Book review: The Innovation Stack

Similar to the most recent books, this one came to me by chance when somebody I follow retweeted someone else who read it. I gave it a chance and I am glad I did. The book is penned by Jim McKelvey, the cofounder of Square. The book should be recommended by business schools and read by anyone who wishes to improve their competitiveness as a business or a company. It is a straightforward, easy-to-read, genuine and informative book. What I like the most about the book is the author’s genuineness. He doesn’t seem to try to immortalize entrepreneurs or make wild exaggerations. For instance, one of his main points is to copy what worked in the past. In my personal experience at business schools, I often listened to professors talk about “blue ocean” or “doing something unique”. I always find it hard to come across something that has never been done before. Perhaps, I am not smart enough. That’s why it’s refreshing to listen to a billionaire who admitted that he copied everything he could at Square.

Jim’s Innovation Stack simply refers to the process of companies trying to solve a problem which leads to two more problems and so on. By tackling each problem, successful entities come up with a unique mix of elements that only they can possess, elements that make them competitive. Any competitor that wants to copy an Innovation Stack has to somehow copy every single element of the Stack, not just one or a few. That makes a solid Innovation Stack defensible and difficult to emulate.

The same concept can also apply to individuals. For instance, speaking English may not give anyone a competitive advantage. However, combining English with other skills such as fluency in Latin and professional training in archaeology makes a person “more unique” and harder to compete.

There are other gems in the book that I believe will be useful to readers. If you are looking for a short quality read over this weekend, give it a try. It’s worth it.

“BEFORE stalking got such a bad reputation, I was pretty good at it. My target was always the same: some famous businessperson. Entrepreneurship was not taught in school at the time,* so I had to invent a way to get instruction. My technique was simple: I would wait until some famous entrepreneur came to St. Louis to give a speech. After the speech I would catch the speaker as he or she left the stage and offer a ride to the airport.”

Excerpt From: Jim McKelvey. “The Innovation Stack.” Apple Books.

“A couple of ratios help illuminate the crime scene. Credit card vendors were making 0.04¢ on every dollar ($0.3 billion / $788 billion) they processed from their large merchants. Now compare this to 1.8¢ on the dollar, the profit they were making on small merchants ($2.4 billion / $130 billion). Their profit margin from small businesses was forty-five times higher than from billion-dollar corporations. I rechecked my math three times before that number sunk in. Small businesses pay forty-five times more than the giants do. We had identified a big problem and a good reason to start a company.”

Excerpt From: Jim McKelvey. “The Innovation Stack.” Apple Books.

The problem with solving one problem is that it usually creates a new problem that requires a new solution with its own new problems. This problem-solution-problem chain continues until eventually one of two things happens: either you fail to solve a problem and die, or you succeed in solving all the problems with a collection of both interlocking and independent innovation. This successful collection is what I call an Innovation Stack

Excerpt From: Jim McKelvey. “The Innovation Stack.” Apple Books.

“But this book’s subject is the exploration of the unknown; so, as a consolation prize for readers expecting between five and seven bulleted steps to success, I will now tell you the universal formula for success in any existing industry. This formula works from building bridges to selling soap. This formula has worked for millennia and it will give you the ability to succeed in any known field of endeavor. Even better, you have been practicing the fundamental skill it requires since before you were born, and are almost certainly a master.

Ready?

Copy what everyone else does.”

Excerpt From: Jim McKelvey. “The Innovation Stack.” Apple Books.

“In 1973, Braniff cut its fare between Dallas and Houston to $13, half of what Southwest charged. The Dallas–Houston run was Southwest’s primary source of profit—competing at that rate, even with its Innovation Stack and greater cost efficiency, would be disastrous. Braniff’s pricing attack violated US antitrust law, but the executives hoped to drive Southwest out of business before Herb could take them to court. Winning in court wouldn’t matter if Southwest was dead, so Herb needed a fast solution. He and his team devised a plan by looking at their customers.

Southwest knew that most of the passengers on the Dallas–Houston route were businesspeople. These businesspeople flew Southwest primarily for the convenience of multiple flights, easy changes, open seating, and on-time performance. Braniff could set any price it wanted, but it could not replicate the other effects of Southwest’s Innovation Stack. These business fliers were not choosing Southwest simply because of the low price, a price their employers reimbursed them for anyway. So Southwest offered fliers the option of paying only $13, or they could pay the full fare of $26 and get a complimentary bottle of Chivas Regal scotch, Crown Royal whiskey, or Smirnoff vodka. Most of the passengers stayed with Southwest and chose to pay the full fare and get the booze. Southwest managed to outsell Braniff at twice the price, and for the length of that promotion became the largest liquor distributor in Texas.”

Excerpt From: Jim McKelvey. “The Innovation Stack.” Apple Books.

“Disruption has become nearly as threadbare a concept as entrepreneurship. The two words could be roommates at rehab. When Clayton Christensen first popularized the disruption concept back in 1997, the idea was novel and interesting. But what Christensen originally called disruptive innovation has now been shortened to just disruption and the oversimplification is profound. Two decades later, disruption has become the high-fructose corn syrup of business, an overused ingredient sprayed on pitches and injected into keynotes in the hope of disguising the familiar taste of conformity.”

Excerpt From: Jim McKelvey. “The Innovation Stack.” Apple Books.

“IS DISRUPTION BAD? Not by itself. But disruption has also never been the focus of good entrepreneurs. The entrepreneurs profiled in this book set out to build and not to destroy. To focus on disruption is to look over one’s shoulder into the past. But if you are trying to solve a perfect problem or expand a market, shouldn’t you study that industry? No, you look at your customers, or I should say your potential customers, for they do not even know your product or service is possible.”

Excerpt From: Jim McKelvey. “The Innovation Stack.” Apple Books.

But now that you have read this book you have lost something as well. You can no longer look at a problem and say, “Nothing can be done.” You can’t even say, “I can’t do it because I am lacking (fill in your excuse du jour).” You can only say either, “I’m not going to do anything” or “I am going to solve this problem.” Because we have seen how world-changing entrepreneurs had few if any qualifications when they began their journeys. 

Excerpt From: Jim McKelvey. “The Innovation Stack.” Apple Books.