Book Reviews
Strategies for Success in the Digital Marketplace: A Review of Unleashing the
Killer App: Digital Strategies for Market
Dominance
Larry Downes, Chunka Mui and Nicholas
Negroponte
1998 Harvard Business Press, Cambridge,
MA
243 pages; US$24.95
In the early 1990's Microsoft approached Encyclopedia Britannica,
Inc. in reference to creating a digital
encyclopedia on CD-ROM. Encyclopedia Britannica, Inc. declined Microsoft's solicitation. In response,
Microsoft created its own CD-ROM
encyclopedia, known as Encarta.
`Burning' the CD-ROM was about
1/100th as expensive as printing a set
of encyclopedias, and the multimedia
content, with its animated, color diagrams, and historical sound clips, was
more engaging. Within 18 months,
Encarta became the best selling encyclopedia in the world, forcing the
200 year-old standard of the encyclopedia industry to completely re-engineer its business in order to survive.
What is it about technology that
makes this sort of dramatic change
possible? More importantly, what can
a firm do to flourish in such an
environment? These questions are the
focus of the book Unleashing the Killer App: Strategy in the Age of Disruption.
Downes and Mui identify three
fundamental characteristics of business technology that make today's
business environment so different
from that of the past. Most important
to electronic commerce is the idea of
Article number = 100027
network externalities, as described by
`Metcalfe's Law', which states that the
value of a network increases exponentially with the number of users. Similarly, `Moore's Law' states that
computing power also grows exponentially. The interaction of these two
`laws' results in the third characteristic
of business technology, a decrease in
transactions costs, which, in a Coasian
view, is the primary reason for the
existence of a firm. These interactions
are shown in Figure 1.
This illustration of `Moore's Law'
of decreasing cost of computing
power and `Metcalfe's Law' of increasing network value illuminates
two points. First, it is clear that the
value of killer applications will far outweigh the cost as the number of users
increases, and as time moves forward.
Second, it rapidly becomes possible to
unleash applications that were formally cost prohibitive. Thus, not only
will profit margins increase, but also
entirely new business models will become feasible.
The authors combine these two
Figure 1. Moore's Law and Metcalf's
Law
This illustration of Moore's Law of
decreasing cost of computing power, and
Metcalfe's law of increasing network
value illuminates two points. First, it is
clear that the value of killer apps will far
outweigh the cost as the number of
users increases, and as time moves
forward. The second point is that it
rapidly becomes possible to unleash
applications that were formally cost
prohibitive. Thus, not only will profit
margins increase, but entirely new
business models will become feasible
laws with decreasing transaction costs
in order to derive two additional laws.
These two new laws are the `Law of
Disruption' and the `Law of Diminishing Firms'. The first maintains that
`social, political, and economic systems change incrementally, but technology changes exponentially' (p.
29). The latter states that `as transactions costs in the open market approach zero, so does the size of the
firm' (p. 42).
The logical argument leading to
the `Law of Diminishing Firms' is
sound, however, alternative theory
prompts a careful reader to question
it. For example, Coasian transaction
costs are not the only reason that
firms exist. As Bakos and Brynjolfsson
(1993) point out, the inability of
individuals to write complete contracts is another reason for the existence of the firm, which is more
robust to technological advancement.
Though there is evidence that even
contract completeness is subject to
technology (Banker et al. 1998, Shapiro and Varian 1999) propose that
the digital market place will lead to a
separation of cost and value. As a
result, items are purchased based on
the value added rather than based on
the production costs. These conflicting views bring into question the
`Law of Diminishing Firms'.
The last half of the book is a
prescription for strategy in a digital
environment. However, the strategy
of the `killer app' is very different
from Michael Porter's concept of
strategy. In the world of the `killer
app', strategy is continual experimentation. The strategy must be dynamic,
and the periods involved are measured
in months rather than years. Downes
and Mui identify three major components to a successful digital strategy:
`reshaping the landscape', `building
new connections' and `redefining the
interior'.
Reshaping the landscape is the high
level strategy of a business. It defines
the general goals that a firm should
follow in its relationships with customers, partners, and the market. By
far, the most important design principle is to `create communities of va-
In the course of this work, one of our twelve
design principles, `Create Communities of
Value'. has increasingly stood out as a key
tactic for designing killer apps. In the
intensifying battle for attention on the
Internet, we think that communities of value
will evolve into the key `killer platform' for
killer apps. (From e-mail I received after
registering the book at http://www.killerapps.com/)
Building new connections is the
strategy segment that deals with the
infrastructure of electronic commerce.
This stage of the model details the
micro-level design principles, which
should be employed to ensure good
relations with partners and customers.
The authors follow their own advice
of giving away as much information as
possible on the book's website, making the entire book available at no
cost. In addition, this stage details
paradigms for interface design and
transaction structure.
The final strategy component, redefining the interior, involves restructuring the nature of the firm. This is
perhaps the most difficult stage to
implement, as it requires a radical new
business model. This step demands
that firms destroy their value chains
and reorganize them in progressively
more efficient ways. Innovation must
be managed as a portfolio of options,
in which some are exercised, but some
are killed. Traditional assets should be
thought of as liabilities; they are no
longer valuable means of production.
Rather, they are the legacy of a bygone era that only limits the business
possibilities the firm can pursue.
The final piece to the reorganization of the interior is to `hire the
children'. Young people are natives of
the digital world and can understand
the nature of that world in ways that
the older generation can not fathom.
Such restructuring of the firm, while
painful, is necessary to compete in an
increasingly digital economy.
Taken as a group, these three strategic components amount to building
a `killer app'. It is necessary to understand the nature of the `killer app'
though. It is more than just a piece of
software; it is a technology-enabled
business product. The Encarta CD is
a `killer app'. It is not the compression algorithms, or the database functions that define it. Instead, it is the
way it changes business. To compete
and survive, a business must form
itself around technology. Technology
is not a problem solution; it is the
core of the business, in the same way
that an engine is the core of an
automobile. The vehicle must be designed around the engine to ensure
optimal performance. In the world of
the `killer app' technology is the engine, and the firm is the vehicle.
References
Armstrong, A. and Hagel, J. (1996)
`The Real Value of Online
Communities', Harvard Business
Review, May/June: 134±41.
Bakos, J.Y. and Brynjolfsson, E. (1993)
`From Vendors to Partners:
Information Technology and
Incomplete Contracts in BuyerSupplier Relationships', Journal of
Organizational Computing, 3(3):
301±28.
Banker, R.D., Kalvenes, J, and
Patterson, R.A. (1998) `The Effects
of Information Technology
Investments on Contract
Completeness and Buyer-Supplier
Relationship', presented at The
Workshop on Information Systems
and Economics (WISE), Stern
School of Business, New York
University, New York, NY,
December
Brynjolfsson, E. and Kemerer, C.F.
(1996) `Network Externalities in
Microcomputer Software: An
Econometric Analysis of the
Spreadsheet Market', Management
Science, 42(12): 1627±47.
Hagel, J. and Armstrong, A.G. (1997)
Net Gain: Expanding Markets
Through Virtual Communities,
Boston, MA: Harvard Business
School Press.
Shapiro, C and Varian, H.R. (1999)
Information Rules: A Straetgic Guide
to the Network Economy, Boston,
MA: Harvard Business School Press.
ERIC WALDEN
(ewalden@csom.umn.edu)
Book Review
lue'. This principle follows directly
from `Metcalfe's Law', and is
espoused by many electronic commerce gurus (Armstrong and Hagel
1996; Brynjolfsson and Kemerer
1996; Hagel and Armstrong 1997).
The true value of communities has
surprised even the authors, causing
them to shift their focus to this area.
Consider the following statement by
Chunka Mui:
2