The Innovation Stack

1. Innovation Stacks: The Key to Entrepreneurial Success

An Innovation Stack is not something you bring home from some management retreat along with the embroidered fleece jacket. An Innovation Stack is not a plan, it is a series of reactions to existential threats.

Definition and importance. An Innovation Stack is a collection of interlocking and independent innovations that evolve in response to challenges faced by entrepreneurs. It's not a predetermined strategy, but rather a dynamic process of problem-solving that occurs when venturing into uncharted territory.

Key characteristics:

• Develops organically as entrepreneurs tackle new problems
• Consists of multiple interconnected innovations
• Difficult for competitors to replicate entirely
• Provides a strong competitive advantage

Examples:

• Square's Innovation Stack: free sign-up, cheap hardware, no contracts, beautiful software, fast settlement, low price
• Southwest Airlines: standardized fleet, open seating, direct routes, no frills service
• IKEA: self-assembly furniture, warehouse showrooms, global supply chain

2. Solving Perfect Problems: The Catalyst for Innovation

A perfect problem has a solution, but not a solution that exists yet.

Identifying perfect problems. Perfect problems are unsolved challenges that an entrepreneur is uniquely positioned to address. They often arise from personal experiences or observations of inefficiencies in existing systems.

Characteristics of perfect problems:

• No current solution exists
• The problem-solver has a personal connection or motivation
• Solving it could potentially create significant value
• It may be overlooked or dismissed by established players

Examples:

• Square: enabling small merchants to accept credit card payments
• Bank of Italy (later Bank of America): providing banking services to immigrants and working-class people
• IKEA: making stylish furniture affordable for the masses

3. The Power of Audacity: Leaving the Walled City

If you stay within this metaphorical wall, you are a sane businessperson. If you leave the world of the known, you are either an entrepreneur or a corpse.

Embracing the unknown. Audacity is the courage to venture beyond established norms and practices. It's the willingness to tackle problems that others deem impossible or not worth solving.

Key aspects of audacity:

• Willingness to challenge conventional wisdom
• Courage to pursue unconventional solutions
• Ability to persist in the face of skepticism and obstacles

Metaphor of the walled city:

• Inside: safety, predictability, established practices
• Outside: uncertainty, risk, but also opportunity for innovation
• Leaving the city: choosing to become an entrepreneur

4. Learning from Historical Entrepreneurs: Giannini, Kamprad, and Kelleher

There is no way to prove that a problem is unsolvable.

Case studies in innovation. The author examines three historical entrepreneurs who created successful Innovation Stacks:

1. A.P. Giannini (Bank of Italy/Bank of America):

   • Focus on serving immigrants and working-class people
   • Multilingual tellers, expanded hours, home mortgages

2. Ingvar Kamprad (IKEA):

   • Self-assembly furniture, warehouse showrooms
   • Global supply chain, low prices

3. Herb Kelleher (Southwest Airlines):

   • Standardized fleet, open seating, direct routes
   • No-frills service, low prices

Common themes:

• Identified underserved markets
• Challenged industry norms
• Built comprehensive Innovation Stacks
• Focused on customer needs rather than competitor actions

5. Copying vs. Creating: The Entrepreneurial Dilemma

Copy when you can; invent when you must.

Balancing imitation and innovation. While copying successful practices is often the safest and most efficient approach in business, true entrepreneurship requires the ability to create new solutions when existing ones are inadequate.

When to copy:

• Entering established markets
• Implementing proven best practices
• Addressing well-understood problems

When to create:

• Solving perfect problems
• Expanding into new markets
• Challenging fundamental industry assumptions

The innovation process:

1. Identify a problem
2. Research existing solutions
3. Attempt to copy or adapt if possible
4. Innovate when necessary
5. Repeat as new challenges arise

6. Timing and Market Expansion: When to Innovate

If the timing feels right, you are probably too late.

Understanding market readiness. Successful innovation often depends on timing – launching too early or too late can lead to failure. Entrepreneurs must balance being ahead of the curve with ensuring the market is ready for their solution.

Factors influencing timing:

• Technological readiness
• Regulatory environment
• Customer awareness and demand
• Availability of key resources or infrastructure

Strategies for timing:

• Monitor the "Horizon of Possibility" for enabling technologies
• Be prepared to act quickly when conditions align
• Focus on expanding markets rather than disrupting existing ones
• Build flexibility into your Innovation Stack to adapt to changing conditions

7. Low Price Strategy: Building Trust and Competitive Advantage

Low price forges a stronger relationship with customers by building trust in the brand.

The power of low pricing. Consistently offering low prices, rather than the lowest prices, can create significant advantages for entrepreneurial companies.

Benefits of a low price strategy:

• Builds customer trust and loyalty
• Creates a barrier to entry for competitors
• Aligns the company's interests with those of customers
• Encourages focus on efficiency and innovation

Implementation guidelines:

• Set prices based on value to customers, not just cost
• Maintain consistency rather than frequent price changes
• Reflect efficiency gains in lower prices when possible
• Use low prices as a tool for market expansion, not just competition

8. Overcoming Fear and Embracing Humility in Entrepreneurship

If you are about to do something that has never been done, there is no way to rehearse the act itself. But you're probably going to be nervous when you do it, so at least practice that part.

Managing emotions in innovation. Fear and uncertainty are natural parts of the entrepreneurial journey. Successful entrepreneurs learn to work through these emotions rather than being paralyzed by them.

Strategies for managing fear:

• Acknowledge and accept fear as part of the process
• Practice operating under stress in low-stakes situations
• Focus on solving the problem rather than personal doubts
• Use fear as a motivator for thorough preparation

The role of humility:

• Allows for open-mindedness and continuous learning
• Helps in connecting with customers and team members
• Enables recognition of personal limitations and the need for help

9. The Myth of Expertise in Innovation

Qualification comes only from successful experience, and successful experience by definition cannot exist in the case of an unsolved problem.

Redefining qualifications for innovation. True innovation often comes from outsiders who are not constrained by industry norms or preconceptions. Expertise can sometimes hinder creative problem-solving.

Challenging traditional notions of expertise:

• Formal qualifications may be less relevant for solving new problems
• Fresh perspectives can lead to breakthrough solutions
• Lack of industry experience can be an advantage in questioning assumptions

Key qualities for innovators:

• Curiosity and willingness to learn
• Persistence in the face of challenges
• Ability to think creatively and connect disparate ideas
• Courage to challenge established norms

10. Disruption vs. Market Expansion: A New Perspective

Entrepreneurs distribute that future. The companies they build are not disrupters, they are market expanders for those people waiting for their slice of the future.

Rethinking the goal of innovation. Rather than focusing on disrupting existing markets, successful entrepreneurs often expand markets by serving previously underserved or unserved customers.

Advantages of market expansion:

• Creates new value rather than just redistributing existing value
• Reduces resistance from established players
• Aligns with solving perfect problems
• Often leads to more sustainable growth

Examples of market expansion:

• Southwest Airlines: made air travel accessible to new segments of travelers
• IKEA: expanded the market for stylish, affordable furniture
• Square: enabled small merchants to accept credit card payments

Shift in mindset:

• From "How can we beat the competition?" to "How can we serve more customers?"
• Focus on creating new possibilities rather than just improving existing solutions

Last updated: November 18, 2024