Chapter 8: Redefine the Problem

You cannot wait for an unguilty tool—Joseph Beuys

We said in Chapter 6 that one of the principles for unleashing killer apps is to manage innovation as if it were a portfolio of stock options. But how do you amass that portfolio? How do you pick the technologies and partnerships that will feed your experiments in developing killer apps? How do you know where to look in the first place?

This chapter is devoted to answering these questions. We will describe how organizations create a technology radar, feed a technology pipeline, and pick and choose the investments and partnerships that maximize their ability to develop and implement winning digital strategies. The commitment made to these learning and collaboration activities cannot be a one-time event, like an annual corporate retreat. The process is ongoing. It requires regular attention from senior management if it is to be kept alive and well. You can't turn the radar on only when you want something to appear in your range, nor can you maintain a relationship by acknowledging its existence only when it's convenient for you. You need to be present, in some sense, all the time.

Succeeding at these early stages of digital strategy development requires substantial changes to the organization. In particular, it requires a new attitude toward technology itself. You can't build a wired organization if you still believe, like many of the executives in our digital strategies survey, that technology is essentially a tool to implement strategy rather than the basis of forming strategy. You can't unleash killer apps without aligning senior executives and I/S professionals with the new, common goal of unleashing killer apps. You can't live in the future without moving there first.

8.2: There Is No Strategy without Technology

Competitive analysis in the new world is not done in the context of current market forces but rather in the context of the new forces, particularly digitization. Strategy work, and even reengineering work, has always had a technology component, but in the old world technology was where you went after determining the strategy. The project teams we worked on in the 1980s usually finished their work before they even made contact with the information systems professionals, and then only to start the danse macabre of trying to match future "requirements" with systems "solutions" based on mature technologies.

In the new world, you start with technology. Instead of being problem-pull, the new approach is also technology-push. What's more, you not only need to push technologies that aren't mature, but ones that have barely started gestation. Thanks to Moore's Law and Metcalfe's Law, those are the technologies that will be available when you implement your digital strategy.

New simulation tools, for example, may inspire an interior design company to leverage its expertise by developing software that lets customers do much of the basic design work themselves. It might then sell the product in addition to the hands-on consulting work it already performs. That software may in turn put stress on the services of lower-cost designers, who in turn may look to the Internet to improve their ability to source materials for their customers.

Developing digital strategy, as this example suggests, requires components of both problem-pull and technology-push. When the two are operating together in a well-functioning organization, the processes become not only circular but indistinguishable, creating what Philip Otley and Paul Spence of Andersen Consulting call a virtuous cycle.

The virtuous cycle is a pragmatic, indeed opportunistic, response to the new digital business environment. You explore future visions by looking at your business and markets through the lens of the twelve design principles, and then look at digital technologies that could most influence the development of those futures. Having identified some target technologies, the process then goes the other way, and you ask yourself how those technologies, in combination with others, might develop in ways that make your design goals possible or impossible. Or you can reverse the process. The process quickly moves from back and forth to a kind of conversation, where you integrate what you've learned about both perspectives. As you do so, the beginnings of new business options for your innovation portfolio-some the complete opposite of what you may have intended for yourself-begin to emerge.

8.3: The Do-It-Yourself Retail Exchange

In our work with a large European do-it-yourself (DIY) retailer, we began with the company's strategic goal to gain dominance in a highly fragmented market. Management believed the company had developed a powerful brand name and wanted to leverage that brand as it launched a significant expansion of its outlets. The digital strategy project team visited a few of the stores, however, and found that they were not appealing places to shop. Salespeople were hard to find and harder still to get help from. Some stores did well, but only because they were in good locations.

The retailer's original goal had been to find ways of improving brand awareness and value by doing a better job of placing its stores, improving inventory and service, and opening many more locations. The virtuous cycle process altered the direction of the planning. As the group reviewed developments in and examples of emerging retail possibilities of new media such as CD-ROM catalogs, electronic commerce, 3D interfaces, and real-time communications, it began to rethink the value of the company's physical assets. The discussion turned to the possibilities of expanding and improving the brand not through physical locations but through virtual presence.

For a wide variety of items carried by the stores, it was immediately clear that electronic shopping could be more convenient, could deliver a better customer experience, and could result in significant cost savings for both customer and retailer. While it was true that no one was likely to go to the Internet to buy a nail, they might well do so for a more expensive power tool. Or they might buy a package containing all the materials necessary to complete a project that was designed with an on-line simulator.

The question of what was most convenient inspired the management team to do something very interesting: they stopped the discussion and asked themselves a series of fundamental questions, some so basic that they might not otherwise have been considered: Why do people shop at DIY stores in the first place? Why had they grown so popular? Why was the market expanding? What features of store designs made one location more satisfying to customers than another?

To find out, the project team went not to the stores themselves but to cyberspace. In this lower-transaction-cost environment, communities of interest had been forming that could give the team some answers. The World Plumbing Council, a not-for-profit group, had created a remarkable site called Plumbnet, in which individuals post plumbing problems they are experiencing (for instance, "water leak somewhere between meter and house"). The software allows other users to post suggestions and to engage in an asynchronous discussion to solve the problem. Another site, Barter Systems, revealed the consumers' interest in avoiding what they perceived as overpriced contractors in favor of trading services with each other.

These and other demonstrations suggested that DIY was less a retail concept than it was a lifestyle. DIY stores seemed to have inadvertently tapped into a pent-up demand from consumers who wanted to do things themselves because they liked to and because they wanted to save money. DIYers, the project team concluded, are a disorganized community in want of not only supplies but a forum in which to trade information and barter expertise. Often they come to the store hoping to strike up conversations with other shoppers for that very reason.

So the recommendation the team made was to shift the strategy from a traditional market share approach to something entirely different—the goal of creating a community of value for DIYers. This was a need so poorly understood that no retailer had begun to address it, and we believed that whoever did it best could find themselves at the center of a wide variety of valuable transactions. Building the community center could distinguish the retailer as something entirely different, making the customer's trip to the store an experience rather than a transaction. And that, the team realized, could really do something for the brand.

The process shifted back to technology again, as the team looked for ways to destroy their existing value chain and cannibalize their physical stores by building this new concept with bits rather than atoms. The new virtual store was dubbed the "DIY Exchange." Sketches of the interface were drawn, and the company immediately began to look at how it could begin offering some goods and services on the World Wide Web to begin its collaboration with customers.

Ultimately, the team understood, the DIY Exchange had the potential to be a killer app, one that would alter not just the competitive landscape but the company's operations. Once fully implemented, the DIY Exchange would make retail locations look more like warehouses and showrooms than points of sale, and the electronic "store" less and less a reproduction of its physical counterpart and more like a network, connecting customers, suppliers, distributors, and contractors to each other, creating a virtual do-it-yourself community.

Operating under the virtuous cycle approach liberated the creativity of the digital strategy process. The retailer suspended its normal rules of engagement, which included long-term budgeting and detailed business case development for any new business investment of this scope. Instead, it essentially structured a business option. With a remarkably small budget and a volunteer team, the company began to experiment with the new model. Within a week it had met with its advertising agency, and within two weeks it had developed a user interface and a business model for offering some of its products electronically over the Internet. Within a month it was ready to pilot the first prototype of its Web site, an electronic catalog that included electronic payment and delivery services using its own stores as the distribution center.

8.4: Technology Alignment

As the DIY example suggests, organizations cannot unleash killer apps until they can harness their own business and technology expertise. We recently participated in a two-day workshop sponsored by a major European manufacturer to explore new ways of doing just that. This meeting, which included a miniature trade show of technologies the organization did and did not use, was attended by more than sixty people, including the CEO and the senior executives of most of the business units, outside experts, and about twenty individuals who identified themselves as I/S professionals.

At the beginning and end of the workshop, the participants answered a series of questions using an electronic voting system, and the results were displayed on bar graphs at the front of the room. The answers revealed a serious rift in the organization's attitudes. When asked "How much time and effort do you invest in developing your own information technology skills?" more than 20 percent of the I/S professionals said that they spent little or no time. When asked how significant a role technology played in the company's overall performance, more than 65 percent of non-I/S senior managers answered "critical," while nearly 50 percent of the I/S professionals answered "irrelevant."

Even at the end of the workshop, during which the CEO, among others, repeatedly stressed the critical role digital technology would play in the company's efforts to restart growth after a long period of cost cutting, 30 percent of the I/S professionals still said technology was irrelevant, and 30 percent defiantly maintained that they didn't plan to invest significant amounts of time in their technology skills. Almost 45 percent of the non-I/S professionals, in fact, were willing to commit themselves to spending more time developing technology skills than did those whose job it was, presumably, to lead the charge.

Whatever else these findings reveal about the health of the organization, it is clear that there was a serious communication gap between the I/S professionals and their operational counterparts. And, pretty typically, it was the I/S professionals who, in the voting and throughout the course of the meeting, expressed the most skepticism about the potential for new technologies to play a strategic role in the organization's future.

Unfortunately, many organizations have experienced a painful breakdown of goals and objectives as seen by the business and its I/S professionals. It's a problem not just in traditional businesses but even high-tech companies. About a year ago we heard from some colleagues who were working with the I/S department of a leading manufacturer of Internet hardware and software. The company was reconsidering its policy of forbidding the use of E-mail for any corporate business, which it had initiated in fear of having proprietary information intercepted. Did we know of any experts on encryption the client could talk to? Yes, we said, we knew the world's leading authority. As it happened, he worked for the client, in the same facility as the I/S department. Unfortunately, we said, he responds only to E-mail.

The reasons for these breakdowns are legion, and they have been the subject of numerous books. We think the basic problem is a historical one. Data processing functions began life in the 1960s as support departments, often in the development of back-office financial systems. In recent years, some companies have made significant progress in upgrading the status of this group to recognize its role in the basic operation of the business, and in many organizations there is now a chief information officer who reports directly to the senior executive.

Even so, attitudes do not change quickly. Today's senior executives were bred in a culture that insisted on engineering and business discipline and predictability from an I/S field that was too young to provide it. In many organizations, this led to dramatic disasters in terms of projects that far exceeded time and cost budgets or, worse, that failed altogether. I/S professionals, as a result, have been conditioned to work only with the most proven and mature technologies and to avoid technology risk taking (hence the old saying that no one ever got fired for recommending IBM). Everyone, including and perhaps especially the I/S professionals, became risk-averse.

As technology moves from its position as a defining element of the back office to a disruptive force in the marketplace, the problem now faced by most organizations is that there is rarely anyone, much less an organization, with the mandate and the resources to help senior management treat digital technology strategically. Before starting down the path to digital strategy, the organization needs to re-create the role of the I/S function, to give it and the organization as a whole a future- and growth-oriented technology mandate.

Aligning technology and strategy is not easy. The challenge is to build the kind of technology awareness infrastructure we described above and put technology not just on the organization's agenda but at the top of it.

8.5: Technology Radars

Part of the failure to use digital technology strategically comes from a simple failure to understand what the technology does. Asked about possibilities for using the Internet, the CEO of an investment banking firm reported that his company "had a, what do you call it, a page on the Internet, an address, or whatever, for six months and, at last count, we had 9,000 to 10,000 whatever you call them. I think we've yet to have our first trade." Despite the fact that his company's site didn't even offer an electronic trading option, he felt confident telling us that "We're not going to do anything of value on the Internet."

The single most important feature of developing a digital strategy is for everyone involved to see technology in the context of the new world. Unless you are in one of those rare organizations—a FedEx, Charles Schwab, Mastercard, or Hewlett-Packard, or a start-up like Security First Network Bank, Firefly, or Amazon.com—that instinctively understands the competitive threat and competitive advantage of the killer app, a key task in forming your digital strategy will be learning to integrate emerging digital technologies with current and future business operations. You'll know you're there when, like the companies listed above, it becomes impossible to determine where the business stops and the technology starts.

One of the best ways to accomplish this change, and one of its key outputs, is to launch a radical new process for raising technology awareness in the organization. Rather than waiting for killer apps to hit them over the head or, worse, wipe out current assets, channels, and customer bases, managers must learn how to recognize early potential and take appropriate steps to learn about, experiment with, and, if appropriate, exploit new technologies.

Organizations that have already implemented successful digital strategies invariably nurture a zealous, rigorous, and organization-wide technology radar that allows them to do just that. The technology radar is the pipeline that feeds digital strategy, and it must be operating smoothly and continuously if you have any hope of maintaining a competitive advantage. Before you can develop your strategy, you need to get this engine running.

The technology radar is only as good as its inputs, or, as the old computer saying goes, garbage in, garbage out. It is therefore critical to make sure you're pointing your sensors in the right direction. The focus must be on those digital technologies that, though not yet at critical mass from a commercial standpoint, are nonetheless ready for inspection and experimentation.

Too often we find that organizations track only mature or declining technologies and mistake incremental improvements to these applications for the true killer apps coming from left field. Companies focused on developments in distributed mainframe computing in the 1980s missed the PC revolution happening right in their own backyard; companies that are today focused on the next release of SAP, Windows, or the next level of Pentium processor from Intel are likewise missing out. Going on around them are the transformation to scalable network computing, heralded by the Internet; the development of platform-independent software environments like Java; and the revolution in computing devices that come not from traditional manufacturers but from consumer electronics companies. If you can't see the technology that's coming, how can you hope to exploit it?

8.6: Feeding the Pipeline

Once you've taken off the blinders, identifying emerging technologies and their future application is easy. Pick up any newspaper or magazine that isn't explicitly focused on technology, and you'll find stories about how digital technology is changing the world. Walk into any electronics store, new car lot, or toy store, and you'll see the applications that will be ready for business tomorrow (or sooner). Some of the best information on new technology is delivered using the technology itself, like Netscape's In-Box, which allows you to subscribe to a wide variety of news sources that are delivered in the form of customized multimedia E-mails.

Finding information is too easy. Finding useful information, on the other hand, is what separates success from failure. Identifying the emerging technologies that may be of actual value to the organization requires a fat pipeline, a sensitive radar screen, and a sophisticated intelligence function. Given the speed that new applications can climb up the Metcalfe curve, your view must be far-reaching and deep, but to survive the onslaught of available data, you'll need the triage skills of an emergency room doctor.

One of the most effective techniques for identifying new technologies and their developers (an equally important point, which we discuss a little later) is to take a periodic technology study tour, either virtually or, better yet, in the real world. We mentioned earlier a tour we designed for a group of executives from leading European postal agencies, including the British Post Office. The Post Office understood that personal communications—its core market—had already gone through significant digitization. It knew that its ability to survive and continue providing a useful service would be determined by its ability to understand such developments and take a leadership role in exploiting them.

The tour for the postal agencies progressed, like Joseph Conrad's novel Heart of Darkness, by moving from familiar to increasingly strange territory. After a day each at AT&T and the U.S. Postal Service, the group relocated to Silicon Valley. There the Europeans met the development team at Sun Microsystems that had launched Java, participated in the production of a television program about new technology at the studios of C|Net, and learned about the trials of developing virtual reality interfaces for the Internet from the twenty-eight-year-old CEO of a start-up whose product had been demonstrated the day before by Bill Gates.

At the end of each day, the members of the group met to debrief and put what they had seen into context. Discussions continued through dinner and well into the night, as managers and I/S executives found common ground, perhaps more so than ever before, in trying to make sense out of the future they were seeing. Maureen Gardiner, who heads development for the Post Office's Future Markets Group (and the woman who was so struck by how much fun the employees of Rocket Science had at work), took a group of her own for a second tour and then decided to get in on the fun herself. She has been developing a prototype Web-based mall for specialty catalog companies that will be hosted by the Post Office (which already delivers the goods), a nice example of managing continuity for her customers at the expense of her own organization's disruption.

8.7: Kicking the Tires

Having identified technologies or applications still in an immature form which you think may have some application to your future business, the most important thing you can do is get it in front of as many people as possible. You can talk about the Internet for hours, but get the CEO of an organization to spend ten minutes surfing the World Wide Web with the mouse in his or her own hand, and the potential uses begin flowing. Write all the reports you want about the value of three-dimensional modeling and simulation, but you'll have much better luck just giving everyone a copy of today's best software games.

We sometimes put together technology "discovery zones," where clients are encouraged to play with the products that could be the basis of their wildest dreams or worst nightmares. At a recent meeting of the Diamond Exchange, we immersed our executive members in a slew of alternative Internet access devices targeted at consumers, not business. The president of a major book publisher installed a WebTV straight out of the box (in ten minutes) and surfed Web travel guides for an upcoming vacation in Germany. The CFO of a major retailer, who had little experience on the Web, was able to find cross-country race results for his son's high school using a Sega Saturn. Everyone in the group saw themselves in cyberspace on a site that featured digital pictures uploaded in almost real time with a Casio Cassiopeia handheld PC. As our colleague Gordon Bell, a senior researcher for Microsoft and a venture capitalist, says, "A demo is worth 1,000 pages of a business plan."

Done in the right context, introduction activities create a rich environment for brainstorming, developing prototypes, and conducting other business experiments critical to developing strategy. We recently made a presentation to the managing committee of a leading Swiss bank, whose members had been told by their I/S department that it was too soon to invest much time or effort in the Internet. Using a laptop computer and a modem in the bank's own boardroom in Zurich, we bought and sold stock over the Web using software from Charles Schwab and E*Trade, both of whom charge less to clear trades than it costs the bank—internally. We also put together several company "Briefing Books," using the financial and news services of the Wall Street Journal, which likewise challenged the bank's belief that its private banking customers had no real alternative source for investment advice. Within thirty minutes the committee had identified half a dozen new business opportunities, had begun rethinking the supposed efficiency of its back-office processes, and had authorized a number of projects with which to gather more information.

A critical feature of most successful technology introduction programs is the existence of a technology advocacy group, with the explicit mission of bringing unfamiliar applications inside and finding a context in which to demonstrate their potential. The British Post Office maintains a permanent technology research group championed by Director of Technology Duncan Hine and operated by Director of Research Alan Shepherd. This advocacy department, a model for any organization, is permanently staffed. Its mission is to facilitate the organization's understanding of new technologies and their implications.

More to the point, the Post Office Research Group takes an active, if not religious, role in promoting and accelerating technology adoption. In addition to coordinating the study tours we mentioned earlier, the group manages a technology innovation fund, produces six internal conferences a year (with attendance as high as 200 executives each, and complete with hands-on demos), publishes a regular newsletter, and coordinates the transfer of technology "lessons-learned" throughout the organization. Taking a counterlesson from their American counterparts, the British Post Office seems determined not to put itself out of business and recognizes the power of a finely tuned technology radar to help it survive.

8.8: Technology Partnerships

Building a killer app requires the formation of partnerships; as we said, the goal is to treat every transaction like a joint venture. Partnering is another natural side effect of the Law of Diminishing Firms. As firms find market partners who can perform functions cheaper and more effectively than they can themselves, the economically necessary response is to shift functions to these partners. In some cases the associated organization will be a familiar one—an existing supplier, a customer, or even a competitor or regulatory body—but the relationship will take on a dramatic new degree of intimacy. In other cases, the relationship will be with someone completely new.

For many organizations, the breadth and depth of these new partnerships can be intimidating. Large, integrated organizations (banks and utilities are good examples) may be unfamiliar with or even legally forbidden to have any connection that involves the exchange of proprietary information. Organizations in mature industries that have enjoyed long periods of stability (many durable goods producers, for example) may not have met a new player for a long time. They may have developed a kind of organizational xenophobia that makes them suspicious of any tie to an unfamiliar partner.

Even in industries and individual organizations where alliances and acquisitions are regular events, there are infamous stories of breakdowns that cost the respective organizations dearly, if only in bad publicity. During the 1980s, IBM was notorious for acquiring entrepreneurial companies and then crushing the life out of them with its self-referential corporate culture and daunting bureaucracy. More recently, the business press has had a field day describing the fireworks associated with on-again, off-again alliances, mergers, and divestitures of entertainment, communications, and technology giants like Time Warner (itself a painful alliance of two giants), AT&T, and Rupert Murdoch's News Corp.

It is particularly important to form technology partnerships, for these are at the heart of the innovation portfolio. Typically, this is an area that most organizations need to improve significantly before they can begin implementation or even development of their digital strategy. Even in organizations with excellent partnering skills, relations with technology suppliers are typically poor. At McDonald's, relations with upstream providers of raw materials are so crucial to satisfying the company's obsession with quality, consistency, and value that these companies are referred to not as business partners but as "McFamily." Yet McDonald's I/S personnel readily admitted their relationships with key providers like Microsoft, Lotus, and AT&T, each of which provides mission-critical components of its technology platform, were arm's length at best.

Understanding that its plans for more strategic applications would cause the company to rely even more on these and other vendors, McDonald's corporate I/S group staged a command performance in which these companies could meet with McDonald's management and with each other and begin to identify win-win opportunities that would take the relationships far beyond that of merely vendor and customer. As McDonald's executives began to think more strategically about technology, they also found themselves working with a kind of technology partner that was new to them—start-up companies. The nature of the company's relations with media partners, like its former lead national advertising agency, Leo Burnett, and a key licensing partner, Walt Disney, changed as well.

Sometimes it is the technology company that leads the partnership, a reflection of its own effort to unleash a killer app. In its move from a software company to a full-scale financial services firm in cyberspace, Intuit has developed an on-line marketplace for insurance, including quotations and applications, in cooperation with Allstate, State Farm, Prudential, and others. The company's site will soon offer a full-service mortgage brokerage as well, and some of the leading lenders in the country have already signed up. To secure its technology platform, the company purchased a 19 percent stake in the search engine Excite.

8.9: The CEO Agenda

Finding and introducing new technologies into an organization's collective consciousness feeds the process of digital strategy, and keeping a pipeline that is full and unfiltered maximizes the chances that something will come out at the other end with the potential to be a killer app. But for the technology pipeline to function, most organizations need to retool themselves in other significant ways.

Like an inactive person training for a new sport, organizations need to prepare for digital strategy before they can hope to succeed at it without too much trauma. Senior management must learn to accept that digital technology has become central to future planning and align its objectives with those parties in the organization who are today responsible for technology implementation, whether that is the I/S organization, an outsourcing partner, or managers in the field organization.

In the end, the real distinction between digital winners and losers is always found in the boardroom. At every client we've worked with on digital strategy, and for every organization we have visited or studied, it is always the case that those organizations which do not have the will to succeed are certain not to do so. That will must be internalized, communicated, and championed by the senior executive and the entire executive team. Inside each of the organizations who have used digital technology to achieve market dominance—whether at a FedEx, Playboy, or tomorrow's high-flying start-up—there are executives who believe in it and who have gone out of their way to communicate their convictions within and outside the organization.

At VEBA, our project began after CEO Ulrich Hartmann met Nicholas Negroponte and instinctively recognized that "being digital" was a requirement for his company to succeed in the twenty-first century, despite the fact that for more than a hundred years it had shown no signs of doing anything wrong. At British Petroleum, CEO John Browne knew better than to ask his directors to expand the company through technology leadership until he communicated his own commitment in no uncertain terms. Every employee at BP agrees to a "performance contract" with their boss, which contains the job criteria by which the employee agrees to be measured. In 1996, Browne made the company's success in digital technology innovation part of his own performance contract with his boss, the company's board of directors.

Digital strategy, like any strategy, requires fearless leadership. As Michael Bloomberg, CEO of the Bloomberg Financial Network, described his role in technology adoption: "If it doesn't work, you can blame me. There's no question about that."