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The Fourth Option – The Source of Innovation

5 min read

Modern Money

Kaihan Krippendorff

Innovation has for years come from designers and marketers, from the creators of new products. The top innovation consulting firms all spring from the roots of building new products. “Most innovative” lists are populated by … well, Apple is always first … then comes a predictable list of companies that make cool products: Nike, Samsung, etc.

But today’s new generation of innovators knows that innovation is no longer limited to the domain of companies who makes things you can see and touch.

The clothing retailer Urban Outfitters, for example, has grown from under $500 million in revenue to nearly $3 billion over the past ten years. Not only does the company consistently grow faster than the competition, they are also significantly more profitable.

I asked the CEO to explain his success. He seems to have a secret formula. Why aren’t competitors copying him? He gave me four reasons:

  1. While his main competitors want to appeal to a broad customer base, Urban Outfitters cares only about one: college students. This means that for a competitor to copy his strategy they would have to give up selling maternity wear, baby clothes, and ties. A choice too expensive for his competitors to consider.
  2. He sells used clothing while his competitors only sell new clothing. For a competitor to copy this element of Urban Outfitters strategy they would have source old jeans, ship them to the U.S., wash them, dry them, iron them, measure them, SKU them, and sort them before sending them out to their stories. This is enormously disruptive to the well-oiled supply chain competitors have spent decades refining.
  3. Though his competitors hire managers from business schools, he hires from design schools. He looks for managers who have a natural aesthetic sense. So he can give them more leeway in how they design their stores. They can bring in artifacts from the streets and put them on display, they can play their own music. Traditional retailers can’t trust their managers to do this because they hired business people not artists.
  4. As a result of this managerial freedom, every Urban Outfitters looks a little different while his competitors’ stores look the same. And for Urban Outfitters core customer – college students – this is really important.

The trick behind the success of any fast-growing, disruptive company is to do things your competition, being smart and well-funded, will choose not to copy. The trick is to find the courage to think beyond the obvious choices and introduce a set of “fourth options.” This is AFLAC offering cancer insurance in Japan at a time when no one else would (today, Japanese cancer insurance is the key driver of AFLAC’s business). This is Common Bond disrupting the student loan business by enabling direct alumnus-to-student lending.

The “fourth option” is the option others don’t see and don’t expect. Your competitors contemplate three choices and feel satisfied that they are considering enough. But the strategic innovator is not satisfied. She asks, what else? What other option are people overlooking?

We’ve helped innumerable companies find multi-million-dollar “fourth options.” The process takes work, but it is not difficult to do once you understand the process through which “fourth options” emerge. Let’s take a look at Google’s Android mobile phone platform to break the process down.

Google decided to enter the mobile phone war in 2007, when RIM’s blackberry was the dominant player and Apple was about to launch the first iPhone. First, Google recognized the strategic threat/opportunity: if they did not remain relevant in a mobile world, their advertising might dry up.

Then Google created a compelling vision: hundreds of millions of mobile phones running on Google’s software so the company is first in line to feed them advertising.

Then Google tried out a sequence of “fourth options”:

  1. While competitors build phones (RIM, Nokia, Apple), Google decided just to build software. It briefly stepped into handset production, but soon exited.
  2. While competitors protected their proprietary operating system, Google decided to give it away for free.
  3. While competitors, particularly RIM, focused their sales efforts on IT departments, Google focused on consumers.

The result: today well over 50% of smartphones in the world are based on Google’s Android operating system, significantly more than any other competitor, including Apple.

“Fourth options” work because competitors resist copying them. They are anchored away from reacting by their prejudices and commitments.

To be great, to grow rapidly, to significantly impact your market and our world, find the courage to think beyond the obvious choices and find your “fourth option.”

There are a number of habits – which we discussed in detail in my recent Securities Industry Institute (SII) class – that derail your teams’ efforts to find a fourth option. Here are four things you can do to help sidestep these habits and discover your fourth option:

  1. Define the “mess”: collectively describe what will happen if you continue with business as usual and make sure people reach a state of discontent
  2. Paint the ideal: create a compelling, exciting, vivid vision of an ideal future that you are all committed to winning
  3. State the obvious: List out the obvious choices, what your competitors do and what they expect you will also do
  4. Ask uncommon questions: In my SII workshop I introduce key questions that unlock fourth options for participants like “Where is the next battleground?” “Who else benefits if you win?” and “What can you create out of nothing?” Asking different questions – more precisely introducing new narratives into the conversation – naturally leads your team to unexpected options.

Kaihan Krippendorff is a business strategist, best-selling author and consultant. He is a visiting professor at SIFMA’s Securities Industry Institute (SII), the premier executive development program for securities industry professionals.