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CONTENTS
Foreword Nicholas Negroponte........................................ix
Preface...........................................................xiii
Acknowledgments...................................................xvii
Introduction.........................................................3
PART 1    Digital Strategy
    1 The Killer App................................................13
    2 The New Economics.............................................35
    3 Digital Strategy..............................................57
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
Selected Bibliography..............................................225
Index..............................................................229
About the Authors..................................................243

Unleashing the Killer App
Digital Strategies for Market Dominance

By Larry Downes and Chunka Mui

Harvard Business School Press



(C) 1998 Larry Downes and Chunka Mui
All rights reserved.
ISBN: 0-87584-801-X



Read BW's Review of This Book



CHAPTER ONE

The Killer App

The world now runs on Internet time. --Andy Grove

CHRISTOPHER BRENNAN WASN'T trying to start a revolution. The regional manager for British Petroleum's (BP) sixteen hundred gas stations in Germany, Chris was looking for new sources of revenue in a saturated, largely commodity-priced business dominated by a few brands. Then he got an idea. Gas stations were exempt from Germany's rigid shopping laws that required stores of all kinds to close by 6 P.M. during the week and by 2 P.M. on Saturday. Small convenience stores attached to the stations already sold basic staples and impulse food purchases 24 hours a day. Why not really exploit this regulatory loophole? Chris had heard about the future of electronic shopping from his colleague Matthias Richly. Why wait for the future? Why not invent it now?

    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. They confounded 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.

    Charles Martel, leader of the Franks, understood from his victory that the stirrup hadn't simply improved the effectiveness of his forces, as a new weapon or fighting formation might have done. Rather, it changed his entire military strategy. Stirrups made possible a mounted cavalry, a new element in the battle equation, and Charles Martel immediately made them a permanent feature.

    Neither Charles Martel nor his descendants probably recognized the longer-term impact of their new technology. To support the specialized fighters of a cavalry, Charles Martel created a new class of landed gentry who had sufficient income from the land he gave them to provide men, horses, and expertise. To do this, he seized some of the vast holdings of the Catholic church, permanently altering relations between medieval church and state. He also created a social and political system in which farming peasants were answerable not only to the king but to the landlords, who became known as knights. In the end, the Pope crowned Charles Martel's grandson Charlemagne the first Holy Roman Emperor, an acknowledgment of the new world order.

    Thus the lowly stirrup played a singular role in rearranging the political, social, and economic structure of medieval Europe. The Holy Roman Empire, in some form, lasted until World War I. Feudalism, the social and economic system that emerged to support the mounted troops, at the time represented a sudden and violent break from tradition. It persisted for nearly a thousand years, long after the actual advantage of the stirrup in battle had been supplanted by numerous other developments. As White concludes, "Few inventions have been so simple as the stirrup, but few have had so cataclysmic an influence on history."

    As this story demonstrates, killer apps have important first-order effects, but their second-order effects are even more far-reaching--as well as being unintended. In 1976, for example, Gerald Ford offered Americans a toll-free telephone number they could dial to share their ideas for "whipping inflation now." Little did he realize that the newly created "800" area code would soon revolutionize telephone sales and service with twenty-four-hour call centers and television home shopping, and create a major source of new business for resource-poor countries like Ireland. Surely IBM never would have believed that its own marketing of a personal computer, with software and hardware from tiny partners Microsoft and Intel, would devastate their mainframe-centered business model and shatter their computer industry dominance in only a few years.

The Digital Age of Anxiety

To see a more contemporary example of the disruptive power of killer apps, we recently visited the headquarters of the U.S. Postal Service in Washington, D.C. There, executives responsible for technology investment candidly revealed that the postal service has developed a scenario that anticipates a complete shutdown of its operations. Having lost the small package and expedited mail delivery segments, the post office now relies entirely on first-class and bulk mail to support its expensive physical infrastructure, including 200,000 vehicles, 800,000 sorters and deliverers, and 36,000 local post offices. First-class mail is in deep decline, and soon business mail and bulk mail may fall victim to the same competitor: the humble, almost pathetically primitive technology known as electronic mail.

    E-mail, a simple hack invented by scientists whose computers were connected during the early days of the Internet, has reached killer app status. Millions of messages are now delivered automatically and virtually without cost every day. By waiting too long, the postal service has probably missed the opportunity to offer electronic postmarks, registration, or other authentication services--from which it could have derived substantial revenue. Postmaster General Marvin Runyon, arguing to Congress unsuccessfully in 1996 for a major expansion into electronic messaging, conceded that "the Postal Service faces growing competition across all product lines" from what he called the "electronic bypass." Given that the post office has had an undeniable legal monopoly on the delivery of first-class mail for the whole 200 years of its existence, this is a pretty remarkable confession. But E-mail emerged so quickly that there wasn't a chance to mount a serious challenge. Now the post office doubts it can even participate.

    E-mail is now being adapted for advertising and information delivery in what is called "push technology." Why just send a message when you can send an entire digital product--a multimedia experience? Why call and get an answering machine when you can type a quick note and be confident that it will be received and answered within a few hours, often automatically by increasingly smart systems that can "read" and answer the mail? Why not send everyone in the company a copy of the complete text of an interesting article, including active hyperlinks to the references, when doing so takes only a few keystrokes, no matter if the recipients are down the hall or in Sri Lanka? E-mail, as a killer app, starts by taking out the post office but may end by redefining human communications.

    It isn't only Postmaster Runyon and his staff who are feeling threatened by looming killer apps but senior executives in every industry. As part of a Diamond Technology Partners (DTP) study led by former Wall Street Journal reporter and DTP partner Paul Carroll, we interviewed 30 leading CEOs and surveyed another 400 senior executives in early 1997, The survey measured management perceptions of the threats and opportunities of digital technology and revealed tremendous anxiety over the new roles for technology signaled by developments like the World Wide Web, intranets (internal networks that use Internet software), and electronic commerce.

    Confusion was evident in every business and across all industries: Executives agreed that technology was changing the basic economic equation of their business, but at the same time held firmly to the notion that in their own organization technology was only a tool to implement strategy. Nearly a quarter of those surveyed confessed to feeling that the rules of competition were changing, and changing in ways made possible by technologies that they don't feel they adequately understand. More than 35 percent strongly agreed that global technology had made markets so transparent that global competitors could now spring up overnight. Few executives felt comfortable saying that they knew how to respond to all these changes, and those few who said they did may have been, as Carroll put it, whistling in the dark.




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