money. The most notable startup founders do very well, but nearly everyone else underperforms.

For those looking to start a new endeavor, strategic copying and exploitation is a far better strategy than pure innovation. If a business or technology has worked once, there’s a good chance that a similar, well-executed strategy can succeed again.

If a business strategy has never worked before, there’s a high probability it hasn’t worked for a reason.