Unleashing the Killer App by Larry Downes and Chunka
Mui
In Unleashing
the Killer App, Downes and Mui provide a primer on strategy in the digital
age. They call the most desirable
manifestation of a good digital strategy a Killer App – “a new good or service
that establishes an entirely new category and, by being first, dominates
it.” In addition to spelling out the
twelve principles of Killer App design, the book describes how the new economic
laws (i.e., Moore’s law and Metcalf’s law) reshape the way businesses “do”
strategy. The rest of this article will
focus on two implications that the new economy, as described by Downes and Mui,
has on strategy formulation.
Historically,
corporate strategy has come out of a linear “planning” process. Corporate strategy departments evaluate
industries or markets by holding them up to the light of Porter’s Five
Forces. With markets selected, they
decided between options to buy or to build.
The option with the highest NPV is launched as a new project. The process is analytical, deliberate, and
discrete.
In
the digital economy, that linear planning process no longer works. It is being replaced by a dynamic buzz of
activity that relies more on intuition than analysis and more on managers than
on a corporate strategy department.
“Digital strategy,” as Downes and Mui call this new activity, requires
creativity, adaptability, and a willingness to jettison the old process
orientation.
In
the new digital economy, corporate strategists must also change the way they
evaluate strategic alternatives. The
rapid pace of change makes the value of projects more uncertain and flexibility
more important. Corporate strategists
must, therefore, manage risk and capture the value of flexibility – a
single-point NPV estimate will no longer do.
Downes and Mui talk about this new mindset as “managing innovation as a
portfolio of real options.”
A
portfolio mindset means placing many bets instead of one bet. Just as a mutual fund manager spreads his
investment risk with bets on multiple securities, so also a corporate
strategist must spread a company’s future business risk across several
different strategic bets. Doing so
increases the likelihood that a company will have one or more value-creating
alternatives available as technology alters the business landscape.
An
option mindset means looking for opportunities that provide “rights but not
obligations.” Alternatives that give a
company access to a developing or yet-to-develop markets without obligating it
to a large investment have option value.
Staged investments, minority equity stakes, alliances, and joint
ventures are strategic alternatives that are often based on option value. Firms need to think about strategic
alternatives in these terms if they plan on excelling in digital world.