The Innovation Stack
Build interlocking innovations that competitors cannot easily replicate
- Difficulty
- Expert
- Time to result
- ~months to results
- Steps
- 5
- Confidence
- 99%
An innovation stack is a system of numerous interdependent departures from established practice. A company begins with a problem that cannot be solved by copying incumbents, forcing it to invent across product design, pricing, distribution, operations, and customer experience. Each innovation changes the requirements for the others, producing a connected system rather than a linear list of features. A competitor may reproduce one element, but reproducing the entire combination is far harder. The resulting defensibility comes from the cumulative interaction of the innovations, not from a patent, isolated feature, or superior scale. Square, Southwest Airlines, the Bank of Italy, and IKEA illustrate how such systems can enable underdogs to withstand much larger opponents.
Origin
Jim McKelvey identified the pattern after Square survived an attack from Amazon. Two years of research into other successful underdogs revealed similar clusters of interlocking innovations, which he named the innovation stack.
Core principles
- 01Solve problems that established practices cannot address
- 02Expect a genuinely new business to require many connected innovations
- 03Treat the whole system, not one feature, as the competitive advantage
- 04Innovate when copying cannot solve the problem
- 05Let each innovation reinforce the others
How to run it
- 1
Start with an unsolved problem
Choose a meaningful customer problem that existing providers and standard practices do not adequately solve.
Pro tip Look for groups that are collectively valuable but individually underserved.
Watch out Do not begin by choosing an incumbent you want to disrupt.
- 2
Try the proven route first
Determine whether established practices can solve the problem. Innovate only where copying fails or is unavailable.
Pro tip Treat copying as an efficient default rather than an ethical failure.
Watch out Novelty for its own sake creates unnecessary risk.
- 3
Invent the missing components
Create each product, pricing, operational, and distribution change required to make the solution work.
Pro tip Record why each departure from convention is necessary.
Watch out Do not mistake one innovative feature for a complete business system.
- 4
Connect the innovations
Map how every new practice affects and reinforces the others. Adjust the system until its components work coherently together.
Pro tip Use dependency mapping rather than presenting the stack as a simple linear sequence.
Watch out An innovation that conflicts with the rest of the system can weaken the whole stack.
- 5
Test system-level defensibility
Evaluate whether a competitor can reproduce the entire combination economically and operationally, not merely copy one component.
Pro tip Estimate the cumulative difficulty of matching every linked innovation.
Watch out Do not respond to a powerful rival by abandoning the economics that make your stack work.
In the wild
Amazon introduced a competing card reader and undercut Square's price by about 30 percent. Square could not match that price without going underwater, so it continued serving its market through its existing combination of product, pricing, and merchant-focused innovations. Amazon withdrew after roughly a year and sent Square readers to its former customers.
→ Square survived an attack from a vastly larger competitor without copying its rival's pricing move.
Swedish furniture manufacturers excluded Ingvar Kamprad from their trade show and refused to manufacture his products. Those constraints forced IKEA to create its own showroom and move production to Poland, adding connected innovations rather than following the established furniture model.
→ The forced innovations contributed to the creation of the world's largest furniture company.
Common mistakes
Confusing one feature with a stack
A novel feature can usually be copied. Defensibility comes from a connected set of innovations that competitors must reproduce together.
Innovating without necessity
Copying is often the safest and most efficient solution. Build an innovation stack only where conventional methods cannot solve the chosen problem.
Matching a giant on its terms
Competing directly on a powerful incumbent's price, scale, or brand can destroy the economics of an underdog's system.
Is it for you?
Best for
It is best for founders solving neglected problems that established business models cannot accommodate.
Not ideal for
It is not ideal for conventional businesses that can succeed by adopting established best practices.
From the transcript
“a company that's inventing something that's totally new is not inventing one or two or three things.”
“They're probably doing ten or twenty or thirty different things that have never been done before, certainly never been done before in combination, and in…”
“But if you can't copy, you're gonna be forced to innovate”
From the episode
Jim McKelvey on 'The Innovation Stack' (Podcast)