JULY 8, 2018

CANNIBALIZATION IN PRODUCT
MANAGEMENT
THE BASICS, IDENTIFICATION, RISKS AND BENEFITS OF A CANNIBAL
PRODUCT

BY GROUP 17
ARPIT AGGARWAL (17P075), AMRITHA SRIDHAR (17P067), CHIRAG PAWAR (17P094), AYUSHI AGARWAL
(17P078), SOHAM SAHA (17P111), SWARBHANU BOSE (17P113)
1 ABSTRACT & ACKNOWLEDGEMENT
We have worked on this report under the guidance of Prof. Jaydeep Mukherjee as a part of our
curriculum in his Product Management course at Management Development Institute, Gurgaon. We
thank him for his guidance and support for the same.

In this report, we explored cannibalization concept theoretically by going through academic articles
and referring to some journalistic articles for data. We have explained cannibalization in the world of
marketing, why is it scary and how it presents an opportunity to manasgers. Then we explore how a
manager can identify a potential cannibal early on in the development stage and explain why a
cannibal launched without a strategic plan can hurt a company. Then we explore how launching a
cannibal can be beneficial, how some companies use it as their innovation strategy and how self-
cannibalization can be used for streamlining product portfolios.
2 CANNIBALIZATION – THE BASICS
In marketing, cannibalization refers to reduction in sales volume, sales revenue, or market share of a
premium product due to introduction of a new product by the same company. When this is not done
intentionally, it can hurt a company’s profitability.

Let’s understand this phenomenon with an example. Jaguar Landrover announced a new model –
Jaguar XE in 2015, with prices starting from around Rs 36lacs. This price point is substantially lower
than company’s previous offerings – XJ (starting around Rs 1 cr) and XF (starting around Rs 50 lacs).
The concern with this new launch was that XE might eat away XF’s sales, thereby reducing
company’s profitability. Another concern is of brand equity getting diluted with a less premium
offering.

To illustrate this phenomenon and to understand why companies might do it intentionally, we can
refer to the chart below. A’s product held 36% share initially and company decided to introduce a
Product 2 in their portfolio. Product 2 took away 12% points share from A’s Product 1, thus
cannibalising market share thereof. But at a corporate level, it also managed to add 17% market
share through it own sales, thereby increasing total market share to 41%. This can be achieved by
tapping into competitor’s market share. This may still mean that Product 2 might end up hurting the
profitability of the company.

Sales Sales

36% 41%

A's Product A's Product 2 B's Product

A's Product B's Product C's Product D's Product C's Product D's Product

We can also understand why cannibalization can help even when profitability is a concern. If a
company’s product X sold 100 units at Rs 10 with profit margin of 10%, Revenue of the company will
be Rs 1000 and Net Income be Rs 100. If suppose the company now introduces Product Y which
cannibalizes sales of Product X by 20 units while selling an overall 50 units at Rs 9 with 8% profit
margin. Product X will now yield Rs 800 revenue and Rs 80 net income while Y will add Rs 450
revenue and Rs 36 net income. So even though X struggled, overall revenue rose to Rs 1250 and
overall net income of Rs 116. The profit margin went down for the firm but overall profits increased
due to an offsetting rise in scale.

This is a positive scenario in terms of numbers, but if the second product fails to expand the market
enough, or capture competitor’s market sufficiently, it can lead to reduction in profits with same
scale of business.
3 IDENTIFYING A CANNIBAL
Before venturing into how a manager can identify a potential cannibal, we should first understand
what can happen if a new product launch is not analysed as a cannibal. We looked at Kodak’s case
and the dilemma to launch Funtime. In 1994, Kodak went ahead with the launch only to plough it
back latter as it had cannibalized their premium offerings. But that in itself was only a part of the
problem. Kodak had spent considerable amount in R&D and Market Research to launch Funtime,
which they could have spent on other growing technologies like digital cameras. The cannibal not
only took away share from their existing product, but it also hampered investment in truly
innovative ideas. [1]

So we can recognize the following threats if a product is launched without being detected as a
cannibal:

 Reduction in bottom line and sometimes even top line

 Dilution of brand equity
 Reduction in market share
 Hogging funds which could be better used for other innovations [1]

Knowing these threat, a manager needs to be cautious about new product development. Kantor
Worldpanel predicted 75% of growth in the second decade of this century will be because of NPD in
2013. [2] This calls for a cohesive system in place to identify a potential cannibal in early stages of
development.

Unfortunately, the traditional innovation process doesn’t just ignore cannibalisation — it can
actively favor cannibal products over ideas that would grow a market or a company’s share of it.
Concept screening, the process of assessing which ideas have the greatest potential, tends to focus
on the total trial they would achieve. Judged by these rules, concepts that involve launching a
variation of an existing brand tend to do very well, since shoppers respond to a brand they already
know. This is why supermarket shelves are often filled with variants of established products. The
problem is escalated if new product launches are evaluated for their return on investment and the
most common metric is sales volume [1] . Sales volume doesn’t factor in the source of the numbers
and if the sales come from lost sales of other products, the RoI of the new product can be wildly
overvalued.

So knowing all this, what can a manager do to mitigate these risks?

Incremental Analyze Finding

Value Individuals Right Idea
1. Demand to know incremental volume
Your company doesn’t need a new product to deliver a lot of sales — what you need is for that new
product to deliver profitable growth. Incremental volume is the only true measure of growth
potential. Yet traditional approaches to innovation only address this towards the end of the process,
through “share of requirements” analysis that gives an average view of how the new product will
affect consumers’ existing spend in the category.

2. Analyze individuals, not averages

In order to estimate incremental volume with some accuracy, businesses need to use some form of
individual-based modelling techniques that take into account the individual spending patterns of
each person who will buy the new product, instead of drawing general assumptions from average
numbers. As a simple example, the impact of somebody who buys an existing product on a weekly
basis and switches about half of their purchases to a new product is far greater than a shopper who
buys an existing product only monthly, but ditches it entirely in favor of the new product.

3. Invest in finding the right ideas, not just developing the ideas you have
Innovation needs to be guided by an integrated understanding of customer needs, the competitive
landscape, and a tried-and-tested approach, identifying the area where a winning concept is likely to
be found and exploring that area with creativity and imagination.

Using these, a manager can better understand cannibalising properties of a product at an early
stage. From here on, we recommend that one should know the risk – that doesn’t mean the new
product should not be developed. There are examples of successful cannibals which served strategic
purposes. For example, Apple’s iPad Mini serves an important position in market for Apple as it
stands against small cheaper offerings like Amazon Kindle Fire, a small and cheap Google-free
Android Tablet.
4 TO CANNIBALIZE OR NOT TO CANNIBALIZE
As a manager, you are not going to dismiss new ideas just because they are cannibals. When used
correctly, such products can improve the growth potential of a company. It will be a mistake to not
launch a cannibal just because it is one. A manager should learn how he can use such products for
sustainable growth. You wouldn’t want to be the manager at a tech-firm in 1980s who looked at
laptops and said – “They won’t sell; we are not going to lose our PC business for this”. Or a manager
in beverage industry who said – “We won’t risk losing sales on our carbonated drinks to launch
healthier options”. [3]

To understand the consequences of not letting the right cannibal out can be serious. Look at Nokia,
now a part of HMD and previously owned by Microsoft. The company held 49.3% market share in
smartphone space leading with their Symbian OS in 2007. Then the numbers kept falling down in
subsequent years - it was 43.7%, then 41.1%, then 34.2%. Apple and Google had launched mobile
operating systems superior to Symbian OS in every way, but the company was reluctant to hope on
the Android bus and tried to compete with their OS. The company known to have done the
smartphone right, failed to cannibalize what they already have to keep up innovative work. [4]

Then there are many examples where launching a cannibal meant a sound growth strategy. Tencent
from China had an online social platform called QQ which they completely cannibalized with a new
platform called WeChat (which had achieved 500m active users last year, and was amongst the most
profitable chat app on Android). [5] Apple’s iPhone completely cannibalized iPod Touch and
dramatically reduced the need for Macbook line of products for an average consumer.

So we know the risks of launching a cannibal and we know the risks of not launching one. We can
also identify a cannibal in early stages of NPD. The next step is to learn if the product at hand is
worth the risks. To evaluate that, a manager should focus on the following points: [6]
1. Can the threat be turned into an opportunity?
The best use of a new product is if it manages to capture a market previously not captured. The
easiest way is to find the consumer who is not consuming because current offering is too
complicated or too expensive. A simpler but expensive solution, or a cheaper solution will take
away some sales but it will bring in the portfolio to a lower tier in the consumer pyramid.
Apple’s iPad was speculated to be a bad move by analysts, but it more than offset the sales it ate
away from Macbooks, but Tim Cook claimed that a 10$ Billion of revenue from 15 million units
sold was a good move for the company.

10 A bigger untapped
market segment
100

1000

2. Is the product legitimately different?

You can always offer something cheaper with lower quality, or even same quality, but that is the
starting point of a price war. A product manager, when handling a brand, needs to remember
that his job is to delight the consumer, not dilute the brand. This is P&G’s mantra. The company
recently launched Tide Natural in India which was uniquely suited for the changing demands of
the consumer. P&G Asia President Deb Henretta also noted how you have to make sure you
have a go-to market and marketing approach that’s appropriately different. If you use the same
marketing vehicles and distribution arms, it’s hard to bring new benefits to different customers.
3. If you don’t cannibalize, someone else will eat you away
No matter how good you are, there is always someone who can do it better than you. In the
world of free markets, this simple statement creates a lot of problems as companies realise that
if they don’t launch new offerings regularly, someone else will. And sooner or later someone
else will be able to take away the market you have captured. Cannibalization, then, is not a
matter of if, but when. Are you ready at this point to risk cannibalization in order to hasten
growth?

Looking for strong logically and analytically backed answers for these questions will help a manager
make a decision.
5 CANNIBALIZATION AS AN INNOVATION STRATEGY
Today, the funding model of Silicon Valley is believed to dethrone giant corporates around the globe.
In 2009, a total of 4 unicorns (start-ups with a valuation of over $1 billion) were born. In 2015, that
number had reached 1 per week. [7]

In such an environment, companies have to always be ready for the next dent in their market share
from a new-comer. To tackle this, companies have come up with an approach of self-cannibalization.
It stems out of basic acceptance that if a company doesn’t cannibalize their offering, someone else
will. Companies like Amazon, Google, Facebook and Apple have managed to fend off any attacks
from a new comer, all because they embrace the simple approach of self-cannibalization. [8]

Embracing this approach isn’t easy – it doesn’t always seem natural to talk about how to replace
profitable businesses. But theory dictates four rules which can help managers of all walks of an
organization instill the principle in their day-to-day work, especially considering how many managers
have vested interests in particular business lines and brands, in order to make a self-cannibalization
strategy successful in the long run.

Rule #1: Get into the habit of building business units which compete with the old

Steve Jobs was a strong believer of self-cannibalization. He would regularly invest heavily on the next
big thing while his current star products were still growing at a healthy pace. In 2005, when the
demand for the iPod Mini remained huge, the Nano was launched, effectively destroying the
revenue stream of an existing product. And while iPod sales were still going through the roof, Jobs
launched the iPhone which combined iPod, cell phone, and Internet access into a single device.
Three years after the iPhone’s launch, the iPad made its debut despite the risk that it might one day
cut into Mac desktop computer sales.

Another example can be Tencent’s play with WeChat that we have already discussed above.
Companies like Microsoft, Amazon and Google have also followed similar approach.

Rule #2: Find a balance between derivative products, platform upgrades, and breakthrough
innovation

Self-cannibalization can mean both replacing existing products and platforms with incrementally
better ones and replacing them with something completely different. Most companies find the latter
more challenging, but the best companies pursue both. [9]

One example of a company successfully implementing this from the literature is of Recruit Holdings,
a Japanese publishing and classified house found in 1963. They used to publish magazine content
like Cosmo. Since 2000, they have entered into a digitization drive. Instead of merely digitizing their
content, they decided to build derivative products out of their core product. They built multiple web
based platforms managed by independent managers who would develop their own business models.
They were competing with one another and disrupting their respective niche segments.

After some time, it was apparent that this model was not efficient. The need for a common platform
was well recognized across the firm. Doing so did require getting rid of many overlapping offerings,
cut-short a few cash-cow businesses, but the end result was a more cohesive overall product
portfolio.

But the story continues as the company didn’t get lost in the web of upgrades and derivative
products. Instead, their focus remained on ambitious and innovative projects. They have hired a tech
expert from Google to look into future projects related to Big Data and AI. Top management saw AI
as having the potential of redefining Recruit’s corporate mission—the ultimate expression of self-
cannibalization.

Rule #3: Create a bypass mechanism to pitch ideas to the top

A major challenge looking to use self-cannibalization as an innovation strategy is that many times a
business proposal just gets lost in the corporate hierarchy and never reaches the right ears. A system
should be put in place to tackle that.

Recruit has tackled this issue by organising Idea Days where operational managers can present their
ideas directly to senior executives. Naturally, there are stories of managers who pitched an idea to
their senior only to have it rejected, but the same idea was accepted and implemented when
presented to a senior executive on an idea day.

Such by-pass not only enables new ideas to be heard, it encourages a culture of coming up with new
ideas – an essential for self-cannibalization.

Rule #4: Create a corporate goal with a percent of revenue earmarked to new products

Corporates can integrate innovation in their compensation structure by rewarding innovation. 3M

famously does it with bonus given for managers who manager to get 30% of their revenues from a
product launched in last 4 years. Tencent and Recruit also followed similar metrics and tracked
performance based on this to reward innovation.

This effectively allows Rule #1 to be implemented with relative ease because a culture which
encourages new products is more likely to encourage self-cannibalization.

A major advantage that large companies enjoy is their capacity to use knowledge on previous
capabilities in order to integrate and reconfigure their current offerings and services. Contrary to
this, although start-ups seem to move fast, they lack the backing of experiences. However, what the
big companies lack is the potential to materialize the next growth engine when they still have time.
Therefore, companies now look at cannibalization as an innovative strategy. It is now regarded as an
essential move to drive efficiency in a diversified firm.
6 SELF-CANNIBALIZATION TO DRIVE EFFICIENCY
An unwritten chapter remains in marketing relating to brand killing. A manager at P&G famously
made an argument that the company should move to a brand-based management system. Only then
would each of its brands have a dedicated budget and managerial team and a fair shot at success in
the marketplace. He defined how a brand based management can work, but he didn’t complete the
story – he didn’t define what a company should do with loss making brands. [9]

Companies are investing time and money towards launching new brands, working on existing ones
and even acquiring rival brands. In order to cater to the increasing number of segments, now there
are sub-brands, line extensions, brand extensions and even channel extensions. What most
businesses don’t do is review their portfolio to check if they might be selling too many brands, spot
the weak ones and kill the unprofitable ones. These non-profitable brands are entirely ignored
without any strategic action taken on them. These has resulted in product portfolios full of lose
making or marginally profitable brands with very few stars.

Diageo sold 35 brands of liquor in 170 countries in 1999, amongst which only 8 brands accounted for
more than 50% of their revenue and 70% of their profits. Nestle marketed more than 8,000 in 190
countries in 1996. Approximately 55 of these were global brands, about 140 were regional ones and
the rest were local brands. Around 200 brands or 2.5% of the brand portfolio contributed the most
to the profits of the company. Procter & Gamble had 250 brands which were sold in over 160
countries. However, its ten biggest brands - including Pampers diapers, Tide detergent, and Bounty
paper products— made up 50% of the company’s sales, more than 50 % of its profits and 66% of its
sales growth between 1992 and 2002. Similarly, more than 90% of Unilever’s profits came from only
400 brands out of its portfolio of 1600 brands. Most of the other 1200 brands were loss making or at
the very best, made marginal profits.

The literature contains various methods to kill a brand like merging brands, selling brands,
liquidating brands etc. and launching a cannibal to take away market from multiple brands at once is
another strategic method suggested, albeit not the first one.

As a top level manager, you might have to face a situation where streamlining your portfolio can
dramatically increase profits. In such situations, cannibalization has to be an option under
consideration.
7 REFERENCES
[1] “Beware the cannibal in your product line”, HBR.org, June 2013,
https://hbr.org/2013/06/beware-the-cannibal-in-your-pr

[2] “Necessity is the mother of innovation”, MarketingMag, February 2013,

https://www.marketingmag.com.au/hubs-c/necessity-is-the-mother-of-innovation/

[3] “The logic of product-line extensions”, HBR.org, December 1994, https://hbr.org/1994/11/the-

logic-of-product-line-extensions

[4] “Explanations of Success and Failure in Management Learning: What Can We Learn From Nokia's
Rise and Fall?”, Academy of Management, March 2016,
http://web.a.ebscohost.com/ehost/detail/detail?vid=0&sid=d33312ec-a286-49fc-9723-
62383da997d6%40sessionmgr4007&bdata=JnNpdGU9ZWhvc3QtbGl2ZQ%3d%3d#AN=113894943&
db=bth

[5] (Journalistic) “No one knows how much money WeChat is making”, Quartz, August 2017,
https://qz.com/1053838/no-one-knows-how-much-money-wechat-is-making-and-bullish-tencent-
hkg-0700-investors-dont-seem-to-care/

[6] “Combating Cannibalization Concerns”, HBR.org, February 2011,

https://hbr.org/2011/02/combating-cannibalization-conc

[7] (Journalistic) “A billion dollar tech unicorn is born every week”, Business Insider, August 2015,
https://www.businessinsider.in/A-billion-dollar-tech-unicorn-was-born-every-week-this-year-but-
winter-is-coming/articleshow/48621060.cms

[8] “The best companies aren’t afraid to cannibalize their most profitable business-lines”, HBR.org,
July 2016, https://hbr.org/2016/07/the-best-companies-arent-afraid-to-replace-their-most-
profitable-products

[9] “Kill a brand, keep a customer”, HBR.org, December 2005, https://hbr.org/2003/12/kill-a-brand-

keep-a-customer

[10] “Should you launch a fighter brand”, HBR.org, October 2009, https://hbr.org/2009/10/should-
you-launch-a-fighter-brand

[11] “Don’t get eaten! Understanding and Handling Cannibalization Risk”, GFK-Verein, May 2018,
https://www.gfk-verein.org/en/publications/gfk-marketing-intelligence-review/all-issues/brand-risk-
matters/dont-get-eaten-understanding-and-handling-cannibalization-risk

[12] “Why you should cannibalize your company”, HBR.org, November 2012,
https://hbr.org/2012/11/why-you-should-cannibalize-you