In the summer of 2014, Square was just a 5-year-old startup. Square is an American financial services company that gives away its little square card reader (that attaches to iPhone via audio jack) to business owners and charges a small fee (2.75% of the transaction amount).
And then one day, the door bang rang. Amazon had launched Register as a direct competition to Square. They had copied Square (although Register was different in form factor) and undercut Square prices by 30 percent. On top of that, Amazon offered live customer service which Square lacked back in the days. What’s more, Amazon was going to leverage the ubiquity of its brand and millions of established supplier and customer network to take over Square’s market share. It wasn’t looking good for Square.
Square needed a counter attack. And they needed it fast. They began looking for examples of small startups that had successfully fought back Amazon. Sadly, nobody had ever written a book about small start-ups beating a giant industry incumbent. And there was no field manual on how to beat the alpha predator.
Amazon’s Assault on Square
Amazon’s first point of attack is form factor. The problem with Square card readers were that credit cards tended to wobble due to the small size and form of the reader, leading to many misreads. By 2014, Square had re-engineered their original reader several times, yet they never changed the size. The wobble was there to stay.
Square insisted on keeping their original design. McKelvey (co-founder of Square and author of Innovation Stack) said: “Our reader was square, and it was Square. It was small and cool and unique. Our reader demanded your attention, first because of its unique look and then because you had to practice using it! There was no way to change the reader to match the function of Amazon’s competing product, Register, without sacrificing one of our core values: beautiful design.”
Amazon attacked this weak point – copying what Square did, except that they triple the width of their reader.
Square offered no live support nor phone support for any of their customers. This was not an oversight. Square intentionally designed their ecosystem without requiring customer support. They built their software and infrastructure with the simplicity in mind. Square believed occasional email support would suffice for their short-term customer needs.
However, as Square’s product line was becoming more sophisticated, the management had to think differently. Even then, customer support isn’t something they could implement overnight. To provide a live customer service requires months of planning, hiring, training and finding a physical space for everyone to sit. They had no choice but to accelerate their efforts because the world’s most dangerous company was coming for them.
Amazon undercut Square’s transaction fees by almost 1-percent. Square could have matched Amazon’s offer and went to attrition war. However, Square was a small, unprofitable start-up and Amazon was a large, profitable Goliath. Fighting with Amazon on price would have driven them into bankruptcy. Plus, their price wasn’t arbitrary. They had chosen a price lower than everyone else’s on the market but also one that will become eventually profitable.
So, how did Square react exactly?
Nothing… Yes, you read it right. Square would do precisely nothing. Why?
- Square couldn’t re-design their reader because doing so would go against their core value.
- Square was already planning to implement live customer support.
- Square couldn’t go to price war with Amazon because doing so would push them over the edge and bleed them to death.
Put it another way, Square’s Innovation Stack was complete in its own way. So, they did nothing.
And then the doorbell rang… again.
In 2015, just in time for Halloween, Jeff Bezos gave Square a treat. Amazon announced that it would discontinue Register. To Amazon credit, Amazonians were extremely cool about how they exited Square market. Every Register customer received a smiling cardboard box containing a little white Square reader.
David has defeated the Goliath. For over a year, the scariest monster on earth that had left a graveyard of corporate corpses, copied their product, undercut their prices and was going to push them out of business. Then to their surprise, the monster gave up and handed them a treat.
For a large part of the history, start-ups don’t beat Amazon. So what was the secret sauce to Square’s astounding victory? According to Jim McKelvey (the co-founder of Square and the author of this book), the answer is the ‘Innovation Stack’. In his own words: “Was our survival more than just luck? And Could what saved Square save other companies?… .Yes, and yes.”
IKEA’s Innovation Stack
#1 Catalogue show rooms
As with other entrepreneurial firms, IKEA had to evolve through the innovation stack, in their case, in response to a harsh environment and boycotts. Kampard (founder of IKEA) explained his innovation stack this way: first, use a catalog to tempt people to come to exhibition (which today is their store). Second, IKEA provides a large premise within which customers are free to roam and see sample decorations first-hand, touch the furniture and leave an order which would be put into effect by mail via factories.
But there’s just one problem. They couldn’t make this furniture in their home country. So, they had to consider…
#2 Overseas Manufacturing
Because the factories refused IKEA as a result of the boycott, Kampard had to source the manufacturing elsewhere, ideally a place with low labor costs and rich natural resources. The economy of Poland was a mess back then and IKEA was able to hire Polish workers for a fraction of the cost of Swedish’s.
But there’s just one problem. Polish factories were worn-down and had many quality problems. So, they had to build…
#3 Efficient Factories
The redesign of Polish factories didn’t only solve quality concerns also increased efficiency and lowered costs. In the coming years, Polish factories produced so much furniture that the shipping volumes grew dramatically.
However, there’s just one problem. The furniture packages were mostly empty space. So, they had to create…
#4 Knocked-Down Furniture
In doing so, IKEA saved shipping space as well as reduced property damages. Still, it required workers on the receiving g end to reassemble the properties. Added labor created additional costs. To address this problem, they adopted…
#5 Self-Assembled Furniture
By asking the customers to do their own assembly job, IKEA eliminated labor and delivery overheads. However, the self-assembled furniture comes with one underlying problem. It was difficult for most people to assemble furniture. And so, they had to…
#6 Custom Design
IKEA built its furniture with its own designers. These die singers worked directly with the production side to design furniture that’s efficient for production, lowering costs even more. Designers were also able to optimize raw materials across IKEA’s entire product line, so they had…
#7 Interchangeable Parts
Customers can use one scree for thousands of IKEA products, and that simplified the assembly job for very different furniture. Standardizing parts also helped IKEA achieved economics of scale. In fact, IKEA grew big enough that it soon exceeded their own production capacity. So, they had to build a…
#8 Global Supply Chain
Efficiencies in supply chain saved IKEA more costs and simplified the logistics that one factory had to perform. But IKEA needed a place to store all these goods. So, they looked into using….
#9 Warehouse Showrooms
Knocked-down and self-assembled furniture was so space-efficient that IKEA was able to store it in their showrooms (which is also their warehouses). This cut down the waiting time for customers to get their products. But with all this success and stores getting bigger and bigger, people were starting to get lost in them. So, they had to build…
#10 Winding Paths
Walk into any IKEA store and you’ll see cleverly spaced winding paths. This helps the stores feel less intimidating and more intuitive, helping customers find their products easier and quicker. As people spend more time in their facilities, IKEA had to think about…
#11 Food and Child Care
Customers can spend the entire day at IKEA, and there’s no reason to leave the store to eat or drop their kids to a playground. IKEA got it all. Plus, these parents have one more main reason to stay in giant stores and look through the wide array of products…
#12 Low Prices
People not only appreciate IKEA’s low prices, they also trust the IKEA brand itself, the value it represents and the quality it brings to their household.
Want more? Check here for the Southwest Airline’s Innovation Stack.
Lesson #1 Learning when is harder than learning how.
For most people, learning how isn’t the challenge. They can learn the task so well that they do it right almost every time. However, the same people can struggle in applying their skills at the right place at the right time. It’s the same with entrepreneurs. The question “When should we implement our idea?” has bugged almost every entrepreneur on the planet. Here’s the thing. Many people have defaulted to “Now” if they don’t know the answer. But is “Now” really the right time?
Lesson #2 First isn’t always the best in entrepreneurship.
Some elements of the innovation stack depend on each other. And when that crucial element is missing, it’s probably best to be late than early.
Take early social network platforms for example. GeoCities, not Friendster, was the first social network in 1995. Friendster only came in 7 years later. They did better until MySpace pushed them out of business in 2003. And then, Facebook came along… ultimately to crash the party.
Part of the reason GeoCities, Friendster and MySpace failed despite of their early mover advantage is that they went to the market, perhaps too early. They did alright back then but Facebook’s timing is just spot on. Facebook had a dozen ideas in its Innovation Stack at the very moment the mobile market exploded. This drives the point that you can be early in innovation and entrepreneurship.
Lesson #3 If the timing feels right, it is probably too late.
Humans feel right when we’re in sync with the rest of the crowd. That means if the innovation feels right for you, chances are it feels right for a thousand other people with the same idea. A good rule of thumb is to start when you feel early because there will always be uncertainty and unknowns looming around the corner. Ask yourself “Is the world also ready?”. If the world is ready, you’re ready.
Lesson #4 Great companies started out in a sea of obstacles.
SouthWest Airlines spent its infancy in a courtroom. Herb Kelleher wasn’t even an airline executive in the earliest days. He was an attorney fighting for Southwest. Herb and SWA won, but the other airlines didn’t give up easily. Even after the triumph, SWA had to overcome the obstacles on the runway. Before their first ever flight took off, the airline industry pressured underwriters to withdraw from SWA’s IPO, and obtained a restraining order forbidding the airline to begin their service.
IKEA’s early competitors banded together to boycott any suppliers and manufacturers who worked with the young company. They even convinced the trade association to ban IKEA from entering the market. They barred Kampard from entering the trade marts and attacked him personally and politically.
The same applies for Square. For years, Square has been a target of dozens of competitors. One CEO even called McKelvey an idiot for serving small merchants. Regardless, Square refused to pay attention to unfounded criticism and political attacks until one day, they came under the threat of the world’s most dangerous company, Amazon.
Lesson #5 If you are under attack, do nothing.
As a child, you might have been told “Don’t fight back and the bullies will leave you alone.” That might be a terrible advice to give to a child but it’s truly applicable when it comes to building your innovation stack.
Do everything you can for your customers and your company. Ignore the unfounded criticisms and personal attacks. By ignoring their hostility, you are sending a strong message that you’re here to compete with yourself and perhaps, form great allies in the process.
Lesson #6 Be first in the mind of your customers.
If you can’t beat your competitors to the market, it’s okay. Beat them to the minds of your customers. When innovation happens, people process this new information and store in their memory. This is what you should be aiming for – occupy the mental real estate of your target market. Once your customers are primed with your innovation, they are anchored to it and conservative towards your competition. Of course, it can also go against you. When your competitor beats you to occupy the space first, it’s extremely difficult for you to turn the tables.
Retraining someone is a lot harder than teaching him something new. Retraining requires the additional and nearly impossible work of breaking down your customers’ existing beliefs because when people think they already know, they just ignore the alternative perspectives (known as the ‘confirmation bias’ in psychology).
Lesson #7 Copy when you can. Invent when you must.
Consider, for example, the restaurant industry. You don’t necessarily have to invent a thing while you can find a decent location, lure some good people from your competitors, buy tables, food, insurance and all other stuff from essentially the same suppliers everyone uses. Price your menu similarly to the competition and may be plant a few positive reviews online. And then, work phenomenally hard. If you get it right this far, you’ll make more or less the same money as other restaurants do.
Following the wheel is great, but copying for the sake of copying should never be your primary strategy. Copying feels safe and comfortable but it will never produce a thrill of invention and excitement. On top of that, copying never results in extraordinary breakthroughs.
Contrary to popular belief, SouthWest Airlines entry was not destructive to the airline industry. IKEA never brought disruption to the furniture industry. In fact when it entered South Korean market, IKEA even increased the sales of their competitors.
Disruption isn’t bad by itself. But it is never the focus of good entrepreneurs. Great entrepreneurs build things, not destroy them. They focus on potential problems they can solve and potential markets they can serve. Above all, successful entrepreneurs realize they can’t offer something great to the world without putting their customers at the center of all product development and innovation efforts.
“If disruption occurs in Innovation Stack, it’s merely a side effect. The focus of the entrepreneur is on the horizon beyond the wall. If we glance at the system, it’s neither to copy it nor destroy it, but simply to see how much more can be done.”