Unleashing the Killer App – Digital Strategies for Market Dominance

Introduction

The history of technology has been a history of dramatic and unexpected consequences. From the Welsh longbow, which decimated the French at Agincourt and effectively ended the Feudal Age, to Edison's lightbulbs, an invention (as recent research in sleeping disorders suggests) that hasn't even appeared yet on the radar of human evolution, change often occurs not slowly and incrementally but discontinuously and in big leaps. The arch, the pulley, the compass, eyeglasses, moveable type, the steam engine, the cotton gin, asphalt, the Model T, elevators, structural steel, the atomic bomb: these are inventions whose impact has extended far beyond the activities for which their creators built them. Ultimately, the havoc they visited on social, political, and economic systems has outweighed the impact of their intended usage.

The investment community that has grown up around technology centers like Silicon Valley and Boston's Route 128 has a name for such inventions. They call them killer applications or, more affectionately, "killer apps." A killer app is a new good or service that establishes an entirely new category and, by being first, dominates it, returning several hundred percent on the initial investment. The personal computer, electronic funds transfer, and the first word processing program are all examples of killer apps.

Killer apps are the Holy Grail of technology investors, the stuff of which their silicon dreams are made. In the coffee shops and juice bars that line Palo Alto's University Avenue, you can always hear someone talking animatedly about the first big spreadsheet or desktop-publishing program, generation-defining video games like Sonic the Hedgehog and Doom, or the first Apple Macintosh, which redefined the very notion of a human-computer interface. Ah, that was a killer app. And now I have one just as good.

For our clients, typically senior executives of large corporations with international operations, killer apps are not seen as such beneficent creatures. Invariably, killer apps wind up displacing unrelated older offerings, destroying and re-creating industries far from their immediate use, and throwing into disarray the complex relationships between business partners, competitors, customers, and regulators of markets. Think of the World Wide Web, for example, and the far-flung predictions for its impact on everything from financial services to manufacturing, from government to the computer industry itself.

Killer apps can create fabulous wealth and breathe new life into a stale economic system. But like the Hindu god Shiva, they are both regenerative and destructive. It is not for nothing that they are called killer apps: our clients are often the companies most likely to be bumped off.

Where do killer apps come from and why do they seem to be arriving in increasing numbers? We describe the process in Part 1, "Digital Strategy". The primary forces at work in spawning today's killer apps are both technological and economic in nature. In bringing the two together in this book, we explain not only what is happening but suggest as well a way to regain your sense of balance, if not control.

The technology we are concerned with is the transformation of information into digital form, where it can be manipulated by computers and transmitted by networks. The driving force behind this transformation is the remarkable science of semiconductors, which has shifted the world's economy from an industrial to an information base in a little over a quarter of a century. The unrelenting, exponential improvements in semiconductor speed, size, and cost that have operated since the 1960s follow Moore's Law, a prediction by Intel founder Gordon Moore that every eighteen months, for the foreseeable future, chip density (and hence computing power) would double while cost remained constant, creating ever more powerful computing devices without raising their price. Announcements from IBM and Intel in late 1997 suggest that Moore's Law may even underpredict the improvement for the next several years. Similar phenomena have been observed by Gordon Bell in data storage and communications bandwidth. The bottom line is simple but potent: faster, cheaper, smaller.

Less well known than Moore's Law is the observation made by Robert Metcalfe, founder of 3Com Corporation, that networks (whether of telephones, computers, or people) dramatically increase in value with each additional node or user. Metcalfe's Law values the utility of a network as the square of the number of its users, and can be easily appreciated by considering the impact of standard railroad gauges, Morse code, and standardized electrical outlets in the last century and telephones, fax machines, and the Ethernet and Internet protocols today. Once a standard has achieved critical mass, its value to everyone multiplies exponentially.

Since the early part of this decade, Moore's Law and Metcalfe's Law have operated together in remarkable new ways. Moore's Law made possible the cheap digitization of nearly every device we can think of, from the toaster to the automobile, children's toys, toilets in public buildings, and, of course, ever more powerful and ever more affordable personal computing devices. The proliferation of information devices led to a search for unifying standards that would allow them to share their digital contents and multiply their value in the process. These standards have now arrived, and came not in the form of proprietary architectures from traditional computing and communications powerhouses like IBM and AT&T but from a sleepy U.S. government-built network called the Internet, whose very openness was the single most important factor in its success. In 1993 the Internet's communications protocols reached critical mass, and since then the value of each additional node and user was so great that it began to exert something like a gravitational pull, sucking in every device and network in its path.

With this inexpensive global computing environment in place, Moore's Law and Metcalfe's Law have begun to feed off each other. New software products and standards can be released into the Internet and distributed so cheaply that developers gladly give their products away in order to reach critical mass quickly. This small investment, as Metcalfe predicts, means future users will adopt products with increased enthusiasm (and therefore potential marginal revenue). New computing devices, such as video games, personal digital assistants, and home appliance networks are being built with Internet connections, allowing them to be both users and suppliers of the growing warehouse of global information, much of it freely available.

In addition to improving overall social welfare by creating what economists call "public goods," this inexhaustible and increasingly valuable information base has another, more daunting economic effect. By making it easier for people and the devices they use to find, use, share, and add to the information base of the network, the Internet has developed into a commercial environment, an open market in the truest sense of the word.

This new market, which Harvard Business School Professors Jeffrey Rayport and John Sviokla have dubbed the "marketspace," now challenges the very foundation of modern industrial organization. In 1937, a young economist named Ronald Coase observed that the then recent phenomenon of complex, geographically dispersed firms was a result of market inefficiency. Firms organized, Coase wrote, to reduce the transaction costs of repeated and complicated activities involved in creating, selling, and distributing their goods and services.

The market today is improving its efficiency at the speed of Moore's Law and with the effectiveness of Metcalfe's Law, moving it ahead of Industrial Age firms whose long histories of anticompetitive regulation and whose aging and expensive technology infrastructure keep them from adopting new hardware, software, and standards at anywhere near the pace of the market itself. As the lightning-fast deployment of Netscape's Navigator product for accessing the World Wide Web suggests, the market can achieve critical mass in a matter of months or even weeks. Firms, meanwhile, struggle for months or years just to install the latest release of the Windows operating system or an application suite like SAP.

This increasing adoption gap leads us to what we call the Law of Diminishing Firms, which turns Coase's original observation on its head. As the market becomes more efficient, the size and organizational complexity of the modern industrial firm becomes uneconomic, since firms exist only to the extent that they reduce transaction costs more effectively. Trends toward downsizing, outsourcing, and otherwise distributing activities away from centralized to decentralized management support this view. These trends will only accelerate in the coming years. Firms will not disappear, but they will become smaller, comprised of complicated webs of well-managed relationships with business partners that include customers, suppliers, regulators, and even shareholders, employees, and competitors.

There is more. In addition to wreaking havoc on the organization of firms, the interaction of Moore and Metcalfe is creating powerful second-order effects that unintentionally challenge the basis of business systems in general, as well as social, economic, and even political systems. Consider the steam engine, which opened the American West, but in doing so unsettled the political equilibrium between North and South, forcing the long-deferred resolution of the slavery question. Similarly, today's digital revolution generates considerable stress as it interacts with systems that are slower to change. The Web is currently tearing apart the financial services and telecommunications industries, among others, inspiring civil wars there much as the steam engine did years ago.

The digital revolution's velocity and trajectory create more frequent and more disruptive ripples than did earlier technologies, giving everyone a permanent case of what Alvin Toffler many years ago termed "future shock." We call this phenomenon the Law of Disruption, which states that where social systems improve incrementally, technology improves exponentially. As the gap between the two increases, so does the potential for noncontinuous, disruptive, indeed revolutionary change.

Digitization spurs on already potent trends toward rapid deregulation of industries and globalization of markets, creating a powerful trio of new forces that overpower the traditional competitive threats that a generation of senior executives, managers, and strategists have been trained to follow. To see these disruptive new forces in action, we need look no further than where we started. Killer apps are examples of the Law of Disruption in action, a use of technology whose novelty turns the tables on some previously stable understanding of how things work or work best. In business, killer apps undermine customer relationships, distribution networks, competitor behavior, and economies of size and scale. Killer apps create global competitors where only local players previously mattered. They give customers, suppliers, and new entrants power, upsetting the careful cultivation of competitive advantages that were themselves based on technology, technology that is now suddenly obsolete.

For creative entrepreneurs or executives with an entrepreneurial spirit, the new forces release the potential for radical improvement in their organizations' ability to survive and thrive in the new competitive environment. To do so, however, they must start by jettisoning much of what they know about planning and strategy, adopting a new model we call digital strategy.

In Part 2, "Designing the Killer App," we demonstrate digital strategies in action. From Moore, Metcalfe, Coase, and our own Law of Disruption we distill twelve key design principles for developing, encouraging, or simply taming killer apps. We demonstrate these principles with examples from more than a hundred different organizations in a wide variety of industries.

The design principles are described from the outside in: moving from the organization's environment, through the interface between the organization and its business partners to the core of the organization itself. Following the metaphor of a construction project, we show how the new physics and economics of the digital age require new tools for selecting and assessing sites, for designing new structures that distinguish organizations through their architecture, and for rehabbing the interior spaces of the existing organization to meet the needs of a new generation of inhabitants.

Part 3, "Unleashing the Killer App," describes how digital strategy integrates the new rules with an organization's planning processes. Our focus is on the early stages: the learning, collaborating, prototyping, and strategy design rather than the actual implementation and deployment of killer apps. In our experience working with clients on digital strategy efforts and studying the successes and failures of other organizations, we have learned that these early activities are the hardest and most important.

They are hard not only because they require creative idea generation and testing processes but because they often greatly accelerate an organization's movement from Industrial Age to Information Age. They are important because killer apps are made less often than they are discovered, and the organization with the healthiest environment for identifying, nurturing, and redefining killer apps, whether their own or those invented by others (perhaps for entirely different purposes), is the organization that will translate its digital strategy into market dominance.

To unleash killer apps you must learn to see them coming and be prepared to put together whatever laboratories, partnerships, and new business models are needed to make quick use of them. Before someone else does.

In the end, digital strategy is not really a planning methodology but a new operating model. Unleashing killer apps requires not only the appropriate technology partners, investment models, and prototyping tools we describe, but the corporate will to make the big leaps and to bridge the gap between incrementalism and exponential change. Without that fearlessness, the killer app you unleash may be your own undoing. What is more likely, however, is that you will never achieve escape velocity from your current paradigm to let one loose in the first place.

We describe the process in broad strokes, and save for another day the detailed technical and sociological study of how today's digital strategies, continually improved, evolve into tomorrow's new industry model and next incarnation of your own organization. To give you some sense of the entire life cycle, however, we take you inside a few leading global corporations and show how they abandoned their old, static processes for developing strategy and learned to think creatively, becoming organizations that are nimble, open, even fun. These companies are turning their digital strategy projects into a new incarnation of the organization itself. In so doing, they become companies that live in the future, maximizing their chances for unleashing killer apps.

Our hope is to give you the power to do the same.

Authors' Statement

Making the change from traditional strategy (or no strategy) to digital strategy is hard work. We know, because we resisted it ourselves. For years, we worked on systems, reengineering, and planning projects that were unrelated not only to each other, but often to the changing dynamics of our clients' marketplaces, changes being wrought, visibly or invisibly, by digital technologies.

When dramatic developments like e-mail, the World Wide Web, and increasingly powerful desktop computers seemed to come from nowhere, upsetting our careful plans, we started to wonder if there wasn't something fundamentally wrong with our approach.

Three years ago, we began working with a few pioneering firms to develop a new approach to planning and strategy, one that was better suited to the world of plummeting technology prices, exploding networks, and "marketspaces" with few transaction costs. We rejected many of our traditional analytic tools and replaced them with experimentation. We studied the obstacles that keep organizations from success, and developed tools and techniques for overcoming them. The result was what we call digital strategy. We believe it is nothing short of revolutionary, and we wrote "Unleashing the Killer App" to be the manifesto for that new revolution.

— Larry Downes & Chunka Mui, May, 1998