This interview appeared in the April 1999 issue of the FT Mastering Management Review, the Financial Times's monthly management magazine. For more information visit www.ftmastering.com.

Training the Killer Instinct

Chunka Mui believes he has identified the strategies that allow companies to redefine and dominate their markets -- they involve technology, timing and lateral thinking, he tells James Pickford.

Chunka Mui is a rarity in the world of technology and business -- someone who is just as familiar with physics and electronic engineering as with the commercial strategies that new technologies are spawning. His grasp of these areas and his ability to explain why they matter to companies helped make his first book a critical and commercial success.

Unleashing the Killer App: Digital Strategies for Market Dominance, co-written with Larry Downes, consultant and adjunct professor of law at Northwestern University, presents a picture of great volatility, feverish entrepreneurialism and increasingly wise and demanding customers. For Mui, these pressures are not confined to high-tech industries, but filter through to all enterprises. As a result, he remarks, chief executives face a growing number of pressures.

Mui began his career studying artificial intelligence systems at MIT’s artificial intelligence laboratory. A spell at management consultancy CSC Index followed, with Mui directing the firm’s emerging technologies research programme. He is now executive editor of Context magazine, which covers specifically the effect of technology on business, and consults widely for Diamond Technology Partners (of which he is a partner) on digital strategies and the economics of the new marketplace.

Q: You describe killer apps [short for “applications”] as products or services that enter a market and restructure the industry around themselves. Will there come a time when no more restructuring is possible?

If technology continues to advance -- and there is no reason to think it won’t -- it will always be possible to create killer apps. With the exponential growth in computing power and the spread of networks one always finds that existing companies cannot adopt technology as fast as it is being developed.

Over time a gap appears between what existing companies are doing and what it is possible to provide -- that gap is the space in which enterprising companies can place killer apps. These apps are goods or services that establish an entirely new category of business, and, by being first, dominate it, returning several hundred per cent on the initial investment. Good examples are the personal computer, electronic funds transfer and the first word processing programme.

Q: You paint a picture of accelerating change and the total devastation of entire industries, laid waste by technologists with bright ideas. Are there not industries and companies for whom this picture just isn’t relevant?

I disagree. The new technologies affect every aspect of business -- not just the product or service that’s sold but also the infrastructure and the company’s relationship with the customer. For instance, if you want to gain premium pricing, you usually have to provide great customer service, and the technology that we’re taking about is fundamental to great customer service. The technology also affects what your competitors do.

Let me illustrate. A senior executive of a US manufacturer of earth-moving equipment and forestry equipment recently told me of an incident from one of his regular tours of his major customers. He had asked, as usual: “How are we doing?” But with one of his major dealers he got the response: “Awful. Here’s the situation I face: I use Federal Express regularly, as everyone does. For $7 I can send a package. It always gets there, I know where it is at all times, who picked it up and when it got to its destination. I pay you $400,000 and you can’t tell me within a margin of three months when I’m going to take delivery of your piece of equipment.”

From one point of view that’s a completely unfair, irrational comparison. On another level it’s about Federal Express providing customer services and products that entirely change the expectations of customers -- not just for their products and services but for everyone else’s products and services. You can think of customers as just your customers, but in reality they are participants in a larger economy. The technological disruptions we are seeing are not taking place in isolation; they are disrupting the entire marketplace.

It wasn’t too long ago that management regarded technology as something of a choice: how they used it, where they used it, whether they used it at all. Because of the spread of technology and its low cost, there’s no longer a choice. It disrupts conventional strategies.

Q: You talk about strategies for creating killer apps, but what should you do if you find your company threatened by one?

In this game offence is the best defence. There are two things such companies must do: they can’t allow the competition to reach critical mass unchallenged. This is a game of increasing returns both in terms of market share and building brand; the longer they wait they uglier the catch-up process will be. So it is imperative for companies to respond quickly -- to try to reduce the pace at which the competition nears critical mass in terms of its market size and infrastructure capability.

The second thing that companies must do is be very careful in terms of the brand that’s being created. You don’t want to end up in a situation -- this is happening with US book retailers -- in which your brand is becoming isolated and narrowed into the physical retail space while your online competitors are developing a brand in the online space.

Q: Is the transition from a strong physical brand to internet brand so very difficult?

I think brands can either be a aid or an anchor for companies moving into a new medium. In the book we talked about Microsoft and Encyclopedia Britannica. When Microsoft first posited the idea of a CD-Rom encyclopedia they sought an alliance with Britannica; Britannica turned them down because they didn’t think the technology was ready and they didn’t necessarily want to yield part of their brand to Microsoft.

So Microsoft went on to develop Encarta, the biggest-selling CD-Rom in the marketplace. They created a brand around the CD-Rom medium and when Encyclopedia Britannica went back to them and asked them to do a deal, Microsoft’s marketing research showed that in the CD-Rom space they had actually established a better brand than Britannica. The strength of your brand in one medium doesn’t necessarily translate into another. It gives you an initial advantage, but if you don’t act on it quickly you get associated with the old world and aren’t necessarily seen as part of the new one.

Q: Few could predict the browser explosion; yet the bookshops are well aware of Amazon’s success and they are still not trying to compete. Why?

It may well be too late for those players to get in with the same model. It would be a copycat strategy that would miss the jump. The question is whether they can pursue another strategy that is not necessarily about selling books online, for example, becoming a retail hub. I personally think that most of those companies will have trouble adapting their current business models.

Q: Is the average CEO equipped to think about digital strategies?

They have little choice. The corporate board of directors is going to ask the chief executive what his digital strategy is. That may not be the exact phrase used but they’re certainly asking a series of question: how are you going to move into those new marketspaces? Who are your next competitors going to be and how are you going to defend yourselves against them? How will you get some of this internet valuation that everyone else seems to be getting but us? Because now it is becoming a matter not only of market share but of market value.

It’s very challenging for these executives because we’re at a time where some of the fundamental assumptions that they make may lead them into failure. They have to look beyond their existing customer base and figure new formulations of customer segments. A few years ago chief executives might have said: I’ve talked to our biggest customers and they tell me they don’t care about the Internet. So why should I care? But when those customers cease to exist, the company will have nowhere else to go.

Q: How can they create the right conditions for their companies -- conditions in which innovation can flourish?

I think innovation demands two things from management. It often means investing in something other than what you are currently making money in -- many corporations don’t have a way of thinking about investments that allows them to do that rationally. The other aspect is simply avoiding poor management -- being able to get out of your own way.

One of my central design principles would be that one should regard innovation as a portfolio of options, and those options needs to be treated in much the same way that venture capitalists treat companies that they invest in. Companies need to have a rigorously constructed portfolio of opportunities, and they need to understand that what they’re managing are very risky ventures, but this is a good thing, because the more risk there is the more potential upside there is. Recognise, though, that you can’t have a portfolio of one -- you have to have a large number of options, each of which has killer app potential. If one fails, the portfolio as a whole would still have a chance.

That’s the main difference with innovation; the rest of the business revolves around avoiding risk, but when you’re searching for competitive advantage you have to seek out risk. And you need to be able not only to nourish your ventures but kill them too; companies have poor mechanisms for feeding new ventures and almost nonexistent mechanisms for getting rid of them. That’s the challenge that senior executives have to face in order to innovate.

Q: Can media-related businesses do the same things that product- or service-related businesses do in the new economy? Is the web the right place for content specialists?

They have no choice. But they have to figure out what they might get in return, because it’s dangerous to think purely about selling information electronically. In essence, they have to give as much away as possible -- because someone else will anyway. Very few organisations have proprietary information that is unique to them.

Lots of newspapers, for instance, may feel that they have proprietary information. But Yahoo!, the top internet portal, now has a deal where it gets news-feeds directly from Reuters and it gives them away to its users for free. As a rule, it’s not necessarily such a depressing thing -- it forces you to think about what else of value you get back from your content -- such as eyeballs or customer loyalty.

If you are the New York Times, for instance, you get six million registered users that you hope you can sell to advertisers. That said, I don’t think a pure advertising model is enough, but it allows you to develop a community of participants -- what I call a community of value -- that you can lead on to other services they might also want.

Q: Are internet stocks correctly valued?

Some are, I’m just not sure which ones. If you look at these kinds of valuations, they represent not what these companies are, but what they might become -- their option value, not their current value. But it’s clear to me that they are underpinning a new way of doing business on the information networks and some of them will survive it -- which is why, when institutions invest in these companies, they invest in portfolios of them.

Some executives will say: “These companies aren’t making any money, the bubble is going to burst, they will be gone anyway, so what do I care?” There are two responses. First, whether or not these new companies have rational business models, they are forever changing the pricing structure and the expectations of consumers in their businesses.

Let’s say Amazon folds tomorrow. The book-buying customer’s expectations of the kind of service they get, the prices at which they buy and the ways in which they buy are set forever. The rest have to deal with that.

Second, it has to some extent become a self-fulfilling prophecy. These outrageous market caps allow these internet companies to invest in themselves in a way that a traditional company can’t. With a market value of $30bn, Yahoo! can go out and buy the online “community” company Geocities -- it can use its inflated currency to pay for Geocities’ inflated price -- whereas a company like Dow Jones, which owns the Wall Street Journal, with a market capital of $3.5bn, can’t play that game. Yahoo! may be inflated, but it can use that fact. You see a lot of internet companies buying up other internet companies at the moment -- the traditional companies would also love to do it as it’s a quick way of getting into those markets, of acquiring the new technology skills, but they can’t play.

Q: Would a crash in internet stocks threaten the continued generation of killer app s?

Moore’s and Metcalfe’s Laws don’t care about market values. If there is a downturn in investment in killer apps all that this creates is a larger gap between technology’s capability and what’s on the market. Someone can always come along and take advantage of it.

Q: How do you stay on top of this field?

You have to get above the noise. Find the underlying trends -- Moore’s Law, Metcalfe’s Law, the theory of transaction costs -- which can explain a lot.

The other thing is that you have to identify who’s actually doing something as opposed to who is making press announcements. I have a good example of noise: take sites that aggregate press releases, such as the Wall Street Journal. If you look at their press release section you can get all the press releases related to a particular company. Take the Amazon section there -- you’ll find a whole lot of press releases, not by Amazon, but by other companies, about how they’ve created a strategic alliance with Amazon through the Amazon Associates programme. This actually means that they’ve been on the Amazon web site and filled out a form and are now one of 400,000 associates.

The point is to get through the chatter. It is an issue of personal responsibility on the part of chief executives; they have to be able to ask not only the initial questions but to understand enough about the marketspace and the technology to ask the crucial further questions and dig into the business issues -- it’s a responsibility about technology that most have not taken before.

 

BOX OUT

Principles of the revolution: Moore’s Law and Metcalfe’s Law

“There are two fundamental drivers for technological development and its entrance into the marketplace: Moore’s Law, which talks about the increase in the power of technology over time, and Metcalfe’s Law which talks about the spread and utility of networks. Gordon Moore, the founder of Intel, predicted that microprocessors would double in power every 18 months and this has proved correct for the past 35 years. Robert Metcalfe, founder of 3Com, observed that new technologies are only valuable if many people use them, and proposed that the utility of a network is proportional to the square of the number of its users. When the number of users reaches a critical point, its utility becomes irresistible for other potential users.

“Moore’s Law makes the information economy possible, but Metcalfe’s Law makes it profitable. The connections established by the networks really creates the opportunities for e-commerce applications. And, in reverse, the spread of the network and the creation of the information economy drives Moore’s Law because they create the economic incentive for the continual advancement of technology.

“Every time someone foretells the demise of Moore’s Law another solution is found that enables it to continue. It is less a law than a sociological phenomenon, in the sense that an entire industry is now established around prolonging it. There was a point when Gordon Moore himself said it would end, not because of the physics involved, but because of the costs of fabrication; the billions of dollars it costs to build the plants. He has since retracted that because engineers have become very smart about using the last generation of technology to fabricate the next generation of chips. Most experts have worked out roughly how the next five or six cycles of microprocessor advances will happen; which gives us the same rate of change in processing power for around the next 10 years.”