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Minimizing the Effects of Cannibalization on Firms' market share.
Conference Paper · December 2013
DOI: 10.13140/2.1.4799.3924
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2. Technology
Innovation
Management
December
12,
2013
Minimizing the Effects of Cannibalization
on Firms’ market share
Adeleye
Afolabi,
Jawad
Ahmad
Choudary,
and
Reza
Shirazi
“Willingness
to
cannibalize
is
an
attitudinal
trait
of
the
key
decision
makers
of
the
firm,
and
resides
in
the
culture
or
shared
values
and
beliefs
of
the
firm”
-‐
Deshpande
&
Webster
Abstract
The impact of disruptive technological change on established companies is fundamental.
Hence many of the decisions, in large firms, which tend to avoid cannibalization, are
increasingly invalid. The reason why they discourage cannibalization is because a
radical new product not only requires change in existing business model but also, decide
if sequential introduction of products is better or simultaneous introduction should be
adopted. That is why the game-changing products rarely emerge from established
businesses. An important factor that firms normally overlook is that an increase in
market share, due to new product, may not necessarily lead to more profit.
The solution to the above problems directly influences executive managers within large
firms, which serves as an aid to evaluate and determine the threats or opportunities that
cannibalization represents. This article contributes by building on existing theories
proposed by Traylor (1986) and Ulrich & Tung (1991) on cannibalization effects, where
they proposed different outlook of cannibalization but failed to provide the best to adopt
and worst to avoid. Also the article provides an innovation strategy for entrepreneurs to
reduce cannibalization effects in product development. This proposed model would
increase the profitability of a firm, when a new product is being added to the existing
product portfolio.
3. Technology
Innovation
Management
December
12,
2013
Introduction
The definition of cannibalization changes within the context in which it is used.
Heskett (1976) defines cannibalization as ‘the process by which a new product gains
sales by diverting them from an existing product’. Copulsky (1976) sees cannibalization
as “the extent to which one product’s customers are at the expense of other products
offered by the same firm”. This article defines cannibalization, in relation with market
share, seen to take away a product’s market with the introduction of a new or similar
product. Few studies have also explained in context with this article to state ignoring the
effects of cannibalization on market share may have adverse consequences on the
financial performance of a company (Chen & Yu, 2001). Since products with similar
attributes compete with each other, which is the underlying premise in all forms of
cannibalization. The need to investigate cannibalization effect on market share remains
a fundamental perspective to decision making in organizations.
Problems with cannibalization
Cannibalization is perceived as a problem to many venture capitalists as it may
bring reduction in profit and also steals away sales of an existing product, as a result of
introducing a new product. What seems at first to be a successful new product can
easily turn into the wrong kind of success when total market share and value is lost. For
example, when Amazon introduced kindle to compete alongside printed books or when
Apple introduced the quality-rich iPhone and iPods that took off sales for its lower-end
iPods, including the Shuffle and Nano series. The introduction of these new products
has a major impact on the existing products, which can be termed as „cannibalization‟.
Gaps in previous research
Decision makers in organizations often ignore or neglect the effects of
cannibalization as they:
• face strong competitive pressure to introduce new products,
• focus on calculating the change in product price while trying to minimize cost or,
• are too busy trying to forecast the product demand.
And this often results to depreciation such as:
• too many market segments that demands similar product quality or user needs
and,
4. Technology
Innovation
Management
December
12,
2013
• damaging promotional attempts seen in a sales representative overemphasis on
new products and abandoning of existing products.
Here, the effect of cannibalization on a market share can be considered from two
different perspectives, mainly; Intra–product cannibalization, and Inter-product
cannibalization. Intra-product cannibalization can be observed between products that are
classified in different product groups, look physically different, but offers similar
functionalities. While Inter-product cannibalization is seen when different products within
the same product group in a firm competes against each other for market niche. Past
literatures on cannibalization have failed to verify if the cannibalized product results in
increase or decrease of overall market share of the company. Also, they have failed to
study the effects of cannibalization in two distinct areas: within an enterprise (internal
environment), and outside an enterprise (external environment), to determine the
strength, weakness, opportunity, and threat (SWOT analysis1
) that a product presents.
The effect on these two distinct areas can only be measured based on the strategies
that the enterprise uses to introduce a new product.
This article devises a four-step model based on the framework proposed by
Srinivasan et al. (2005), and Ulrich & Tung (1991). The model assesses the different
pattern of product cannibalization in a firm, thus helping the firm to determine the threat
or opportunity that cannibalization presents.
Literature
Review
Radical innovations have the capacity to destroy fortunes of existing firms. Once
the skill sets and accumulated experience lead the firms’ success, later it may cause it to
become uncompetitive against these innovations. The effects of radical innovation on an
established firm’s market share and profit formula can be large. Despite this, firms see
cannibalization as a threat that ought to be avoided. Johnson et al. (2008) defines the
different segments of business model of large firms, which mainly includes customer
value proposition and profit formula. With these, cannibalization can affect both business
segments of the firm. According to Johnson et al. (2008), established companies do not
succeed in offering radically new product, unless they understand exactly how the new
opportunity is related to their current business model and what changes needed to be
made in order to adopt the new product. Also, Moorthy & Png (1992) sees
5. Technology
Innovation
Management
December
12,
2013
cannibalization from a different perspective and relates its phenomena with timing by
stating that sequential introduction is less attractive as compared to simultaneous
introduction of products. Also, Moorthy (1992) emphasized that the time of introduction
of a new product plays a vital role in its success or failure.
Proactive decision making for managers of established firms plays a game-
changing role for firms. Cravens et al. (2002) provided an executive frame work to
evaluate the drivers of successful innovations in developing their strategies. Anticipating
the changes, leveraging the existing capabilities and the innovation challenges are some
important attributes that Cravens et al. (2002) defined amongst many others. Srinivasan
et al. (2005) aims to divert some attention and stated that considerations should also be
made related to the cost of manufacturing the product and other expenses in order to
find out if the new product would increase the total profit, since increase in market share
may not necessarily lead to more profit. Their framework is less focused on a proactive
decision making model for the executive managers to determine if cannibalization
presents threats or opportunity for the firm, as they do not suggest any innovative
strategy for entrepreneurs in large firms to reduce the effects of cannibalization in
product development.
Contribution
In order to decide when and how to introduce a new product to increase your
total market share, it is important to identify the different categories that the introduction
falls into, and which model is best to adopt, to introduce the product. To reduce the
negative impacts of cannibalization is dependent on the four strategies through which a
firm introduces a new product to an existing line of product in a market. These strategies
are illustrated in the figures below:
Product - A Product - B (competitors)
The new product
cannibalizing the existing
product portfolio, but has no
effect on competitors product or
total market share
Product - C (new)
Figure 1
6. Technology
Innovation
Management
December
12,
2013
Product - A Product - B (competitors)
Product - C (new)
Figure 2
Product - A Product - B (competitors)
Product - C (new)
Figure 3
Product - A Product - B (competitors)
Product - C (new)
Figure 4
Building innovation and introducing new products are required for enterprises
that wants to be prominent in a market, and also for their survival. Several products are
introduced daily, despite the fact that most of them are extensions or upgrades to
existing products. With this, we can assume that cannibalism is common. The motivation
to cannibalize increases product innovation, which means that the cannibalization of
existing products may be an attractive strategy that promotes transformation, new
product introductions and also play a key role to a firm’s long term success in the
competitive market.
The new product increases the
overall market share and
cannibalizes both the product
portfolio and the competition
e ro c i crea e e o al
ar e are oe o a ec
exi i g ro c
T e e ro c i crea e e
overall ar e are a
ca i alize o ly e
co e i or ro c
7. Technology
Innovation
Management
December
12,
2013
Conclusion
This study was motivated by the pervasive belief in diminishing wears and tears
of cannibalization in firms to help managers and entrepreneurs in adopting new
products. What really causes some firms to be radically innovative over long periods of
time, whereas many others ossify and perish. The answer lies in the extent to which the
firms are prepared to give up the old and embrace the new product. Nevertheless,
entrepreneurs need to realize that cannibalization is not always avoidable. Nowadays,
many firms have experienced the need to offer more productivity because of increased
competition and more demanding customers. This article stresses the importance of
increase or decrease in market share value of the company, due to the diminished value
of an old product.
Cannibalization clearly is a difficult and painful thing to do. It requires firms to
swim against the tide of organizational inertia. This article focused on its effect on market
share value, but it also has an effect on the other aspects of the company, including the
organizational structure and personnel management within a firm, which requires further
research. Here, radical innovation might not be limited to small firms or startups. Firms of
any size could play this game, if they know the best time to adopt or avoid
cannibalization.
References
Copulsky, W. 1976. Cannibalism in the Marketplace. The Journal of Marketing, 103-
105.
Cravens, D. W., Piercy, N. F., & Low, G. S. 2002. The innovation challenges of proactive
cannibalisation and discontinuous technology. European Business Review,
14(4), 25
Heskett, J. 1976. Marketing, Macmillan Publications, New York, NY.
Johnson, M. W., Christensen, C. M., & Kagermann, H. 2008. Reinventing your business
model. Harvard Business Review, 86(12), 57-68.
Chen, M., & Yu, C. 2001. The marketing of hi-end or low-end versions of a product:
Which should be launched first? International Journal of Management, 18 (4),
459-472.
8. Technology
Innovation
Management
December
12,
2013
McDermott, C. M., & O'Connor, G. C. 2002. Managing radical innovation: An overview of
emergent strategy issues. Journal of Product Innovation Management, 19(6),
424-438.
Moorthy, K., & Png, I. L. 1992. Market segmentation, cannibalization, and the timing of
product introductions. Management Science, 38(3):345-359.
Srinivasan, S. R., Ramakrishnan, S., & Grasman, S. E. 2005. Identifying the effects
cannibalization on the product portfolio. Marketing Intelligence & Planning,
23(4), 359-371.
Traylor, M. B. 1986. Cannibalism in multibrand firms. Journal of Consumer Marketing,
3(2), 69-75.
Ulrich, K.T. & Tung, K. 1991. Fundamentals of Product Modularity. Paper presented at
the ASME Winter Annual Meeting, Atlanta, GA, 73-80.
Footnotes
1
SWOT
analysis
-‐
(alternatively
SWOT
Matrix)
is
a
structured
planning
method
used
to
evaluate
the
Strengths,
Weaknesses,
Opportunities,
and
Threats
involved
in
a
project
or
in
a
business
venture.
A
SWOT
analysis
can
be
carried
out
for
a
product,
place,
industry
or
person
(http://en.wikipedia.org/wiki/SWOT_analysis)
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