Don’t Throw Out the Innovation Baby with the AI Bathwater

Not every innovation needs artificial intelligence. Sustainable competitive advantage begins with solving customer problems, not simply adopting the latest technology.

Artificial intelligence is attracting extraordinary attention, investment and management time. For many businesses, it has become almost synonymous with innovation.

But there is a danger in allowing enthusiasm for one technology to obscure a more important principle: innovation is not about adopting the latest technology. It is about finding better ways to solve problems, serve customers and create economic value.

In our enthusiasm for AI, we should be careful not to throw out the baby with the bathwater.

Innovation Is More Than AI

A feature accompanying The Australian’s Top 100 Innovators for 2026 provides a timely reminder that some of the most interesting innovations have little to do with artificial intelligence.

Innovation has always taken many forms. It can involve developing a better product, improving a manufacturing process, eliminating unnecessary costs, finding new distribution channels or creating a more attractive business model.

What matters is not the sophistication of the technology involved, but the value created for customers and the competitive advantage achieved by the business.

Yet the current enthusiasm for AI risks narrowing our understanding of innovation. Businesses may feel compelled to demonstrate that they are using AI, even when other investments could deliver greater commercial benefits.

The danger is that innovation becomes defined by the technology being adopted rather than the problem being solved.

Australian Innovators Show Another Way

Three Australian businesses featured in the 2026 innovators coverage illustrate very different routes to competitive advantage.

HiveKeepers has developed a compact honey-harvesting system designed to simplify extraction and reduce the physical effort traditionally involved in collecting honey.

Its innovation addresses a practical problem through improved product design. The value lies in making an existing activity easier and potentially more productive.

Mako has developed Flightfilm, a surface treatment inspired by the microscopic structures of shark skin. The technology is designed to reduce aerodynamic drag, with the company reporting potential reductions of approximately 4 per cent.

In industries where even modest improvements in efficiency can produce substantial economic benefits, specialised engineering knowledge can become a valuable source of competitive advantage.

Then there is Lyka, which has developed a differentiated fresh-pet-food business combining product quality, customer positioning and a recurring-revenue model. The company reports annual recurring revenue of approximately $200 million.

Lyka illustrates that innovation need not involve a technological breakthrough. A distinctive customer proposition combined with an effective business model can be equally powerful.

These are company-reported achievements, but the broader lesson is important.

One business improves a physical process. Another applies specialised engineering knowledge. The third combines product differentiation with a different business model.

None relies on artificial intelligence as the central source of its competitive advantage.

Start with the Problem, Not the Technology

These examples illustrate a fundamental principle that risks being overlooked in the AI investment boom: innovation begins with a problem, not a technology.

For decades, successful businesses have innovated by identifying unmet customer needs, eliminating inefficiencies, improving products and developing superior business models.

That logic has not changed simply because a powerful new technology has arrived.

Yet many management teams appear to be approaching innovation from the opposite direction.

Instead of asking, “What is preventing us from delivering greater value to customers?”, they begin by asking, “Where can we use AI?”

The distinction may seem subtle, but its commercial consequences can be substantial.

Starting with a technology encourages businesses to search for applications, whether or not those applications address important problems.

Starting with a problem encourages businesses to consider alternative solutions and select the approach that creates the greatest economic value.

Sometimes that solution will involve AI. Sometimes it will involve better engineering, simpler processes, improved customer service or a different business model.

And sometimes the most effective innovation will be surprisingly uncomplicated.

This is not an argument against artificial intelligence. AI has enormous potential to improve productivity, decision-making, research, customer service and product development.

Businesses that ignore these capabilities may miss significant opportunities.

But recognising AI’s importance is different from assuming that every worthwhile innovation must incorporate it.

Three Questions Every Business Should Ask

Business leaders evaluating AI investments should distinguish between three questions that are frequently confused.

First, can we use AI?

This is a technical question. Can the technology perform the proposed task? Can it be integrated into existing systems? Is the necessary data available?

Second, will AI improve our business?

This is an economic question. Will the investment reduce costs, increase revenue, improve quality or generate sufficient additional value to justify implementation and ongoing operating expenses?

Third, will that improvement make us more competitive?

This is a strategic question, and arguably the most important.

Will the investment create an advantage that competitors cannot easily reproduce? Will customers notice and value the improvement? Will the business retain the economic benefits, or will they quickly be competed away?

A technology can pass the first test and fail the other two.

An AI application may be technically impressive without delivering an attractive financial return. Equally, it may improve efficiency without creating a lasting competitive advantage if every competitor can purchase the same capability.

As AI tools become more accessible, many applications may become standard business requirements rather than meaningful sources of differentiation.

Efficiency Is Not Competitive Advantage

There is an important difference between becoming more efficient and becoming more competitive.

If every business in an industry adopts similar AI tools, operating costs may decline across the sector. Customers may benefit through lower prices and better service, but individual businesses may struggle to retain a distinctive advantage.

In economic terms, the benefits of the technology may be competed away.

By contrast, innovations built around specialised knowledge, distinctive product design, trusted customer relationships or difficult-to-replicate business models may provide more defensible competitive positions.

This is why the examples of HiveKeepers, Mako and Lyka are instructive.

Their approaches suggest that competitive advantage can emerge from understanding a problem more deeply than competitors and developing a solution that is difficult to imitate.

AI might subsequently help these businesses improve operations, accelerate product development or strengthen customer relationships. But it would be a supporting capability, not necessarily the source of their differentiation.

For business owners and boards, the practical implication is straightforward.

The innovation agenda should not be organised around a single technology, however fashionable or powerful.

It should be organised around the opportunities that matter most: unmet customer needs, operational bottlenecks, emerging markets and weaknesses in existing business models.

Management should then compare alternative investments based on their likely economic returns, implementation risks and potential to create sustainable competitive advantage.

AI should compete for investment alongside other opportunities, not receive preferential treatment simply because it dominates the headlines.

The greatest risk is not that businesses will invest in artificial intelligence. Many should.

It is that enthusiasm for AI will divert management attention and scarce investment capital from other innovations that might deliver greater value.

Business history is full of companies that succeeded not by being first to adopt a fashionable technology, but by understanding customers better, executing more effectively or developing business models that competitors struggled to match.

Those principles remain as relevant in the age of artificial intelligence as they were before it.

The objective of innovation is not to become more technologically sophisticated. It is to become more valuable to customers and more competitive in the marketplace.

Artificial intelligence can be a powerful means to that end. But it should never be confused with the end itself.

In the rush to embrace AI, business leaders should remember that the baby is innovation. AI is only part of the bathwater.

Source: The Australian, Top 100 Innovators 2026.