Engaging in digital transformation is a dilemma. Either the transformation is aggressive enough to scale,- but brings the risk of excessive self-cannibalisation-, or the transformation is designed to be protective, but runs the risk to be too narrow, with business being aggressively cannibalized by disruptive attackers. If, at current, both sides win, intentional cannibalization can become a winning strategy if incumbents pick the right bundle among five proven practices.
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. The few laggards are smaller companies, in aspiring markets, competing in B2B industries.
But despite digital transformation being mainstream, a large part of incumbents’ transformation has appeared to be painful– with a majority not returning a return above its cost of capital.
One main culprit of poor returns may be that engaging in aggressive digitization process often means that companies will have no choice but to intentionally cannibalize their own businesses. Of course, this implies a major dilemma: without intentional cannibalization, the digital transformation bet is that defending legacy revenue will be enough to protect against business stealing from digital disruptors. However, this bet is risky, as the evidence suggests digital natives are often successful in stealing business across many sectors. If the path is then to intentionally cannibalize, through aggressively transforming to build new opportunities, the risk is to cannibalize oneself too strongly and too quickly.
The academic consensus is that deliberate cannibalisation is an important strategic practice (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). 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, the Apple case can be the exception. After all, Apple is a global brand, and its unique products are so wanted that Apple could always time cannibalization to limit excess, while creating a new major sparkling boost in demand that more than compensates any product starting to become mature.
Surprisingly, -to our knowledge 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 baseline of the average digital transformation is not the one of Apple, and intentional cannibalisation is barely compensating from disruption.
One reason for this “so-so” result is that digitization has indeed created above average cannibalization: the perception is that about 40% of established revenue streams could be facing the risk of third-party cannibalization through digitization. Perception, by the way, may fit reality, e.g an industry well attacked by digital is the media industry, and digital media has been cannibalizing old media in print for example, at 36% of books buy, (http://www.serci.org/congress_documents/2018/Reimers.pdf) and up to 45% in music sales.
This cannibalization effect is on the high side; it is above the traditional range found out of radical innovations, with an effect in the 20-25%; as an example, the range of how new car categories self-cannibalise old models has historically been 26- see the Lexus RX300 revenues drawn from Lexus’ luxury sedan sales, (https://www.semanticscholar.org/paper/Estimating-Cannibalization-Rates-for-Pioneering-Heerde-Srinivasan).
This current level of revenue contestability is not only high, but it is to be coupled with the fact that the scale of success of digitization by incumbents remains limited. Among large incumbent firms, digital currently account 23% of their revenues, or only 60% of the original top line being recovered. Clearly, this means a gap of 40% and the dilemma is on.
Five best practices for returns to intentional cannibalisation
Not every company is Apple, but not every company is born to fail either, -our research has identified five practices to close the 40% gap, –and even generate attractive net returns to cannibalization.
The high-level idea is to blend a strategy that offers a) scale, b) legacy differentiation, and c) speed. Scale will boost digital revenues while speed will make companies get the scale rewards against peers; differentiation allows to limit substitution with legacy and to preserve a larger part of the incumbent revenue flow. The strategy pay-off, we find, is also made attractive, because of digitization.
1. Launch radical innovations.
Digitization has favoured the development of platforms and ecosystems, and the rise of digital versioning of products and services. In return, incumbent companies vested 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 extends 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).
Incumbent executives can also be better off by considering to blend those archetypes for better pay off, eg platform play with new services increases revenues by 32%. 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 a 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 the 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 blinded by competition. This means proactiveness pays better than reactiveness. The key managerial insight from our research is that managers should look at adding multiple forms of first moves. It includes not only launching new products and innovations before competition. But it includes 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 revenues. Domino’s Pizza was very keen 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 extent of cannibalisation, not as a failure, but as a 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 originally 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 cannibalisation and have been generating a higher payoff. Executives should be 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 intentional cannibalisation better (see Figure 1), yet a large portion of companies think about those diversifications often as an extension of the current offering, or a broader scope within their natural industry. We found that entirely new products and services outside the industry boundary get twice the 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 an 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 on top of traditional telco service.
How to win an intentional cannibalization strategy?
We have laid out 5 ways to play the intentional cannibalization game. The good news is that companies may noy have to play all five to close the 40% gap. Successful incumbents manage cannibalisation to their benefits by choosing 2 or 3 of the practices above.
This also means that the opportunity set is not as limited as incumbents tend to believe. And cannibalisation may be a risk that could be neutralized in-, or even used as an impetus to push- many digital transformations.
About the Authors
Jacques Bughin is a professor of Management, Chaire Gillet of Management Practice, at the Solvay Brussels School of Economics and Management at Université libre de Bruxelles (ULB), and among others, a former Director of McKinsey and of the McKinsey Global Institute. He advises Antler and Fortino Capital, two major VC/PE firms, and serves on the Board of multiple companies.
Nicolas van Zeebroeck is a professor of digital economics and strategy at the Solvay Brussels School of Economics and Management at Université libre de Bruxelles (ULB). He serves on Belgium’s High Council for Employment and as Advisor to the President and Rector of ULB for IT and Digital.