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The Math of an Attack

An Innovation Stack isn’t simply a list of independent changes to an existing business model. The innovation is integrated. Each block in the Stack only works in conjunction with all the others, and the entire Stack fails if one block is missing. For example, regarding Square’s Innovation Stack, online sign- up is great, but it only really works if you dispense with traditional FICO underwriting, and you can only do that if you’ve developed new ways to model risk, and you can only develop those models with high volume, which necessitates a number of the other blocks in the Stack. Copying just one—or even a few—of our elements wasn’t going to be enough for our competition to beat us. Amazon would have to copy them all successfully in order to win. And the math involved in doing that gets very tricky.

So far, we have examined fourteen elements of Square’s Innovation Stack. Let’s say that a company has a 75 percent chance of copying any one element successfully. Since the company in our example is Amazon, let’s give it an 80 percent shot at getting each one right. So, with one element, it’s at 80 percent. To get two elements right, it’s got a 64 percent chance. And only a 51 percent chance of copying three correctly, a 41 percent chance of copying four, and a 33 percent chance at successfully copying five of the elements we were utilizing every day. You see where this is going. Even a place with all the talent and resources of Amazon can’t escape math. Its chances  of copying all fourteen of our elements (0.814) were about 4 percent. Which was still scary, but no reason to order diapers.

This is admittedly an oversimplified view, because it assumes that each element in an Innovation Stack is independent, but in reality, each element is tied to the others. The complexities of the impact that fourteen innovative elements have when simultaneously unleashed on an industry are compounded by the interrelationships of those elements themselves. When everything affects everything, you have a dynamic system. Dynamic systems are hard to understand and nearly impossible to copy.

To understand a dynamic system, imagine a jump rope. Let’s first consider the mass of the rope itself—it cannot be too heavy or too light. For instance, if you try to jump a piece of thread, you can’t get it spinning because a piece of thread doesn’t weigh enough. In other words, the mass of the rope affects the rotation of the rope, which affects the shape of the rope. That’s why you can’t jump a thread.

Now let’s add another variable, elasticity. If the rope is a yellow bungee cord, which will elongate as tension is applied, the speed of the rotation of the rope will now change its length. And a changing length affects the speed of rotation and the mass per unit of length. Confused yet? You probably should be.

We humans are no good at modeling more than a couple of variables simultaneously. The math quickly becomes overwhelming. If you have two variables that affect each other, you have one possible interaction. If you have eight variables, there are 251,548,592 possible interactions.* In other words, you’re never going to model an Innovation Stack on a spreadsheet—you can’t do the math.

But companies love math, especially math that senior managers can use to make decisions. Take that math away, and they are left with nothing concrete upon which to base a decision. So where does all this complexity leave our entrepreneur? Actually, in a really good place.

Excerpted from The Innovation Stack: Building an Unbeatable Business One Crazy Idea at a Time.

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