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CANNIBALIZATION-PRODUCT STRATEGY

‘Companies don’t want replacement products to kill the profits of


existing products prematurely. Yet they don’t want someone else to
do it either.’

MARKET CANNIBALIZATION is the negative impact of a company's new


product on the sales performance of its existing related products. Thus one
product may take sales from another offering in a product line.

In most cases this doesn’t make much sense unless it’s a defensive move to
protect the product line from a competitor stealing market share because
the current product line is insufficient.

Case1- Coca-Cola

This is best illustrated by the "Cola Wars" - the marketing fight between
Pepsi and Coca-Cola, which lasted most of the 1970s and 1980s. The soft
drink rivalry pushed Coca-Cola Co. to make one of the most famous
marketing blunders in financial history. In the process of creating Diet Coke,
the company's chemists discovered a new formulation for Coke. The new
concoction was sweeter and smoother than the century-old formula upon
which Coke had been built. In fact, it was similar to Pepsi - the drink that was
eating away at Coke's domestic market share.

On April 23, 1985, Coca-Cola Co. announced


that New Coke was on its way. Because of a
strong preference for New Coke in consumer
taste tests, Coca-Cola decided to pull the old
Coke formula from the shelves. Essentially, the
company was throwing away a century of
branding by favoring the new, relatively
unknown formula over the one that consumers
had grown up with. For Coca-Cola executives,
this made sense. Much like with software
companies that pull old versions from the
shelf when a new one is released, they didn't want their old product line to
keep consumers from buying their new one. Unfortunately, this bold move
backfired horribly.

Consumers rebelled and flooded Coca-Cola with angry letters and phone
calls. Coke's stock and market share took multiple hits and Pepsi even
proclaimed victory in the Cola Wars now that Coca-Cola had copied its taste.
The influx of complaints led to a "We've heard you" marketing reverse. On
July 11, 1985, mere months after its sudden exit, the old formula was re-
introduced with "Classic" added to the title - probably better than "Old
Coke". Coca-Cola Classic quickly ate up the sales of New Coke in a textbook
case of market cannibalization

3 TYPES OF PRODUCT CANNIBALIZATION:

Cannibalization is a key consideration in product portfolio analysis.

 Multi-product pack cannibalization – multiple products are marketed as


one but could also be sold separately. The total price for the product pack
is usually lower than the sum of the prices of the individual items, and
thus, the pack will be bought rather than the separate items. The
company receives lower revenues compared to a situation then all
product items are sold separately. Although some product cannibalization
may occur (the sales of the individual items may decrease), combining
different goods and/or services in a package stimulates the total sales of
all products included in it.

 Intra-product cannibalization occurs as a result of a competition between


different products with same or similar functional characteristics and
same target market.

Case2- Ponds

Pond’s Cold Cream’s comfortable position was suddenly challenged by a


brand from another product class altogether of HUL. The first appearance of
Lakme’s Winter Care Lotion ad came as a rude shock- being described as a
‘greasy cold cream’ by Lakme, and that Lakme’s Winter Care Lotion was
“cold cream + moisturizer in one” and was “so much more than cold cream”.
 Inter-product cannibalization happens within the same product line. When
the products are essentially the same in content, quality standard,
duration, price range and form one product line in a company’s portfolio.
The competition between these products can cause cannibalization within
the product line. In general such inter-product cannibalization is desirable,
because it increases the customer choice and the probability that the
seller will offer a product that suits customer’s needs.

Companies shrink in righteous horror from the very concept of devouring


others of their own kind. Product development, leads to drop in sales of one
product, resulting from a competition of a substitute product, offered by the
same company. Furthermore, these same products will compete not only for
customers’ money, but also for managers’ and agents’ attention, sales force
time, company’s resources, shelf space, customers’ attention and memory.
Therefore, product development strategy can lead to a series of
cannibalization traps. The general idea behind cannibalization is that the
marketing strategy of the company in launching new products, allocation of
resources, selection of distribution channels, or similar, can cause a decrease
in sales and profits as a result of the expected or unexpected self-
competition.

There’s good cannibalization and bad cannibalization, however the latter


takes place when companies inadvertently consume their own profits. Very
few companies understand the basic concepts of cannibalization.
Cannibalization really occurs only when there is not an orderly or profitable
transition. The replacement product kills the original product before its time.
Companies make their strategic mistakes in not understanding when
cannibalization should be avoided and when it’s appropriate. Cannibalization
can reduce profits when the original product is still successful at the time the
replacement product is launched and hence sales and profits start declining
as sales are transferred to the replacement product

FIG 1. When replacement products are introduced too early, they can hurt
overall sales and cannibalize profits.
Market cannibalization typically benefits the attacker rather than the
defender, since the attacker has nothing to lose.

CAUSES OF UNFAVOURABLE CANNIBALIZATION:

1. New product will contribute lower profits- a new product could


generate lower profit contribution than the product it cannibalizes.
2. New product would require significant retooling- when the product
requires a different manufacturing process. Profit is lower because of
the investment in that process and because of write-offs associated
with closing or retooling current manufacturing plants.
3. New product has greater technical risks- the new product may be
profitable, but it may introduce much higher risks. In this case a
company can cannibalize its position in the market with a failed
product.

CANNIBALIZATION STRATEGIES:

The cannibalization on company level is usually analyzed in relation with


product or technology innovations which make existing products or
technologies uncompetitive and obsolete. Companies can adopt offensive or
defensive cannibalization strategies which they can use in different stages of
product’s life cycle.
 Cannibalize the market to attack the market leader:

Cannibalizing an existing market is a successful strategy for attacking an


entrenched market leader. The attacker erodes the position of the dominant
company, although the attacker cannibalizes its own products in the process.
The attacker hopes to compensate for its loss with increased market share in
the redefined market.

Case3- Sega enterprises-Nintendo:

Sega enterprises’ attack on Nintendo’s dominance of the $3.5 billion


American video game market included a
strategy to cannibalize its own video game
software with a new form of software
distribution. In ’93 Sega formed a joint venture
with Time Warner entertainment to offer Sega’s
video games through cable TV networks. The JV’s Sega channel provided
Sega’s video games for a monthly fee of $20. This strategy could have
significantly cannibalized Sega’s own game software revenue, since Sega
would receive a much lower license fee for software distributed through
cable. However as a the market attacker Sega sought to increase its overall
market share in both game players and software by redefining the market To
be successful, it would need higher volume to offset lower profit per unit.

 Defensive cannibalization strategy:

For market leaders/ defenders, controlled cannibalization may be a


necessary strategy to repel attackers. ‘Cannibalize yourself before
competitors do’. Self cannibalization may be necessary as a defensive
strategy to keep an attacking competitor from being successful. With this
strategy a company chooses to cannibalize its own products rather than let a
competitor do so. Cannibalize your own business before someone else does.
Changes and innovations are happening so fast and globally that they're
striking, not at the margins of the profits and the outputs of the existing
firms, but at their foundations and their very lives.

Case4- Borders

In 1997, Borders, the dominant


bookseller in the United States, refused
to sell books online because its leadership feared cannibalizing store sales
for cheaper, online sales. Eleven years later, Borders was cannibalized, but
not by its online sales; Borders market share was swallowed by
Amazon.com.

Case5- Le-Sancy

Lux’s market standing was being threatened by the


soon to be launched Camay from the house of Godrej
to be marketed by P&G. HUL then launched Le-
Sancy to counter Camay’s attack.

INNOVATION AND CANNIBALIZATION:

The effects of radical product innovations are not uniformly positive or


straightforward. Such innovations have the potential for three important
effects as they relate to existing markets: a) market expansion b)
cannibalization and c) destabilization.

In such a case of cannibalization the element is sales cannibalization,


whereby innovations take away sales from the firm’s existing products in the
category. Another element is the cannibalization of specialized investments,
whereby innovations reduce the value of investments that are tied to
existing products. Innovating firms have to incorporate the potential for
cannibalization in their decision-making leading up to the introduction of an
innovation. Firms with higher levels of market dependence are most likely to
introduce a radical product innovation if they expect enough market
expansion to compensate for the cannibalization of existing products.

Cannibalization of sales does not have to lead to radical innovation. While


organizations may decide to replace sales from an existing product by sales
from radical innovation, they may also decide to replace them by introducing
incremental product innovations, i.e. innovations that improve, adapt or
extend the currently available product, such as product modifications,
product line extensions or product repositioning.

The risk of cannibalization is a very real threat for many new product
launches and that the risk becomes even more significant if the new product
is launched under the same brand name as an existing product.

WHEN DOES CANNIBALIZATION AFFECT PRODUCT LINE DESIGN?


Products within a product line are partial substitutes, and consumers can self-
select the products they want to purchase, multi-product firms have to
carefully consider the cannibalization problem in designing their product
lines.

If lower-quality products are sufficiently attractive, higher-valuation


consumers may find it beneficial to buy lower-quality products rather than
the higher-quality products targeted to them. That is, lower-quality products
can potentially cannibalize higher-quality products. The cannibalization
problem forces the firm to provide only the highest-valuation segment with
its preferred (efficient) quality. All other segments get qualities lower than
their preferred (efficient) qualities. When the cannibalization problem is very
severe, the firm may not serve some of the lowest-valuation segments.

Cannibalization is not always bad, deliberate cannibalization can be a key


element of product strategy. Intra-brand shifts may not necessarily be
undesirable if they’re a form of preemptive cannibalization. In other words
consumers might have switched to a competing brand instead of the line
extension if the extension hadn’t been introduced.

Extending a product line may cause cannibalization not only through self-
competition for market share but also for the limited resources of the
company itself. Cannibalization may also lead to the ineffective and
inefficient use of company’s resources and personnel. Cannibalization starts
as soon as the consumer exhibits brand switching behaviour, or even before
that.

Case6- Maruti Zen

In 2006 Maruti Zen’s market had gradually started disappearing. Its falling
sales, which were cannibalized by Maruti's newer
models like the Swift, Alto and the Wagon-R, are
making Maruti to consider stopping production of
their once best seller B segment car. This may not
come as a surprise to most. Being one of the older
cars on the road, Zen was getting out-dated, and the newer models of Maruti
cannibalized the sales of Zen. It was spruced up to a new look in the year
end 2003, but that was not sufficient.

CANNIBALIZATION AND THE TIMING OF PRODUCT INTRODUCTIONS:

A seller who faces two customer segments with differing valuations of quality
of a durable product whose demand is stationary and known, the technology
exists to release two products simultaneously, and the seller can commit in
advance to subsequent prices and qualities. He needs to decide whether to
introduce two differentiated products at once or one at a time. Under the
simultaneous strategy, the lower quality would cannibalize demand for the
higher quality. To reduce cannibalization, the seller would have to lower the
quality of the low-end model and reduce the price of the high-end.
Alternatively, he could increase the quality of the low-end model, but delay
its release. Sequential introduction, however, would mean that the profits
from the low-end model arrive later. We show that sequential introduction is
better than simultaneous introduction when cannibalization is a problem and
customers are relatively more impatient than the seller. However, when the
seller cannot pre-commit, sequential selling is much less attractive because
then he cannot use his product designs to alleviate cannibalization.

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.

Case7- Airbus

The entry of the Airbus A380 in 2005 was expected to


toughen the price competition and reduce the Boeing
747’s market share, but the cannibalization of the
A330 and the A340 was even greater (although
Airbus’ aggregate share, including the A380,
increased).

Businesses still view cannibalization as the most dreaded issue but there is a
counter to it. Many businesses believe they must cannibalize their own
products or the competition will do it for them. You can counter
cannibalization by making your older products unique and desirable to
extend their product life cycle. Many companies cannibalize their own
products at some time in the future. You can definitely create your own little
product niche from older products to counter cannibalization. Your older
products can be reduced tremendously in price to make it cheap and
affordable. This way your old products can capture the low income
consumers while the latest products can capture the high income
consumers. Counter cannibalization by making your older products special
again. You can reduce the old products price tremendously to tap a new
market or make them unique again. Make your old products popular by
making it cheap, reliable and unique in order to extend the product life cycle.
If you can do it, there is little to no cannibalization because your old products
are capturing a new market.
Make new products niche from original products to counter cannibalization.
Old products can tap a new market with just a little innovation.

Case8- TIDE

Tide was launched with much fanfare in 2000. Tide


was launched as a premium brand. P&G had a
serious problem because there was a chance of
cannibalizing between Ariel and Tide because there
was no significant differentiation between the two
brands. P&G had to come up with a new strategy
through which Tide aimed to capture the safedi
segment while Ariel would fight Surf in the Color segment.

Hence, in conclusion it can be said that market cannibalization can well be a


new product strategy wherein old products aren’t doing very well and sales
and profits of the old product are declining or being threatened by another
player in the market. It is a more effective attacker strategy and is not
advisable for a market leader under normal circumstances when its products
are still doing well.

BIBLIOGRAPHY

Books:
1. Marketing Management -Philip Kotler

Internet:

1. http://books.google.co.in/books?
id=p1xvYvtUJmQC&dq=product+strategy+for+high+technology+com
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QWuG0UX-
iSpj_2N5pFa8Bk0&hl=en&sa=X&oi=book_result&resnum=3&ct=result
#PPA258,M1

2. http://mansci.journal.informs.org/cgi/content/abstract/38/3/345

2. http://www.investopedia.com/ask/answers/08/market-cannibalization-
coke-cola-wars.asp

3. http://marketingdeviant.com/

4. http://www.emeraldinsight.com/Insight/viewContentItem.do?
contentType=Article&hdAction=lnkpdf&contentId=857620

5. http://mktsci.journal.informs.org/cgi/

6. http://www.people.hbs.edu/besty/Esty_Airbus_Boeing.pdf