PRODUCT CANNIBALIZATION

BUSINESS ACCOUNTING AND FINANCE II

SUBMITTED BY GROUP NUMBER 1 AMULYA MANTENA (01) ANURADHA .K (02) BINSHA SHAJAHAN (03) BHAVANIKANTH (04) RAM CHAITHANYA (05) CHAITANYA. S (66)

CANNIBALIZATION
What is it all about? Cannibalization is what happens if one part of a company grows by taking sales from another. For example, if a retailer opens a new shop close to an existing one, then the existing shop is likely to lose some sales to the new one. It is most commonly a concern where a company is selling the same products though different channels or in different locations. An example of the former would be a retailer's web site competing with its own shops. It reduces sales growth (as the benefits of growth in one place will be offset by a reduction elsewhere). It may also reduce margins if customers switch to a lower cost (for them) and lower margin (for the seller) sales channel. Conversely, obviously, cannibalization may encourage a switch to a higher margin channel (e.g. internet sales may cut out a middle man) or it may be a price worth paying to develop a new business. It is often a problem. Its effect is often less significant than might be expected because most companies are already in a competitive environment: they compete with others, so the extra impact of also competing with themselves is often limited. Competing with oneself may even be turned to a company's advantage by inducing customers to look at the same produce twice in different guises. This is why some companies (such as car manufacturers and food producers) often sell very similar products with different branding.

What is product cannibalization? Product cannibalization occurs when a company decides to replace an existing product and introduce a new one in its place, regardless of its position in the market (i.e. the products life cycle phase does not come into account). This is due to newly introduced technologies and it is most common in high tech companies.

What is market cannibalization? Market cannibalism is defined as the negative impact a company's new product has on the sales performance of existing products. In the normal case of cannibalization, an improved version of a product replaces an existing product as the existing product reaches its sales peak in the market. The new product is sold at a high price to sustain the sales, as the old product approaches the end of its life cycle. Nevertheless there are times that companies have introduced a new version of a

product, when the existing product is only start to grow. In this way the company sustains peak sales all the time and does not wait for the existing product to enter its maturity phase. The trick in cannibalization is to know when and why to implement it, since bad, late or early cannibalization can lead to bad results for company sales.

CANNIBALIZATION IS NOT A HAZARD

Many businesses 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 your own product niche from your old products to counter cannibalization. Your old products can tap a new market with just a little innovation.

APPROACHES TO CANNIBALIZATION
1. UNFAVORABLE CANNIBALIZATION Cannibalization should be approached cautiously when there are hints that it may have an unfavorable economic effect to the company, such as lower sales and profits, higher technical skills and great retooling. The causes of such economic problems are given bellow. The new product contributes less to profit than the old one: When the new product is sold at a lower price, with a resulting lower profit than the old one, then it does not sufficiently increase the companys market share or market size. The economics of the new product might not be favorable: Technology changes can force a product to be cannibalized by a completely new one. But in some cases the loss of

profits due to the cannibalization is too great. For example a company that produced ready business forms in paper was forced to change into electronic forms for use in personal computers. Although the resulting software was a success and yield great profits, the sales of the paper forms declined so fast that the combined profit from both products, compared to the profits if the company did not cannibalize the original product showed a great loss in profits. The new product requires significant retooling: When a new product requires a different manufacturing process, profit is lower due to the investment in that process and due to the write-offs linked to retooling the old manufacturing process. The new product has greater risks: The new product may be profitable but it may have greater risks than the old one. A company cannot cannibalize its market share using a failed or failing product. This can happen in high-tech companies that do not understand enough of a new technology so that to turn it into a successful and working product. As a result a unreliable product emerges and replaces a reliable one, that can increase service costs and as a result decrease expected profits. 2. OFFENSIVE CANNIBALIZATION STRATEGIES Cannibalization favors the attacker and always hurts the market leader. For companies that are trying to gain market share or establish themselves into a market cannibalization is the way to do it. Also cannibalization is a good way to defend market share or size. A usual practice is the market leader to wait and do not cannibalize a product unless it has to. It is thought that a company should acquire and develop a new technology that will produce a newer and better product than an existing one and then wait. Then as competitors surface and attack market share, cannibalization of a product is ripe. Then and only then quick introduction of a new product into the market will deter competition, increase profits and keep market share. But this strategy does not always work since delays will allow the competition to grab a substantial piece of the market before the market leader can react. 3. DEFENSIVE CANNIBALIZATION STRATEGIES Controlled cannibalization can be a good way to repel attackers as deforesting can repel fire. A market leader has many defensive cannibalization strategies that are discussed below. Cannibalize before competitors do: Cannibalization of a companys product(s) before a competitor does, is a defensive strategy to keep the competitor of being successful. Timing is the key in this strategy. Do it too soon and profits will drop, do it to late and market share is gone.

 Introduction of cannibalization as a means of keeping technology edge over competition: A good strategy is for a company, that is the market leader, to cannibalize its products as competitors start to catch up in terms of technology advancements. (For example Intel Corporation cannibalized its 8088 processor in favor of the 80286 after 2 years, the 80286 in favor of the 386 after 3 years, the 386 in favor of the 486 after 4 years, the 486 in favor with the Pentium after another 4 and so on). So the market leader dictates the pace and length of a products life cycle. (In the case on Intel the replacementof 486 to Pentium took so long because competitors had not been able to catch up). Management of cannibalization rate through pricing: When cannibalization of a product is decided, the rate at which this will happen depends on pricing. The price of the new product should be at a level that encourages a particular mix of sales of the old and new product. If the price of the new product is lower than the price of the old then cannibalization rate slows down. If the opposite happens then the cannibalization rate is increased. Higher prices in new products can reflect their superiority over the old ones. Minimization of cannibalization by introducing of the new product to certain market segments: Some market segments are less vulnerable to cannibalization to others. This is because there is more or less to lose or gain for each of them. By choosing the right segment to perform the cannibalization of a product a company can gain benefits without loses and acquire experience on product behavior.

TYPES OF CANNIBALIZATION
Four different scenarios resulting in product cannibalization (in consumer industry) are discussed in this section. (1) Multi-product pack cannibalization. This type of cannibalization occurs when companies market multiple products as one product. For example, a combination of closely related products (such as a tube of toothpaste, toothbrush, dental floss, and mouthwash as one product) or a set related by their use rather than their nature (such as a camping kit that includes insect repellent, torch light, knife, and sleeping bag). Typically, the price of this multi-product pack would be less than if the products in the pack are purchased individually, and if a consumer finds the cost of the multi-product pack to be only minimally higher than the sum of the individual items they intended to purchase, the multi-product pack will be purchased and cannibalization of the individual items will occur. In such cases, it may be difficult to determine which product is being cannibalized.

(2) Combo-product cannibalization. An example of a combo product is a television monitor, plus VCR, plus a DVD player. The main difference between multi-product pack products and the combo products is the fact that the products in the multi-product pack can be separated into individual products, while the combo product cannot be separated. The difficulty of identifying which product is being cannibalized still exists. (3) Intra-product cannibalization. Different products in the market could compete for the same market share. Intra-product cannibalization is observed between two that are different but offer similar functionalities. Although these products are different, their functional commonality is higher than the differences and hence results in cannibalization; hence they compete with each other for a common market share. Depending on their functionalities and the needs, one product might be cannibalized in preference to the other. An example of intra-product cannibalization is the competition between microwave and ovens. Although these products are different in the fact that they offer minor functional differences from the other, they compete for a common market share. (4) Inter-product cannibalization. This occurs when products within the same product group from a company compete with each other for market share. It could affect, for example, mint-flavored and cinnamonflavored toothpastes. Both these products have very similar features and are competing for the same market share. Depending on factors such as price, consumer preference and marketing strategies, one product might be cannibalized in preference to the other.

SOURCES OF CANNIBALIZATION

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 technologiesincluding 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.

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 investmentsfactories, 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.

HOW TO COUNTER CANNIBALIZATION

Many businesses 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 your own product niche from your old products to counter cannibalization. Your old products can tap a new market with just a little innovation. Cannibalization doesnt sound so scary if you think outside the box.

HOW TO COMBAT CANNIBALIZATION CONCERNS?

Find ways to turn the threat into an opportunity. One of the easiest ways to do this is to find customers who aren't consuming because existing solutions are too expensive or complicated. There probably isn't a clearer recent example of this than Apple's iPad. It was noted when the product came out that that analysts might complain about how it ate away at Apple's higher priced computer offering. As Chief Operating Officer Tim Cook noted in Apple's recent analyst call, there did appear to be some of that going on. But that effect was more than offset by Apple using the iPad to introduce people to its products. And of course, selling 15 million iPads and producing $10 billion in revenue didn't hurt. "If this is cannibalization," Cook quipped, "it feels pretty good."

Make sure you are doing something legitimately different. If all you are doing to win in a more price-sensitive market tier is chopping price, you deserve the fate you receive. One mantra that Procter & Gamble follows is "delight, don't dilute." P&G's VP for R&D in Asia Maurizio Marchesini described how the company successfully introduced a custom laundry brand in India called Tide Naturals. It's a unique product that's attuned to the needs in the market. 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.

Remember, cannibalization isn't really in your control. It is essential at a particular point of time to impose new products as the customers expectations have to be met. And for the very same reason the process of cannibalization is beyond the control. Cannibalization is a real concern. But the right framing and the right strategic approach can make sure it doesn't stop the pursuit of high-potential growth strategies.

HOW DO WE TAKE ADVANTAGE OF THE CANNIBALIZATION?

There only way a cannibalization works on your favor is that the new product is more profitable than the old. This analysis should include the extra cost of production and handling the new sku, the difficulty of managing a broader portfolio. In the global market is possible to watch several cases of cannibalization of products. Some of them very famous. In 1964 a branded soft drink named Pepsi decided to launch a diet version of their famous Pepsi to satisfy an incumbent demand for a healthier soda. This demand couldnt be satisfied with regular coke, but being afraid of the cannibalization to regular coke, Coca-Cola hesitated to develop the line extension. After some harm was done, in 1982 Diet Coke was born, proven to be a great innovation (cannibalizing some volume) but keeping profitability within Coca-Colas bank accounts. Nowadays, Diet Coke is the second largest soft drink sold in the US, over regular Pepsi.

Extensions like this have happened in almost all types of products. So, if you face the option of developing an innovation (and you are afraid of cannibalization) you should at least be capable to answer: In the consumers mind: Is the product a substitute for current offer? Is the product a compliment to current offer? Is the product designed for new occasions? New consumers? How the consumer does rates the product? Is it better than the current offer? Will he/she pay more for it? Is it easy to understand? Will it conflict with current habits?

For the business: Is it more profitable than current offer?. Are there any products alike in the market? Will you be the first to offer? Are you capable of upscale in short-term? May another brand steal the idea?. Is it protected (copyrights, patents, etc)? May private label copy-cat the offer at cheaper price?

EXAMPLES
1. iPhone cannibalizing Android sales In the sales war between the iPhone and Android, latest figures from the NPD group suggest that while iPhone sales are on the up, while sales of Android device have slumped preciptously. Between Q3 2011 and October/November sales of iPhones soared from 26% to a whopping 43%. During the same period sales of Android devices fell from a high of 60% to 47%.

Heres a chart:

This chart clearly shows how the smartphone race is between iOS and Android. RIM has pretty much vanished into oblivion and none of the other players were worth adding to the chart. Is the the iPhone 4S effect that we are seeing here, or is it indicative of a deeper problem and perhaps a slowing down of the Android machine? Hard to tell based om just a single data point. What will be interesting is seeing where this goes during the year. Also according to NPD, two out of every three phones sold in the Oct/Nov period was a smartphone, while during Q3 11 this figure was only 59%. Basic phones only accounted for 15%, while messaging phones didnt fare much better with 18% of sales. The cellphone market is now very much the domain of the smartphone.

2. Mitsubishi's product cannibalization This new SUV you see here from Mitsubishi is the third-generation Outlander which still has seven seats to match the Pajero Sport in concept. Like Pajero Sport, Outlander is a seven-seater.But the two are different under the skin. While the Pajero Sport is built on the chassis-on-frame body of the Triton pickup, the Outlander is based on a car-like monocoque platform. Mitsubishi is aiming to give the Outlander a more dynamic on-road appeal with a host of safety-enhancing features usually found in luxury cars, like anticipatory accident-preventing systems. The Outlander also gets more advanced engines like a 2.0-litre petrol and 2.2-litre diesel featuring MIVEC valvecontrol technology, plus a six-speed automatic, 2WD and 4WD options and automatic stopgo. And next year, Mitsubishi will give the Outlander a plug-in hybrid drivetrain _ good for over 800km and emitting less than 50g/km of CO2 _ previewed in the PX-MiEV II concept car shown in Tokyo last year. So the Pajero Sport is merely a third-world SUV...

In one way or the other, yes. But perhaps, it would be more diplomatic to say that the Pajero Sport is the heavy-duty SUV and the Outlander a more sophisticated variation in the guise of a crossover. Although Mitsubishi says the Outlander will be a global vehicle, it hasn't confirmed yet whether it will be sold (and made) in Thailand. Mitsubishi Motor Thailand once tried selling the first-gen Outlander (aka Airtrek in Japan) in imported form, but it wasn't a success due to its price exceeding 1.8 million baht. Apart from being assembled in Thailand, the Pajero Sport also gains a special excise tax for pickup-based SUVs thus explaining its prices low down at 900,000 to 1.5 million baht.

It's an interesting point because Life has learned that there will be no all-new replacement for the aging Space Wagon MPV. And our moles have indicated that the new Outlander will eventually slip into the shoes of the Space Wagon in marketing terms. Even so, Mitsubishi's Thai boss told the media earlier this year that the Pajero Sport will be an adequate remedy for those needing seven seats.

3. Coco-cola case

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". CocaCola Classic quickly ate up the sales of New Coke in a textbook case of market cannibalization, but the company's stock did recover for the most part. The marketing blunder may not have been as much of a disaster as it appears. The controversy and media attention attracted some fence-sitting consumers back to the Coca-Cola brand.

Nevertheless, the saga of New Coke turned off many investors and resulted in Coca-Cola becoming an undervalued wallflower that nobody wanted to touch. Due to the strong international presence of Coke, however, investing sage Warren Buffet started buying significant amounts of Coca-Cola stock in the late '80s, which proved to be one of his most profitable buys. Despite its flirtation with a branding disaster and market cannibalization, Coke remains one of the world's strongest brands and a stalwart company to boot.

4. Netbook Cannibalizing Laptops and PCs. The introduction of the lightweight, convenient and inexpensive netbook has some computer manufacturers worried. Although these manufactures expected and planned for the mini-laptop to be purchased as a complement to consumers laptops and PCs, the recent economic downturn has turned the product into a supplement.

Although the mini-laptop lacks the storage and software capabilities of the larger laptops and PCs, the dramatically lower price is convincing the consumer they can manage. The article quotes one consumer who, being concerned about the rough economy purchased the mini because it was less than half the price of a traditional laptop. Normally the computer manufacturers would be thrilled to see a products sales to go from 182,000 to 11 million in one year, but not at the expense of more profitable products (i.e. Laptops and PCs). The mini has not only cannibalized laptop and PC sales, but has put pressure on the prices of these items. The article states that the estimated average selling price of portable computers will drop 8-12% in the next two years, partly because of the netbook. It outlines options for mitigating product cannibalization. The computer manufacturers could upgrade the high-profit products and/or degrade the mini-laptops to highlight the differences between them and help the consumer directly discriminate. This strategy might be a short-run solution to cannibalization, but comes with the obvious risk of damaging a product, that could be profitable in a different economy.

5. Hyundai Santro A good example of cannibalization would be Hyundai Santro. They have introduced Santro Xing as a new product in the market. In other way they have cannibalized their own market. A person who wanted to buy Santro old model will now buy a Xing as it is the latest product. Thus they are not capturing new customers but converting their own customers to a product within their brand.

CONCLUSION
Change is an inevitable part of life. Same is the case for organizations, businesses and their products. The core motive of any organization is profit maximization by survival and growth. As stated above, cannibalization is not intentional but happens at times. So, now companys strategy should be to ensure that mutual existence is ensured when necessary and on the other hand the product gets cannibalized if that is the need of the hour.