CANNIBALIZATION



Cannibalization is a phenomenon that results when a firm develops a new product or service that steals business or market share from one or more of its existing products and services. Thus one product may take sales from another offering in a product line. Although the idea of cannibalization may seem primarily negative, it also has some positive implications. In the evolving world of E-commerce, some companies are intentionally choosing to cannibalize their retail sales through bargain-priced online offerings.

POSITIVE AND NEGATIVE ASPECTS OF CANNIBALIZATION

Having a new product take sales away from an existing product is not usually an attractive situation for a firm. Clorox, for example, saw sales of their bleach products suffer when they introduced laundry detergents with bleach as an added ingredient. A new Subway sandwich franchise can cannibalize sales from another franchise just two miles down the street. Other examples of the power of new products to harm companies or even entire industries are everywhere.

In this case of cannibalization, a firm will need to reduce the benefit calculated for a new product by the amount of the existing product benefit lost. However, firms need to recognize that cannibalization is not always avoidable. After all, competing companies might have entered the market with a similar product and taken these sales anyway, even if the new product had not been introduced. Cannibalization can even occur before a new product is introduced. In fact, some experts claim that a pre-announcement for a new product can cannibalize the sales of an old product in a prior period.

While cannibalization may seem to be very negative, several researchers have found that truly innovative firms are sometimes willing to sacrifice or cannibalize their prior investments. In fact, this may be a type of growth strategy. Professors Chandy and Tellis state that as digital-imaging technology replaces film cameras, Kodak could lose billions of investment dollars in their film-based technologies—including plants and photo development processes. If firms like Kodak try to preserve the value of their investments, they can risk making themselves obsolete. The best strategy is to embrace the new technology and make new products like digital cameras.

Some experts argue that organizations should encourage cannibalization. By encouraging competition among their stand-alone business units, companies could create a climate in which risk taking and new ideas were both rewarded and valued. Having a future market focus and abandoning an old product as soon as a new one comes along can benefit overall profits.

Some firms currently encourage the act of cannibalization and forced obsolescence. According to business writer Jerry Useem in an article for Fortune , Jack Welch refers to General Electric's Internet business units as "destroy-your-business.com," while Andy Grove talks about a "valley of death," and Harvard Business School's Dr. Christensen calls the concept "survival by suicide."

CANNIBALIZATION AND THE E-ECONOMY

Changes in Internet upstarts are threatening to overturn successful technologies and business models of the past. Remaining competitive in this rapidly evolving business environment may mean destroying the value of past investments—factories, relationships within a supply chain, or commitments to a certain way of doing things. It may mean actively working to depress share price and profitability, even if these actions may go against a manager's training or beliefs.

The Internet is making cannibalization a common phenomenon. As an example, Pet Smart, like Barnes and Noble and Toys 'R' Us before, launched an online venture as a separate company. With this launch, they cannibalized sales at their brick and mortar stores, in some cases pricing online goods lower than those in their stores. Other retailers are following similar strategies with Web-based versions of their retail stores. Bank One launched a completely virtual bank, Wingspan Bank.com, with more attractive rates than Bank One. Changes in financial measures are necessary to embrace cannibalization. In fact, return on investment measures may not be appropriate in the new economy.

In the trend toward intentional cannibalization, entrepreneurial companies often prevail through excellent innovation. Small firms are seen as quick and nimble and better able to take the risks necessary to develop radically new product and service innovations. In the future, they may surpass the larger firms with greater research and development capacities and financial resources.

FURTHER READING:

Chandy, Rajesh, and Gerard Tellis. "Organizing for Radical Product Innovation." Journal of Marketing Research. November 1998.

"New Products: Growth or Cannibalization?" Beverage Industry. March 1999.

Useem, Jerry. "Fine Young Cannibal." Fortune. September 6,1999.



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