Cannibalization

Background

Cannibalization refers to a scenario within a company where the introduction of a new product or store leads to a reduction in the sales of its existing products or stores. The term is metaphorically drawn from the idea of self-consumption, as one part of the company’s portfolio feeds on the market share of another part.

Historical Context

Cannibalization became relevant with the expansion of multi-product firms and chains. Especially pertinent in retail, FCMG industries, and technology sectors, the phenomenon started to gain more scrutiny with the proliferation of data analytics, allowing companies to track internal sales pattern shifts more accurately.

Definitions and Concepts

Cannibalization occurs when:

A new product reduces the sales volume or market share, or both, of existing similar products within the same company.
New store openings take sales away from existing stores within the same chain.

Key characteristics:

Intentional or unintentional within business strategy.
Frequently discussed within the context of product line extensions, new markets, retail geography expansions, and competitive strategy.

Major Analytical Frameworks

Classical Economics

In classical economics, the impact of cannibalization might be examined through the lens of market structure and competitive dynamics. Classical economists might focus on issues like overall supply and demand balance and the effects on allocative efficiency within the firm.

Neoclassical Economics

Neoclassical economists would analyze cannibalization in terms of consumer choice and marginal utility. They might explore how cannibalization affects consumer welfare and firm optimization regarding output levels and product differentiation.

Keynesian Economics

Keynesian economics might consider cannibalization in the context of aggregate demand. This perspective might examine how cannibalization influences overall spending patterns within the economy and its potential impacts on investment and employment levels within the firm.

Marxian Economics

Marxian economists might interpret cannibalization as an outcome of internal contradictions within capitalist enterprises, reflecting the pressures to continually expand markets and products to sustain capital accumulation.

Institutional Economics

Institutional economics would concentrate on the role of business practices, organizational structure, and regulatory environments in shaping the incidence and outcomes of cannibalization.

Behavioral Economics

Behavioral economists could analyze how cognitive biases and heuristics influence managerial decisions about product launches and market strategy, leading to cannibalization as a predictable error or strategic choice.

Post-Keynesian Economics

This school might consider cannibalization concerning the firm’s financial structures and the implications for long-term stability and growth, focusing on profitability and financial parameters.

Austrian Economics

Austrian economists might critique the central planning within firms that can lead to cannibalization, emphasizing the entrepreneur’s role in managing resources efficiently and anticipating market changes.

Development Economics

Development economists might look at how cannibalization impacts emerging economies, particularly focusing on how international firms opening new branches might affect local businesses and intra-firm competition in these markets.

Monetarism

Monetarism might interpret cannibalization’s effects concerning a single firm’s pricing policies and overall monetary strategy, influencing inflationary pressures and expenditure velocity within a company.

Comparative Analysis

Cannibalization is often compared among similar scenarios across different market structures and business models. Comparative studies would assess strategies that firms use to minimize cannibalization, such as clear differentiation of products, strategic market segmentation, or spatially distribution of retail outlets.

Case Studies

Apple’s decisions on releasing new iPhone models.
Starbucks’ strategy in opening new stores.
Car manufacturers and the introduction of electric vehicles over traditional combustion-engine models.

Suggested Books for Further Studies

“Innovation and Entrepreneurship” by Peter F. Drucker
“Blue Ocean Strategy” by W. Chan Kim and Renée Mauborgne
“Competitive Strategy: Techniques for Analyzing Industries and Competitors” by Michael E. Porter

Market Cannibalization: The specific market impact where new products or services take sales away from existing offerings of the same company.

Product Line Extension: The process of expanding product variety within a firm’s existing product categories, often leading to cannibalization.

Competitive Dynamics: The actions and responses between competing firms aiming to improve their relative market position, in which cannibalization can play a significant role.