The art of self-cannibalizion during digital transformation
Note: One trauma for companies when being disrupted is often to react and self cannibalize their past success. Understandably, this is not easily done. Here are the five ingredients of successful intentional cannibalization during digital transformation. This article follows a lecture I gave recently on business strategy.
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With time and shocks such as the covid 19, digital transformations have continued unabated with roughly 90% of large incumbent companies worldwide being engaged in some forms of digital transformation, -our research says. The few laggards are smaller companies, located in aspiring markets, competing in B2B industries, or in more business services-oriented. But despite digital transformation being mainstream, a large part of incumbents transformation is not returning its cost of capital, as the change process remains a risky endeavor.
One major risk companies are struggling with is cannibalisation. Cannibalisation has never had a great press, (see Scott Antony, 2011,combating cannibalization concerns, https://hbr.org/2011/02/combating-cannibalization-conc), and digitization has opened the venue for major disruption of incumbents’ businesses. The risk behind cannibalization is the balancing act of defending legacy revenue with the risk of major business stealing from digital disrupters, and of accelerating the cannibalisation of own market, creating excessive depreciation of their orginal business.
The academic consensus is that deliberate cannibalisation is an important strategic practice in business life (see Chandy and Tellis 1998), especially in the case of rapid technology changes, such as the advent of digital technologies (Haynes, Thompson, and Wright 2014). Netflix intentionally self cannibalized its own DVD business when pivoting its model to flat fee streaming model, and generate a large payback. Apple is known to have risked and cannibalized its successful iPod lines when introducing the iPhone, and has systematically continued to play an intentional cannibalization strategy for its different product lines.
Still, those case studies can be the exception. Surprisingly, -to our knoweldge at least-, the question of the importance of business stealing versus self-cannibalisation has not been systematically assessed in detail in the context of digitization. Our recent research has just done that. Leveraging a panel composed of about 12,000 companies worldwide, we conducted an online survey among top executives regarding their digital performance and the link with cannibalization. With an answer rate of 10%, we have collected a very informative sample worldwide. Using machine learning techniques to link digital revenue generation by incumbents and top/bottom line growth, we also have been able to estimate the payoff of intentional cannibalisation in the context of digitization. We have found five factors that optimise the payoff of the cannibalization posture.
The anatomy of cannibalisation in digital transformation
Our research shows that the base line of the average digital trnasformation is a positive, but incomplete hedge against cannibalisation :
- Cannibalisation under digital disruption is a large threat. Cannibalisation under digitization is felt to be important. On average, executives stated that 38% of their entire revenue could be facing the risk of third party cannibalization through digitization. From the pace of digital build- up, this revenue at risk can materialize in between 4-6 years depending on industries and geographical locations. The extent of business of risk is also positively correlated with extent of digital maturity, eg- how many competitors and digital natives are acting with digital tools in their industry. The perception by executives of the size of cannibalization is on the high side; it is slightly above , say, the range of how new cars categories self cannibalise old models (e.g. 26% of the Lexus RX300 were drawn from Lexus’ luxury sedan sales, https://www.semanticscholar.org/paper/Estimating-Cannibalization-Rates-for-Pioneering-Heerde-Srinivasan). This perception of business at risk is also consistent with industry evidence how digital media has been cannibalizing old media in print for example (eg 36% of books buy, https://www.serci.org/congress_documents/2018/Reimers.pdf)
2. It pays off, but not fully, to self cannibalize. At current level of revenue contestability (38%), the typical digital revenue generated by incumbents is roughly 23% of their revenue. If revenue is flat before and after digital transformation, this implies that intentional cannibalization might not be an easy deal, with only 60% of the original top line being recovered. Fortunately, digitization also opens new revenue stream, but on average, our statistical analysis suggests that digitization recovers 75% of the total revenue at risk. The picture is also more challenging on profit with digitization recovers at best half of the profit at risk; reason of this gap is usually the extra cost to build the digital engine, and digital competition with often lower yields linked to lower level of pricing, more churn etc.
Five managerial imperatives to make self-cannibalisation more than a hedge.
While intentional cannibalisation seems necessary, but does not cover the full gap, we have found ways five practices to boost net returns to cannibalization:
1.Launch radical innovations. According to our research, Incumbent companies who did invest in new business model innovation – especially platform-based, and/or companies who leverage their digital transformation to generate entirely new digital products and services have made the intentional cannibalization strategy more compelling than average; platform-play extend by 22%=(92%/75%) the average potential while new products boosted revenue by 10% Cost cutting strategies is the least amenable posture for complete recovery ( see Figure 1).
Figure 1 : The pay off of intentional cannibalisation by business archetype, worldwide firm average
Business archetype and revenue recovery rate
Platform play 92%
Entirely new product/services play 83%
Average play 75%
Unbundling of product play 64%
New channels play 52%
Source: Top executives survey, 1070 firms wordwide
Incumbent executives will be better off by considering to blend a mix of archetypes for better pay offs, eg platfrom play with new services increase revenue by 32%, generating an additional net revenue impact of 7% top line extension. As an example, John Deere developed additional product/services offering to its IOT platform play—John Deere managed to grow twice the rate of the traditional equipment play, at 12% versus 6% a year in the recent years.
Part of the success of Lego growth is that, on top of its classical brick toys, Lego expanded to movies, video and mobile, while creating support service tool platform such as the Lego digital designer to allow its users to make construction design guides and share creations with other fans. Digital natives also use those archetypes to grow faster. Amazon has long diversified from its e-tailing to a marketplace and cloud services platform, on top of products such as twitch for example. Product/platform extension grew a revenue stream at 40% a year during last 5 years, or 60% faster than original retailing.
2.Be a first mover ; do not play the wait option. The rationale of an intentional cannibalization strategy is to avoid being blindsed by competition. This means proactiveness pays better than reactiveness. The key managerial insight from our research is that managers should look at adding mutiple forms of first moves. It includes not only launching new products and innovations before competition ; but it includes as well adopting frontier technologies earlier at scale than others, as this provides the time advantage to understand how new technology may support new market opportunities and new extra revenue. Domino’s Pizza was very keep to develop its ‘AnyWhere’ ordering platform to expand its commerce revenue, using long before others tools such as tweets and emojis as interface tools to customers
3. Use cannibalisation as driver of digital transformation success. Our research discovers that digital transformations meet their goals, half of the time. But success requires persistence 50% were transformations that orginally were not succeeding, and got relaunched to finally scale and succeed. Companies, such as Best Buy in the US, that took a second chance at digital transformation, accurately shifted their mindset, regarding cannibalisation, from a risk, to become a key leading indicator of scaling and success.
4.Size turbulence. within the same industry, cannibalization risk perception can vary significantly—but only the ones that perceive the risk as high are usually acting faster in their intentional cannibalisatino, and have been generating a higher payoff. Exuctives should obsessed by adequately sizing turbulence. Gilead’s hepatitis C blockbuster, Harvoni , had intentionally launched to cannibalize one of its star product, Sovaldi, which the firm introduced only months earlier, so as to avoid being blinded by competition (https://journals.sagepub.com/doi/full/10.1177/1069031X19866832)
5. Go beyond natural boundaries. New products/services are making the pay-off of self cannibalisation better (see Figure 1), yet a large portion of companies think about those diversifications as extension of the current offering, or a broader scope within their natural industry. We found that entirely new products and services outside industry boundary gets twice better payoff. Executives should be well advised to bundle their intentional cannibalisation posture with a goal to go beyond original market boundaries,- and where they could tap into extra possible pool of revenues and profit. Netflix footprint went global, instead of US regional, Ping An added classifieds to its financial platform, or Vodacom added M-pesa payments of top of traditional telco service.
In general, successful incumbents manage cannibalisation to their benefits by choosing 2 or 3 of the practices above. This means that the opportunity set is not as limited as incumbents tend to believe. And the good news is that, with objectivity, cannibalisation may be a risk that could be neutralized in many digital transformations.
(c) jacques bughin