Stripe: A Case Study in Managing Innovation

Last week’s Stripe Sessions revealed much about how Stripe manages growth and innovation. Most notable is how they are managing a portfolio of both sustaining and disruptive innovations. These concepts were central to the late Professor Clayton Christensen’s work on innovation that highlights the need for any company managing in a dynamic market to manage across both types of innovation to achieve sustained growth.

Christensen’s work (Author’s page on Amazon) categorizes innovations into two primary types: sustaining and disruptive.

Sustaining innovations take an existing product or service and improve its appeal to current customers without significantly altering the market structure. These innovations focus on existing markets and customers and are rarely radical changes.

On the other hand, disruptive innovations focus on creating new market niches through very simple solutions with low performance requirements but at a lower cost. Over time, these disruptive innovations move up market, improve performance and start appealing to larger segments outside their initial niche to transform entire industries.?

Some of Stripe's product enhancements announced at Sessions, like optimized checkout suites and adaptive pricing models, are good examples of sustaining innovations. These solutions aim to improve the user experience and efficiency for existing customers. These enhancements are positioned to ensure that Stripe’s core offering remains competitive in their current market relative to other payment service providers. If recent history is any indicator, Stripe will continue to refine these services at a rapid pace and Stripe will strengthen its value proposition to current customers in the highly competitive payments market.

Conversely, Stripe’s strategic announcements around making its platform processor agnostic and adopting a more modular approach represent disruptive innovations. By allowing users to integrate its services with external payment processors, Stripe is able to target previously underserved segments of the market, like small and medium sized businesses needing flexible, cost-effective best-in-breed solutions.?

And because teams inside Stripe are solely focused on these modular components, you can expect a rapid advance of each component’s capabilities. This is Stripe’s source of disruption.?

Put another way, and paraphrasing Jim Barksdale, there are two ways to make money in business:? bundling and unbundling. Stripe’s modular approach unbundles fintech components in their products, each of which will now compete head on with distinct segments of fintech. Link can compete with wallets, Radar can compete with fraud solutions, Identity with ID solutions, Sigma with business intelligence, Capital with lending, Treasury with banking services, Issuing with card issuers, etc.

As Stripe offers these services and they’re adopted by segments that may be too niche for existing players or unprofitable to existing players, disruption will take root. Stripe’s blistering pace of product enhancements will improve the performance of these modular solutions very rapidly to the point where incumbents who are not paying attention will begin to see their markets get picked apart by the disruptor. This is the very definition of Christensen’s “dilemma”.?

Stripe’s modular strategy is not without risks. Complexity, compatibility issues, compliance, acquisition costs and an ability to allocate resources appropriately across the business will be difficult to manage.?

But on balance, the risks to competitors who are not prepared to address what Stripe’s announcements represent far outweigh Stripe’s own risks in managing innovation.

Managing both sustaining and disruptive innovations is critically important in periods of rapid technological and market change. Sustaining innovations help maintain relevance and competitiveness with core customers, while disruptive innovations serve to secure future growth. Stripe's approach is a model for how to manage innovation in fintech.