Sunday, December 14, 2008

Innovation rule #3: Do ignore cannibalization

New initiatives are often evaluated looking only at the incremental sales they will generate. The cannibalized sales are subtracted off of the total sales to yield the incremental size of the new business opportunity.

This does not make sense. It relies on an untenable assumption and will force you to undervalue innovation opportunities.

The assumption is that the pie you are holding on to right now will remain intact and in your possession forever so long as you do not discard it of your own volition. The world doesn’t work this way. Your competitors are out there looking to grab a slice of that pie. If you have an innovation idea, chances are that someone out there has the same idea and they will not care about cannibalizing your business. In fact, that’s exactly what they intend to do. So your cannibalized sales are as good as gone.

When you discount your new initiatives by the value of the cannibalized sales, you are pretending that those sales would have been yours forever. Putting your hand over your eyes blinds only you. Your competitors can still see and they will exploit your blindness and leave you wondering why the heck you couldn’t see it coming.

So forget cannibalization. The world is constantly changing and what you have in your hand today will not remain in your hand forever. Just do the best job you can for your customers and the rewards will follow.

2 comments:

Jer979 said...

ok, but what about the short-term loss in profits, the resulting punishment in the stock market, the fact that most execs won't be around to realize the gains and that people, in general, just have a hard time stomaching the risk?

Adam said...

Jer:

I don't know why you believe there must be a loss in profits. If you accept my point (that the cannibalized sales are as good as gone regardless of what you do), then there shouldn't be any loss in profits. That loss is just a chimera that resides on P&Ls that have no correspondence to reality.

Your point about risk and people's stomachs is well taken. In the end, I think this is a matter of perspective. If you believe that your forecasts are real then cannibalization seems like a problem. If you believe that you must earn your sales every day with every consumer, then you worry more about withholding a new and better product than you do about cannibalizing an old and worse one just because it is your old and worse one.