Innovation Isn’t Voluntary

Jim McKelvey is the co-founder (along with Jack Dorsey) of Square, one of the most successful, and disruptive, Fintech startups.  He has just written a book called ‘The Innovation Stack: Building an Unbeatable Business One Crazy Idea at a Time’ and in this interview, he discusses Square’s history and also his theory of why they have been successful and why others (including Amazon) who have tried to copy what Square does, have failed.

McKelvey’s claim, based on his own experience and backed up by the research he has done, is that the most successful businesses are built on a ‘pyramid’ of services – a stack of interconnected components that solve a specific problem and are part of a holistic system that works together. To truly solve the problem, and create a solution that is almost impossible for others to copy, you need the whole stack, one or two components won’t do.

The other part of the equation is that the problem to solve is one that the existing market doesn’t recognize. For example, Southwest Airlines solved the problem of average income people taking 14 hour bus rides who would be more than willing to take a reasonably priced 2 hour plane ride. Square solved the problem of small merchants who could not take credit card payments because the existing system was so onerous.

The key is to build a service for people who are not customers of the current system – e.g. an airline for people who are taking busses, payments system for merchants who could not take credit cards. These target customers are outside the existing system. The solutions are for underserved populations, people who are disenfranchised in the existing system. Aquare did this for small merchants and now, with their Cash app, they are doing it for the non-banked population.

In these situations, you are forced to build new solutions that don’t exist. These solutions need to be holistic, interconnected systems that solve the whole problem of underserved populations. Square did 14 distinct things to solve the problem of small merchants being able to take credit cards. Amazon tried to copy them and offered the ‘same’ service at 30% less cost than Square. But they only implemented 3-4 of the things Square did. Amazon failed. They failed because Square had built a dynamic system consisting of 14 interconnected components. Dynamic systems are hard to understand and hard to copy. You can’t copy just a few elements. Innovation Stacks are therefore massive competitive advantages.

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