How do some startups with an ostensibly commoditised product and no obvious competitive moat manage to outcompete much bigger and better-funded incumbents?
Jim McKelvey, co-founder of Square (now $65bn market cap company Block, Inc), explored this question using the example of how his young payments company came out on top after being taken on directly by the closest thing the business world has to a superpower: Amazon.
McKelvey coined the concept of an innovation stack, which describes how every innovative product is built on a foundation of smaller innovations. It’s easy for outsiders to perceive the end product and even to deconstruct some of the product’s USPs. Established rivals can copy the product and outcompete on elements like price or service, but only the innovating company itself knows the multiple wrong turns, trade-offs and customer learnings on the path to the final product.
The innovation stack theory posits that it’s the sum of those decisions and (often involuntary) workarounds that make the product what it is and that it’s next to impossible for a competitor to copy all those elements.
Like every management theory it has its weak parts, but as an overall concept it does go a long way to explaining why companies like Amazon - or perhaps closer to home: Bloomberg - don’t dominate all areas of their respective markets.
A Bank’s suite of tech solutions results in its own innovation stack
Even more intriguing though is to apply the concept of an innovation stack to an established, competitive and - from a process perspective - standardised industry like DCM origination. The pre-trade and client coverage process in DCM has been close to unchanged for the last 20 years and we’re only now starting to see some serious efforts by banks to redesign their long-standing practices.
At first this is about relatively small steps, focused on improving or streamlining existing workflows. But banks quickly build on that foundation and once they’ve digitalised their existing processes, they can leapfrog ahead.
They gain access to new types of data and analytics, new ways to add value to clients, new levels of management transparency and new opportunities to connect different tech solutions to something more powerful than the sum of its parts.
Over time, we might even see the whole DCM coverage model change.
It’s easy to draw parallels to how the secondary bond market has evolved from on-demand voice trading to emailed runs to electronic quotes to now trading on full-execution electronic platforms.
We’ll have to see where the journey leads for the primary market, but what seems clear is that the banks who start to build their innovation stack today, by adopting new technology ahead of their peers, will enjoy a lasting edge.
Just like an innovative startup’s product, an ecosystem of adopted tech solutions and staff processes can’t be copied overnight. So the sooner banks start on that journey, the better off they’ll be.
The big advantage of focusing on the pre-trade process is that you don’t need to wait for the whole market to shift before reaping the rewards.
So if you’re ready to embark on an innovation journey in the DCM and Syndicate space and you need a partner who speaks your language and can make it happen: get in touch.