Monday, March 24, 2008

The corrupt calculus of cannibalization

There is something seriously wrong about the way that new business opportunities are evaluated. We always look at cannibalization and incrementality. That is, how much of the new business is truly incremental to the existing business as opposed to simply replacing existing sales. The cannibalized portion is subtracted off of the total sales to yield the incremental size of the new business opportunity.

This is all wrong! And it forces us to undervalue new opportunities.

The reason it is wrong is that it relies on an assumption for which there is a wealth of evidence to the contrary. The assumption is that the pie I am holding on to right now, will remain intact and in my possession in perpetuity so long as I do not discard it of my own volition. But the world does not work this way! Change is the way of the world. And if you are holding on to a tasty pie, rest assured that some hungry dude is out there trying to figure out how to score a piece.

If a new product or service is attractive to customers, then someone will find a way to deliver it at a profit to those customers. If you are the current market leader then this new product or service may cannibalize your existing products or services. And that might make the opportunity look meager. But do you really think that as long as you don't launch the new product or service that nobody else will either? C'mon! Of course they will. And don't get me started about barriers to entry. Yes, in rare instances it is truly impossible for a would-be competitor to enter your market. But usually you can only buy yourself some time at best. And more likely, innovation will flow to those who want to pay for it like water flows through cracks. So those cannibalized sales are gone already! Don't even think about them. Instead, just do your best to identify and satisfy the needs of your customers.

Either you do it or someone else will.

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