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With Unleashing the Killer App, Downes and Mui offer a progressive guide to transforming your company into a place where killer apps are born. Drawing from their experience and research with leading global businesses, the authors identify the 12 fundamental design principles for building killer apps; illustrate these principles with classic stories from history and examples from a wide range of industries that have successfully developed killer apps; examine the economic consequences of the diminishing transaction costs in cyberspace; and describe how to integrate digital strategy into an organization's planning process to create new markets, form new customer relationships, and change the product line.
Among these strategies are structuring transactions as a joint venture, cannibalizing market share and 'hiring' the children. The authors are serious; they advise executives to listen to young people, including their own children. By watching them play with video games or computers, executives can learn more about their products than if they tried to perform the same tasks. The authors, affiliated with Diamond Technology Partners, an executive learning forum, provide various examples of companies that have successfully incorporated these strategies, including AOL, McDonald's and Lotus Notes. With an insightful foreword by Nicholas Negroponte, this book presents a convincing case for a radical shift in current business strategies.
Working with discretionary marketing funds (and largely on personal time), Chris and a small team created the BP multimedia shopping kiosk, a brilliant combination of digital technology and strategic partnerships with name-brand merchants and credit card companies eager to try a new marketing chanel. At the kiosk, consumers use a touch-sensitive screen to view short videos, select merchandise, and get advice on everything from party planning to the latest fashions. All goods ordered at the kiosk could be picked up the next day at the gas station or in some cases even delivered to the customer's home.
Early reception to the kiosk was enthusiastic. German shoppers, assumed to be hostile both to technology and to new services, embraced the kiosk at once. They seemed delighted to be able to order everything for a birthday party or a brunch, based on the recommendations of two-dimensional images. Theyconfounded traditional marketing dogma by using the kiosk to purchase precisely the kind of goods that no one expected anyone would want to buy off a computer screen in a smelly gas station—fruits, vegetables, and even meats. Shoppers began to use the kiosk to replace, rather than supplement, their regular grocery shopping. German consumers, it turned out, were fed up not only with the inconvenient shopping hours but with the quality of their shopping experience. Now they could avoid the crowds, the dirty stores, and the generally unhelpful attitude of the merchants. The kiosk tapped into a channel that conventional wisdom had told Chris didn't exist.
A month into a pilot deployment in Munich, Chris and his team had redesigned the interface several times and increased the number of participating stations. They began making long-term plans to exploit the stations' prime locations as staging and distribution centers, and to deliver the system itself directly to home computers using public networks. Chris and his team were beginning to see that their project had the potential not just to improve gas station revenues but to re-create the very notion of the "station" and the role it played in the consumer's life.
Then they did something really radical. They told the folks at BP headquarters what they'd been up to.
Is There a Strategy in the House?
Chris's story is a story of digital strategy. A manager suspends his disbelief, looks around at the available technologies that might play some role in his planning, forms a variety of alliances and partnerships, and then executes, fine-tuning the experiment not in the laboratory but in the marketplace, with the customer as a true partner. The final result, at least in this case, may be the worst nightmare not just for BP's competitors but for a wide range of other retailers, wholesalers, and distributors. The kiosk may be, in other words, a killer app.
We have purposefully chosen an example from outside the world of high technology companies to demonstrate the broad reach and applicability of digital strategy. What could be less digital than a gas station? What industry less vulnerable than oil and gas exploration, refining, and retailing? Who less likely to remake the face of the value chain than a lone manager, operating in a country that prides itself on conservatism and adherence to long-established rules of commercial engagement?
But hold on a minute. What does the BP kiosk have to do with business strategy? There was no strategy here, just an idea followed by an experiment. Chris did no long-term planning or detailed analysis of the industry. BP, like all large organizations, has a formal strategic planning process and a group of highly trained planners working away in Britannic House, its showcase corporate headquarters, in London. Chris was only vaguely aware of the planning activities of this group. He certainly wasn't acting on the basis of their recommendations.
Perhaps this is your immediate response. A few years ago it would have been ours. Strategy, after all, is the process that Michael Porter and others have taught us about: careful, analytical, and based on a thorough understanding of current market conditions and leverage points. Strategy is what big companies do from the top down. Strategy takes time to develop, time to execute, time to evaluate. What Chris did wasn't strategy, it was just an application, a reordering of relationships. In a word, it was creative.
In the new world, that is strategy.
The Killer App through History
It is too soon to say whether the BP kiosk, or even some future version of it, will prove to be a killer app, which we defined in the Introduction as a new good or service that single-handedly rewrites the rules of an entire industry or a set of industries. Certainly it has the potential. Over the last two years, electronic commerce, of which the BP kiosk is an example, has been touted as the killer app that will redefine the entire manufacturing-distribution-retail-finance business cycle, creating gigantic new markets while it undermines existing ones. Estimates for the speed and scale of electronic commerce range from the conservative (a few billion dollars by the end of the 1990s) to the extreme (the entire cash economy will go digital), but there's no doubt that it is a force with which to be reckoned. The question is when, not whether, and we suspect that you or someone in your organization is already worried.
Electronic commerce as a killer app is more a combination of digital technologies than any one particular new component, product, or service. Its novelty and its explosive potential come from an innovative mix of applications. These include multimedia interfaces (now combining sound, motion, text, and graphics); high-powered, increasingly cheap capacities for computing, data storage, and telecommunications; new forms of payment such as electronic cash; and improvements in security made possible by advanced encryption hardware and software. Electronic commerce is the sum of these parts, built on top of and delivered over the open, global computer network protocols and shared communications services known as the Internet.
Many more killer apps have arrived already, and still more are on the horizon. Consider the potential impact on your business of any of the following: Internet-ready televisions, cars, and other appliances, low-cost digital cameras, desktop publishing software and personal laser printers, intelligent software agents, and telephone services over the Internet. And how about applications now in development at the world's leading technology labs, such as rooms that respond to where you are and what you are doing, wearable computers, electronic ink, and personal area networks?
We don't know how or whether these developments will ultimately change civilization, let alone your business. It is easy, though, to find examples of killer apps from history that demonstrate just how unpredictable and indirect their impact can be. In Medieval Technology and Social Change, for example, historian Lynn White, Jr., studied several inventions from the Middle Ages that revolutionized not only the activities they were intended to affect but society as a whole.
Perhaps the most important of these medieval killer apps was the stirrup, which the Franks—Germanic tribes who ruled central Europe after the fall of Rome—adopted from an Asian design. The stirrup made it possible for a mounted fighter to strike with his lance without falling off his horse, greatly increasing the force that could be put behind such a blow. It proved decisive in the Franks' efforts to turn back the marauding Saracens who invaded western Europe in the eighth century, despite the superior numbers of the invaders...
|Preface to the Paperback Edition||xi|
|Part 1||Digital Strategy|
|1||The Killer App||13|
|2||The New Economics||35|
|Part 2||Designing the Killer App|
|4||Reshaping the Landscape||79|
|5||Building New Connections||111|
|6||Redefining the Interior||139|
|Part 3||Unleashing the Killer App|
|7||Digital Strategy in Practice||167|
|8||Redefine the Problem||181|
|9||The New Operating Model||199|
|10||Lighting Out for the Territories||213|
|Appendix||World Wide Web Addresses||219|
|About the Authors||243|
Larry Downes: I'm doing great. I am participating from the Diamond Technology Partners offices in Chicago's John Hancock Center. We've just had our one great weekend of spring, and I can still see lots of people hanging out at the beach.
Larry Downes: Thanks, Justin. I think the major difference between, say, the steam engine and today's digital technologies is the speed with which new inventions are arriving and spreading. Thanks to the plummeting cost of semiconductors and the exploding power of the Internet, new applications can go from zero to 10 million almost overnight.
Larry Downes: We borrowed the concept of the "killer app" from the Silicon Valley investment community, but with a twist. For venture capitalists, a killer app means an investment in a startup that will pay off a few orders of magnitude in a relatively short period of time. Killer apps do this by creating new categories of products and services -- digital cash, for example, or 64-bit video games. Our twist is the observation we had that increasingly our clients -- mostly traditional, large-scale businesses -- were becoming increasingly aware of the disruptive force the killer apps were generating. Indeed, it became apparent to us over the last few years that it was our clients who were the ones being "killed" by digital technology. Much of the research came from our work with companies in a variety of industries trying to formulate digital strategies and unleash killer apps of their own. We also made use of an extensive survey of senior executives coordinated by Chunka's company, Diamond Technology Partners. And of course, we used the Net itself to collect additional stories!
Larry Downes: The law of disruption states that while traditional systems -- social, political, business, and legal systems -- tend to change incrementally, technology changes exponentially, creating great gaps between the world we're familiar with and the one we suddenly find ourselves living in. The difference between the two is the disruption caused by a new technology. I'll give you a nondigital example from last year, which is in fact the event that helped us crystallize the concept: the birth of Dolly, the cloned sheep. No one had thought of cloning as anything more than science fiction; indeed, most biologists thought it was never possible. And then, suddenly, here it was. So of course there was wide-scale confusion, and we had the familiar response of the political system -- President Clinton immediately called for hearings to figure out how to stop it. But of course there's no turning the clock back, and so we have to muddle our way through while these incremental systems try to catch up to reality.
Larry Downes: I think it's all of the above. For many of the companies we work with, the concept of killer apps really is a wake-up call. Many industries have fallen behind the market itself in their adoption of new technology, and the market is starting to overcome them. When we first started talking about electronic commerce and its potential to remake traditional business in 1995, people laughed at us. "Well, no one will ever buy a car over the Internet," they said. But of course people now are buying cars over the Internet, and a host of companies outside of the traditional car-buying process, like Auto-by-Tel and Edmunds, and soon Microsoft, are busily remaking the process right under the noses of the dealers and manufacturers. So we wanted first to make sure that everyone realized that this phenomenon applied to their business, whether they were big or small, old or new, global or local. And then we wanted to show them how they could start applying some of the emerging new rules themselves, even if they weren't a startup company. Or especially if they weren't.
Larry Downes: Of course, if I knew the answer to that question, Ben, I'd be investing money instead of writing books! The process varies for different technologies, as it has throughout human history. One important observation, however, is that in every case, there is a magic moment when the application reaches critical mass, and from there it quickly spreads to wider and wider audiences, which is where the real disruption occurs. We explain this in terms of network effects, or what is generally known as Metcalfe's Law because it was formulated by Robert Metcalfe, who invented Ethernet. Metcalfe said that the usefulness of a network was the square of the number of people using it. One telephone, in other words, has no use, but a million telephones makes a network that is suddenly quite attractive. There's a knee in that curve which, when hit, starts to head straight up, and that seems to be the defining moment for a killer app. For the Internet, that happened in 1993, and you can see the results for yourself just by thinking about our ability to even have this chat. The faster a new technology can be spread, the faster it can hit that knee -- and that means doing what you can as a developer to get it into the market, even if it means giving the product away, as happens today with most web browsers and related software.
Larry Downes: Not necessarily, Andy. Those long-term investments (or in many cases no investments at all, as companies stay focused on cost-cutting exercises) may not be worth much by the time the company is ready to make use of them, because the market will have changed so dramatically in a short amount of time that they may be worth nothing. Imagine if you were a buggy-whip company during the time Henry Ford was starting to sell the Model T, making incremental investments in your manufacturing, distribution, and products. It wouldn't just be new opportunities you were missing out on -- you might just lose the entire business. We believe that this is precisely what is happening in a wide range of industries today, everything from banking to telecommunications to insurance to wholesaling to retail to education. Traditional players in these markets who do not recognize the ways digital technology is changing their rules may not have a business in a much shorter period of time than anyone could have imagined a few years ago.
Larry Downes: I'm happy to say, Bob, that I never was much of an antitrust lawyer, so unlike everyone else I know I'm not competent to answer that question. What I can say is that the Department of Justice is a frequent victim of the law of disruption, which I described a little earlier. The concepts that are at the foundation of antitrust, intellectual property, foreign relations, and personal privacy (just to name a few) are rooted in industrial notions about scarce goods and physical presence. Trying to apply the rules we have built around those concepts is incredibly hard. Our senators won't even allow laptop computers on the floor of the Senate. How can they possibly debate laws about electronic commerce?
Larry Downes: This is certainly what the market research people are saying -- the battle for the eyeballs, I think is the way they unfortunately put it. I'm not sure we've really come close to the limits of consumer attention. The remarkable thing, Simon, about human beings is what seems to be an inexhaustible ability to communicate -- nearly every new medium we invent adds to, rather than replaces, the existing media (did we stop going to movies, like the film studios thought, when VCRs reached their critical mass? Quite the opposite). So I suspect that consumers have a lot more attention to give than we are giving them credit for -- it's just that up until now, they haven't had much reason to pay attention. Now, in fact, they're taking the initiative and going out to find useful information. That's certainly going to change the dynamic between consumers and manufacturers. We believe that companies who say that serving customers is the key to their success are in for a serious wake-up call -- they're about to find out just how true this cliché is, now that the customers can tell them what they really want.
Larry Downes: There's no magic formula here, Richard. But our study of companies who seem to be first in line more often than their competitors -- innovators like FedEx or Charles Schwab, or start-ups like Yahoo! or America Online -- suggest a number of tools and techniques, which we describe in the book and some of which we have made available on our web site. These include what we call "technology radars," a set of early-detection exercises, and technology investment portfolios, a new approach to investing in technology futures. What's most important, though, is the right attitude toward technology from the top of the organization all the way down. We didn't come across a single story of a company that had launched a killer app without the support and leadership of the senior executive, no matter how big or small the company was.
Larry Downes: There is no rule, as you suggest, Madeline, and that makes watching these developments a great hobby. Start-ups do seem to have the advantage of flexibility, a cherished quality in Silicon Valley, where I spend much of my time. The good news for the established players -- and that is by and large who our clients are -- is that they have some remarkable assets to leverage in this struggle. The bad news is that they often don't recognize them. If you look at the balance sheet of any large organization, you see the physical assets all right, but you can hardly find what we call the information assets -- things like brand, expertise, the network of relationships a company has, and of course the human capital of its employees and other business partners. In the digital world, these are the assets that will really win the day against a nimble start-up, not trucks and factories. But many of our clients don't even know they have them, let alone how to make the best use of them. One of the companies we talk about in the book, for example, is McDonald's, which places a heavy emphasis on the network of relationships it has with suppliers and franchisees. This is the network they call "McFamily." But if you ask McDonald's how they value that network, let alone how they can increase its value by digitizing it, they don't have an answer. Meanwhile, others do.
Larry Downes: We're very optimistic too, Henry, and in part we used the term "killer app" because we find in our consulting that we really need to get the attention of some very conservative people in boardrooms who don't want to think too hard about radical change to their businesses or planning processes. The remarkable thing about digital technology and networks like the Internet is that they do seem to create new value out of nothing, and that means a bigger pie for people to slice up. Technology has historically been the chief way that civilization has improved the standard of living, and we've come very far in the 20th century, although of course we have a long way to go just to get everyone on the planet to the most basic level of comfort. It's our belief that the free flow of information will help the world in many ways, most of them unpredictable. Competition in business, of course, has always been a challenging game -- maybe not brutal, but not always entirely fun either. We think that for organizations willing to suspend their disbelief and really play with the new technologies, it can be a much more rewarding experience. But traditional management thinking, as we all know, has tried very hard to drown creativity and fun out of the corporate vocabulary. For companies that can make the change, it should be a very interesting 21st century. For the rest, well, there is still a market for those buggy whips, albeit small.
Larry Downes: The interesting thing about the Internet (really one of many) is that it isn't so much a killer app itself as a test bed for other apps to develop, or what we call in the book the primordial ooze from which digital killer apps will continue to come. There's really no there there -- the Internet is more a set of protocols and standards than the devices and pipes that connect them, and of course those standards are in constant revision and replacement, as are the pipes and devices themselves. So even if we all move to Internet II, or even if we stop talking about the Internet altogether and it becomes simply part of the fabric of daily life, we'll still have some channel for sending around all of these valuable bits. So one could really say, the Internet is dead, long live the Internet.
Larry Downes: I have to confess, Samuel, that I haven't read Blur either, but I have great respect for Stan Davis, one of the coauthors. One of the things we tried hard to do in UNLEASHING THE KILLER APP was to avoid academic discussions about strategy and to give readers some very concrete things they can do themselves to develop killer apps of their own, and to back those up with as many examples as we could fit. So we challenged ourselves to develop 12 principles for designing killer apps, and those principles are laid out in the second part of the book. In the third part, we tried to give as much information as we could about how companies started the process, and went into detail on several companies where we had witnessed the process firsthand. And on our web site, at www.killer-apps.com, we're trying to continue the discussion and keep developing the ideas in collaboration with our readers. Our goal is to get you, in a sense, to write the next book. But you'll have to tell me if BLUR is doing the same!
Larry Downes: There are some, Nadine, who say that the old rules never really did apply. Henry Mintzberg, in particular, wrote a devastating attack on the traditional strategy enterprise, called THE RISE AND FALL OF STRATEGIC PLANNING, a book that Tom Peters says changed his life. We tend to agree with Prof. Mintzberg, in part because he emphasizes that strategy is especially difficult in times of great change, and we think that the law of disruption is generating a lot of change. So many of the old rules about planning really don't apply anymore, and never will again. In the book, we talk about the new rules. But really the best way for companies to continue learning about them is to stay aware, and using the very technologies that are causing the disruption, like the World Wide Web, turns out to be the best way to stay on top of the developments. Or as one of the design principles says, "Hire the Children."
Larry Downes: I must confess, Morgan, that I don't have an MBA myself, so I'm not sure how useful the degree will be in the new world! But I very much doubt that it will be useless. Certainly it's important to learn the ways today's executives and managers think, because it will be your job to change that thinking in light of the changing world. So I would encourage you to take whatever classes you can in organizational psychology and organizational change management; these will be permanently valuable skills. And of course, you could encourage the strategy professors to read our book!
Larry Downes: It's been my pleasure. The sun has set here in Chicago. These were great questions, and I can say for both Chunka Mui and myself that we are very excited to have the opportunity to try our thinking out on a wider audience. The remarkable thing about digital technology in this capacity is how much easier it now is to have not just a two-way dialogue with readers but a dialogue among readers, or what we call in the book a community of value. This conversation would not have been possible three years ago, and yet now we almost take it for granted. It's one thing to write about it, and to study it, and to help clients with making it work. But experiencing the killer apps ourselves makes it that much more real. Thanks, everyone.