Richard Cutfield: Time to focus that famous NZ ingenuity

Why is it that, for a country that prides itself on ingenuity and punching above our weight internationally, we perform so poorly as exporters of anything other than commodity products?

Research in 2002 (as part of the Growth and Innovation Framework) showed that fewer than 4 per cent of businesses export - and only 151 exported more than $25 million worth of goods and services per annum.

Exclude primary product exports such as dairy, meat, wool, wood, fish and fruit and we have few export successes of value-added or "elaborately transformed" goods and services.

The reality is that too few of our businesses produce offerings that the rest of the world wants, desires and demands. Yet, at the same time, we, as consumers, have an insatiable desire for imported brands.

At the heart of this problem is, by international standards, how little our businesses employ design disciplines to create differentiated and desirable product offerings and compelling brand propositions.

Too many businesspeople think design is simply about styling. Twelve years ago, I was one of them. My perception was that these self-professed gurus of taste (called designers) consumed vast sums of money indulging in some form of "black art" to make products cool. I lacked confidence in a process I did not understand and associated more with art than the pragmatism required to achieve sustainable market success.

Then something changed.

I was forced to gain a proper understanding of the extraordinary power of an effectively managed design process that targets commercial outcomes. Processes in which styling is just the tip of the iceberg and which deliver fundamentally better offerings because all aspects of the customer experience are addressed and reconciled with practical issues of production efficiency and supply costs. Processes which yield market-leading offerings because issues are identified and addressed in product designs before competitors are even aware of them.

This week, about 300 business people are taking a lesson in design that I only wish was available to me when Pencarrow Private Equity was launched back in the early 1990s. The message they'll receive is unmistakable - if you want to break into new markets and compete with the best in the world, then effective design and design processes are fundamental to success.

Some of the world's best-known names in business and design are workshopping with New Zealand's most ambitious and outward-looking companies at Better by Design 2005 here in Auckland.

The reason I'm so committed to Better by Design and its philosophy is that Pencarrow Private Equity and our investment partner, AMP Capital Investors, have a lot riding on making design a critical success factor for New Zealand companies.

We've been putting our money where our mouth is. During the past decade we've invested $150 million or so in private New Zealand companies to fund management buy-outs and growth initiatives. A significant proportion of this investment has been committed to what we would call design-led businesses.

In the early days of Pencarrow, our focus was on companies we considered had strong brands and good distribution. We thought these were the key ingredients to competitive advantage.

But we soon came to appreciate that these were simply outcomes of something more fundamental - the ability to create products and services that are distinctive and which appeal strongly to the customer and can be supplied profitably.

We came to realise that design capability was this key ingredient and a powerful driver of sustainable, organic, profitable growth of a business and, hence, value-creation.

It's not surprising that of the 10 private businesses in which we manage investments, there is more than a smattering of design-led names, from Formway to Methven to Design Mobel to Wellington Drive Technologies.

The most design-capable businesses we invested in have had three critical elements in common:

1. Independent direction and insight - a key part of their design process is about investing time and resources in knowing customers and their competitors intimately, and forming a strong independent view of what will be important to their customers in the future. It is this independent view that informs their design and brand building processes and ultimately differentiates such businesses in the marketplace. Notable international examples of this are Apple (particularly with the iPod) and, before them, Sony's Walkman.

2. Disciplined design processes - researching, planning and developing clear design briefs, with objective targets, comparative benchmarks and defined process milestones ... For investors like me, it is this level of design process discipline that gives the confidence to invest capital.

3. Teamwork (or design culture) - wide buy-in throughout the organisation and the ability to collaborate across business functions to ensure that the design process is fully integrated with all the other business disciplines critical to commercial success. Disciplines such as production engineering, production, procurement, logistics, sales and marketing, even finance, all contributing to the design process.

* Richard Cutfield is executive director of Pencarrow Private Equity and a member of the Better by Design Advisory Board.