The Search for New Killer Apps,
Systems That Change a Company

By LEIGH BUCHANAN
Inc. Online

Killer Apps ('ki-l r 'aps) n. 1 new goods or services that completely rewrite the rules of an industry 2 what should be the driving force behind every company's business strategy.

Time was, if you were smart about business, you could afford to be stupid about technology. Such a confession of weakness was almost endearing, like a talented writer, artist, or mathematician's sheepish admission that he can't carry a tune.

Today, technology-free commerce has ceased to exist outside of roadside lemonade stands, and company leaders must formulate digital strategies that not only support business but actually dictate how business is done. That, at any rate, is the contention of Chunka Mui and Larry Downes, a pair of consultants whose new book, Unleashing the Killer App: Digital Strategies for Market Dominance (Harvard Business School Press, 1998, $24.95), makes the heretical argument that business change originates with technology -- particularly with new computer-based products and services that transform industries, the way American Airlines' SABRE system transformed travel more than three decades ago. In this environment, what you do is often less important than how you do it, and software and digitally delivered services are everybody's business.

Mui and Downes attribute the new landscape to the convergence of three principles: Moore's Law, named for Intel founder Gordon Moore (every 18 months, processing power doubles while cost holds constant); Metcalfe's law, named for 3Com founder Robert Metcalfe (a technology's usefulness grows with the number of people using it); and Nobel Prize-winning economist Ronald Coase's theory that companies should perform only those functions that cannot be performed more cheaply by the market. That last one's a biggie: it means that large corporations got that way because they found it cost-effective to internalize everything from buying and selling to designing products and hiring staff. But now that a pack of emerging technologies -- with the Internet as alpha wolf -- are making the marketplace more efficient, many of those activities are moving into cyberspace, where they are fair game for anyone who can figure out better ways to do them.

Those better ways are the "killer apps" of the title, defined by Downes and Mui as "a new good or service that single-handedly rewrites the rules of an entire industry or set of industries." Many of their examples are canonical: Federal Express's package-tracking system, Microsoft's Encarta encyclopedia, the Wall Street Journal Interactive Edition. Some killer apps are themselves technology products, like Web-based Firefly, an intelligent agent that recommends products to shoppers based on the preferences of people with similar tastes. Others, like the wireless and Internet connections linking a heating-oil business directly to customers' homes, allow traditional low-tech companies to perform virtual end runs around their old sales-and-distribution networks.

The opportunity to create such applications should be the driving force behind every company's business strategy, the authors argue. Strategic planning -- held in increasingly ill repute -- will be replaced by "digital strategy," a protean creature that succeeds by blowing itself up over and over. Indeed, Mui and Downes's rules for designing killer apps are rife with creative self-destruction: cannibalize your markets, treat your assets as liabilities, ensure continuity for the customer, not yourself. Smart organizations, the authors write, "are preemptively destroying their own value chains. Recognizing that change is coming that will [render] obsolete their infrastructure, force them into a commodity role, or remove them from the process altogether, many are choosing to hasten the end of the old model."

Not surprisingly, such a deconstructive approach favors the small, the new, and the assetless: technologically sophisticated start-ups without a lot of bad habits to unlearn. Some of the authors' large clients argue that their new competitors are scarcely companies at all, merely "brokers, partnerships, and cherry-pickers, skimming off the most profitable customers, products and channels." From the standpoint of many entrepreneurs, that ain't a bad business to be in.

Much of the authors' thinking emerged from their work with the Diamond Exchange, a Chicago-based executive-learning forum of which Mui is director and where Downes is a visiting fellow. Inc. senior editor Leigh Buchanan spoke recently with Mui.

Inc.: Is the low-tech company becoming an oxymoron?

Mui: Certainly, I think technology is everyone's business. If it's not a fundamental part of the product that you make and sell, then it's a fundamental part of the processes by which you sell it and of how you provide service. That places the onus on company founders and business executives to think as though they're in a technology business from the beginning, because in some way they're going to be.

Fortunately, we're at a time when technology is all around us and is much more accessible to the entrepreneur than in the past. Information technology has traditionally been the domain of large corporations. Scale mattered. Sophistication mattered. You had to have deep skills. We're at a point now where the things that even big corporations are trying to catch up on are easily accessible to high school and college students.

Inc.: Technology is more accessible, but I would think you'd need a better-than-average understanding of what it can do in order to create a successful digital strategy. The CEO of a pincushion business isn't necessarily going to know much about the Internet.

Mui: What you need is an understanding of your customer's perspective. As a consumer, you have your own expectations about the levels of service you want and what, in the way of technology, you're willing to put up with to get them. That's information you can use in designing your own approach. How will customers want to find out about your pincushions? What kind of information will they want, and how will they want it delivered?

Inc.: Suppose your customers don't want to use computers at all?

Mui: Well, for one thing, that assumes you're selling to end consumers. Maybe you're not; maybe a better way is to sell to a retailer who does use the technology. You can also look at ways to improve the design of your pincushions or the manufacturing process or the way you buy fabric and thread and stuffing. The killer app can affect any part of the organization, not just the selling side. A small business might form virtual partnerships with other companies so it can improve logistics -- for example, by outsourcing delivery and package tracking to UPS. In that case the technology lets it form and manage partnerships that give it world-class fulfillment capabilities.

Inc.: The flip side, I presume, is the opportunity to provide those services to large corporations that are relinquishing internal functions to the marketplace?

Mui: Not just to large corporations. Small and midsize companies are also looking at ways to use the technology to push out some of their back-office activities and other things that aren't core to their business. Those folks aren't going to outsource to Andersen Consulting. They're not going to outsource to EDS [Electronic Data Systems]. So I think the next wave of entrepreneurial start-ups will be those providing services to companies that are getting smaller. And because those start-ups will base most of their operations from the very beginning in the digital marketplace, they won't get loaded down with the physical assets and infrastructure that existing companies have, so they already have an advantage.

Inc.: So what happens to the traditional goal of "growing a company"? Is that idea hopelessly atavistic?

Mui: Well, there are both advantages and disadvantages to large scale. But with this new model, you don't necessarily have to be on a growth path in the noncore aspects of your business. If there's something you don't have -- a certain skill or a certain function -- you can use technology to form a partnership with someone else to get it, and when you don't need it anymore, you end that partnership and form a new partnership. What you end up with is a series of joint ventures that form around a project or a transaction. So there's no real need to build a large organization in order to compete.

Inc.: From what you've been saying, it sounds as though you think business-to-business commerce is the most fertile ground for killer apps.

Mui: I think many of them will happen there first. But there are some great opportunities in other areas as well. I know there's lots of skepticism: everyone keeps saying that consumers are scared of the Internet or not ready for the Internet. But when companies say that, most of the time they're the ones that are afraid, not their customers. Take electronic commerce, for example. People buy out of catalogs, they buy over the phone, they buy things shown on TV. And they deal with electronic interfaces every day, on their VCRs and at their ATMs and on their car dashboards. So why would they be afraid to buy using their computer via the Internet? I think they'll be comfortable with that. But you have to put yourself in a customer's place and create a strategy that ensures continuity for the customer rather than for yourself.

Inc.: All right, let's assume you have customer buy-in. But with revenue models on the Internet so dicey, how do you figure out what makes the business profitable? Should entrepreneurs do what you recommend that large companies do -- adopt a portfolio strategy by investing in a number of different technologies and revenue streams?

Mui: For large companies it makes sense to invest in a portfolio of digital options because it allows them to foster innovation and to spread risk. But small companies benefit from focus, from having a very deep understanding of their customers and their product and their market. The Internet doesn't change that, and I think trying to set up a bunch of skunkworks projects -- a little bit of this and a little bit of that and we'll see what works -- would tend to fragment a small business and possibly be very damaging.

Inc.: So if you don't have the pockets to take six digital strategies out for a spin, how do you know which strategy is the right one?

Mui: It's important that entrepreneurs not ask themselves, "How do I make money on the Web?" Rather, they should be asking, "How do I make money in the business I am in?" As with any business venture, you have to have a hypothesis about what your customers want. And you need metrics for what results you expect and how much money you're going to invest at different points based on the results you're getting. There's a sense that when you're experimenting with technology you can be looser or more speculative than you can with other ventures. But when you come down to it, digital strategies require that you put more rigor into the exploration process, not less.

Inc.: I suspect that perception grows out of the relatively low cost of technology experiments -- particularly those involving the Internet.

Mui: That's part of what makes the Internet such a wonderful place for entrepreneurs. Look at Firefly, for example. It's a system that gives music recommendations by comparing a user's stated preferences with those of other users. If you and I like the same five artists, and I like a sixth that you've not heard of, chances are good that you'll like that sixth artist as well. Firefly started as a student term project at the MIT Media Lab, so the incubator doesn't even have to be a typical business environment. At first Firefly was just people in the lab telling the software which musicians and composers they liked best. Then other people at MIT started using it. Then they set it loose on the Net, and still more people filled its databases. And the more people who told it their preferences, the better Firefly worked.

Inc.: So, essentially, the customers became the content.

Mui: Right. And Firefly was able to amass this very large amount of high-quality content at practically no cost. Now Firefly is making money by selling the underlying technology to sites like Yahoo! and Barnes & Noble. The model turned out to be successful, and there weren't a lot of risks in the exploration process.

Inc.: You mention Yahoo!, which of course was also born inexpensively at a university. But it seems to me that for companies like Yahoo! and Amazon.com and Virtual Vineyards, the killer app was simply the fact that they were operating on the Internet at all. New entrants can replicate -- and have replicated -- much of what they do, but with the exception of companies that have well-established brands in the physical world, those new competitors aren't generating a lot of heat. How do you establish a brand on-line if you can't be first?

Mui: Sometimes the lack of a brand -- at least at first -- can actually be an advantage. Because while a brand defines who you are, it also defines who you're not, and there's a degree to which it's an advantage only if you use it quickly. Look what happened to Encyclopedia Britannica, which tried to protect its print product by refusing to license its content for CD-ROM and subsequently found its sales battered by Encarta.

But it's the early days yet, and there are still plenty of opportunities for companies to brand themselves because they're innovative, whether they do something first or simply do it better. Netscape wasn't first. Neither was Amazon. But they worked very hard at their businesses, and they got exposure, and they developed a brand fairly quickly.

Inc.: You and I have both mentioned Amazon.com, and it troubles me that half a decade into this, we're still trotting out the same names as examples of Internet success stories: Amazon and FedEx and Marshall Industries and Cisco Systems. I'm wondering whether -- through a failure of courage or imagination or technology or marketplace acceptance -- radical innovation in this area has somehow stalled.

Mui: I understand your disappointment, but I think it's still very early in the life cycle to be saying that. When we first started talking to clients about the Internet in 1991 and 1992, 90% of them had never heard of it. Almost all the interesting killer apps have evolved from nothing in a very short period of time. Companies like Amazon.com and Virtual Vineyards happened to find an early niche, but I think we should look at them as leading indicators rather than as isolated examples. And there are other emerging killer apps out there. Take Edmunds, the car-buying guide. They've transformed themselves in their move to the Internet and are in the process of helping to redefine the whole car-buying experience. Yes, there's still a lot of head scratching going on. But what comes through much more clearly is a sense of excitement. There's a lot of innovation going on, too.

Leigh Buchanan is the editor of Inc. Technology. She can be reached at leigh.buchanan@inc.com. Inc.'s Web site, Inc. Online, can be found at www.inc.com.

Resources

If you liked "Killer Apps," here are some additional articles about leveraging technology to gain a competitive advantage:

"From Steer to Eternity": American beef producers are revolutionizing their industry with technology. New computerized tracking systems allow ranchers to document every aspect of a cow's life, improving both quality and efficiency. By Leigh Buchanan, from Inc. Technology #1, 1998.

"Using Supply-Chain Technology to Create Competitive Advantage": A look at how innovations in product-tracking technology will streamline operations in a variety of industries. By Shane McLaughlin, from Inc. Online, March 17, 1998.