The Innovation Stack
Building an Unbeatable Business One Crazy Idea at a Time
Book Edition Details
Summary
When a glassblower loses a sale due to archaic payment systems, a spark ignites that will revolutionize commerce. "The Innovation Stack" chronicles the audacious journey of Jim McKelvey and Jack Dorsey as they disrupt the financial world with Square, a startup that empowers small merchants to accept credit card payments via mobile phones. Amidst towering competitors and seemingly insurmountable odds, McKelvey unveils the secrets behind their success—a series of bold, ingenious moves that form the 'Innovation Stack.' Through captivating anecdotes and historical insights, McKelvey demystifies how relentless curiosity and fearless creativity can build unassailable companies. This isn't just Square's story; it's a rousing manifesto for the maverick in each of us, urging a leap into the unknown to solve problems others dare not touch.
Introduction
Traditional business wisdom suggests that success comes from copying what works, incrementally improving proven models, and competing within established markets. Yet history reveals that the most transformative companies—those that fundamentally reshape entire industries—operate by entirely different principles. These organizations don't simply compete for existing customers; they create entirely new markets by solving problems that others have deemed unsolvable or ignored altogether. The phenomenon behind such remarkable success isn't random luck or exceptional genius, but rather a systematic pattern of interlocking innovations that emerge when entrepreneurs venture beyond the boundaries of known solutions. This pattern challenges conventional assumptions about competition, pricing, and market dynamics, revealing why some companies can withstand attacks from much larger competitors while others crumble under pressure. Through rigorous analysis of historical cases spanning different industries and time periods, we can discern the mechanics of how revolutionary businesses actually develop and defend their positions. The examination reveals counterintuitive principles: how focusing on excluded populations can lead to massive markets, why "doing nothing" can be the most effective competitive response, and how low prices can create unassailable advantages rather than erode profits. This investigation into the anatomy of transformative business success offers both a new lens for understanding economic history and practical insights for anyone seeking to solve meaningful problems in novel ways.
The Nature of Innovation Stacks: Beyond Single Inventions
The conventional narrative of business innovation focuses on singular breakthroughs—the lightbulb moment that changes everything. This perspective fundamentally misunderstands how transformative businesses actually develop. Revolutionary companies don't succeed because of one brilliant invention, but through the evolution of multiple interconnected innovations that emerge from attempting to serve customers who have been systematically excluded from existing markets. When entrepreneurs choose to solve problems that established companies ignore or consider unsolvable, they cannot simply copy existing solutions. Instead, they must invent new approaches, which inevitably create new problems requiring additional innovations. This chain reaction produces what can be understood as an Innovation Stack—a collection of interlocking business innovations where each element depends on and reinforces the others. The interconnected nature of these innovations creates a powerful competitive advantage. Unlike single innovations that can be easily copied, Innovation Stacks resist replication because copying just one or two elements provides little benefit. Competitors must successfully implement nearly all elements simultaneously—a feat that proves mathematically improbable due to the exponential complexity of interdependent systems. This systematic approach to innovation explains why certain companies can expand markets dramatically while maintaining dominant positions for decades. The process begins not with a desire to innovate, but with a commitment to serve people who have been excluded from existing systems, forcing the development of entirely new ways of doing business.
Historical Evidence: Four Companies That Built Innovation Stacks
Four companies from different eras and industries provide compelling evidence for how Innovation Stacks develop and function in practice. Bank of Italy, founded in 1904, transformed banking by serving immigrants and working-class people whom established banks ignored. Through innovations like branch banking, simplified lending, and multilingual service, it became the world's largest bank while fundamentally changing what banking meant. IKEA's journey began when seventeen-year-old Ingvar Kamprad was banned from furniture trade fairs and boycotted by suppliers. Forced to find alternative approaches, the company developed flat-pack furniture, self-assembly, warehouse showrooms, and global supply chains that made quality design accessible to ordinary families. What started as defensive responses to industry hostility became the foundation for dominating the global furniture market. Southwest Airlines emerged from legal battles with established carriers and government regulators who sought to prevent its formation. The constraints forced innovations in aircraft utilization, boarding procedures, route structures, and pricing that enabled profitable service to customers who previously couldn't afford to fly. The company's Innovation Stack proved so effective that it survived industry-wide bankruptcies while maintaining profitability for decades. Square's development followed a similar pattern when it attempted to enable small merchants to accept credit card payments. Serving this excluded population required innovations in hardware design, pricing transparency, fraud detection, and regulatory compliance that established companies couldn't or wouldn't implement. The resulting system proved resilient enough to survive a direct assault from Amazon. Each case demonstrates how Innovation Stacks emerge from necessity rather than strategic planning, evolve through iterative responses to existential challenges, and create market positions that prove remarkably durable against competitive threats.
The Physics of Innovation: Why Stacks Create Unbeatable Advantages
Innovation Stacks operate according to principles that invert traditional business logic, creating advantages that seem paradoxical from conventional perspectives. The mathematical complexity of copying interconnected innovations provides the first layer of protection. When a system contains fourteen interdependent elements, even a highly capable competitor has less than a 4% probability of successfully replicating all components simultaneously. The dynamic nature of these systems compounds the difficulty further. Each element influences others, creating feedback loops and emergent properties that cannot be predicted through analysis alone. Entrepreneurs develop these systems through experimentation and adaptation, constantly adjusting elements in response to real-world performance. Established companies attempting to copy Innovation Stacks through planning and analysis face the impossible task of modeling systems they cannot fully understand. Customer relationships form another crucial advantage. Innovation Stacks typically serve new market segments, training customers in entirely new behaviors and expectations. These customers become anchored to the innovator's approach and resistant to alternatives. Psychological principles of anchoring and conservatism make it far easier to teach new concepts than to change existing beliefs, giving first movers substantial advantages in customer loyalty. The low-price component common to most Innovation Stacks creates additional protective effects. By sharing efficiency gains with customers rather than maximizing short-term profits, innovative companies leave little room for competitors to undercut them while building trust that translates into powerful word-of-mouth marketing. This approach contradicts conventional profit maximization but proves strategically superior for market expansion and defense. These principles explain why Innovation Stacks enable small companies to withstand attacks from much larger competitors and why "doing nothing" in response to competitive threats can be the optimal strategy.
Building Your Own Stack: From Perfect Problems to Systematic Solutions
Innovation Stacks cannot be planned or engineered through conventional strategic processes. They emerge from entrepreneurs' decisions to tackle "perfect problems"—challenges that are solvable but have no existing solutions, typically because they involve serving people excluded from current systems. The key lies not in seeking innovation for its own sake, but in committing to solve problems that genuinely matter, regardless of whether established approaches exist. The development process follows a recognizable pattern. Entrepreneurs first exhaust all possibilities for copying existing solutions, discovering that conventional approaches cannot serve their intended customers. This realization forces them outside established market boundaries, where different rules apply and innovation becomes necessary for survival. Each solution creates new problems, generating the iterative cycle that builds the Stack. Timing plays a crucial role in Stack development. Missing elements—often technological or regulatory capabilities—can prevent Innovation Stacks from forming until the right moment. Successful entrepreneurs work on all controllable elements while waiting for external factors to align, then move rapidly when conditions permit. The feeling of being "too early" often indicates optimal timing for innovation. The process demands comfort with discomfort and willingness to operate without expert guidance, since expertise only exists for known solutions. Entrepreneurs must develop tolerance for uncertainty, fear, and the absence of positive feedback that characterizes work in uncharted territory. Success requires stubborn persistence driven by genuine care about the problem being solved. Most importantly, Innovation Stacks remain accessible to anyone willing to venture beyond established boundaries. The same principles that enabled a produce vendor to build the world's largest bank or a teenager to dominate global furniture retail are available to those who choose meaningful problems over safe solutions.
Summary
The systematic analysis of transformative businesses reveals that lasting competitive advantage stems not from individual innovations or strategic planning, but from the evolutionary development of interconnected solutions that emerge when entrepreneurs commit to serving excluded populations. This approach to understanding business success challenges fundamental assumptions about competition, innovation, and market dynamics while providing a framework for recognizing and potentially creating similar advantages. The insights prove particularly valuable for those seeking to address meaningful problems through business solutions rather than simply competing within existing market constraints.
Related Books
Download PDF & EPUB
To save this Black List summary for later, download the free PDF and EPUB. You can print it out, or read offline at your convenience.
By Jim McKelvey
