Cannibalization

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CANNIBALIZATION

Cannibalization refers to the business process whereby engaging in one activity or practice necessarily eats into another activity or practice. Cannibalization can take place within a firm, between businesses, or across industries. Cannibalization became a crucial concern as e-commerce flourished in the late 1990s and early 2000s, since the efforts to cash in on the new commercial medium often sacrificed other business practices and sales channels. At the end of 1999, Jupiter Communications predicted that by 2002 only about six percent of all online expenditures would derive from incremental sales, while the remaining 94 percent would proceed through traditional channels, indicating a high degree of cannibalization.

Channel cannibalization involves the devouring of one avenue for generating sales, such as a particular sales outlet or distribution chain, in the name of moving to an Internet-based direct relationship between companies and consumers. With fewer actual stores and physical distribution channels, companies transforming themselves into dot-com players have had to walk the fine line between over-cannibalizing their established distribution channels, thus losing business altogether, and losing their market share by a laggardly shift to the Internet. In addition, many of these established distribution channels are deeply rooted and highly valued by the companies in question, and may be of intrinsic necessity to their success, which raises the stakes of their cannibalization in the pursuit to get online.

The extent to which cannibalization has occurred, and the nature of its effects, varies considerably by industry. Some industries are built on infrastructures that are more conducive to the process of cannibalization than others. In the banking industry, for instance, Deloitte Consulting encouraged not just a basic online operation to supplement regular banking operations, but a more radical infrastructure transformation incorporating the emerging e-business model, even at the risk of cannibalizing existing operations. Online publishers face a similar dilemma. In the rush to set up their online content, magazine and newsletter publishers are faced with a number of questions. To what extent does the online content serve to simply give away our subscription-based content? How do we avoid cannibalizing our subscription revenues while maintaining a Web site with enough content to make it worth visiting? How can the Web site be used to keep revenues flowing and build brand recognition? Some publishers offer only selected content, while others offer their online content via subscription. Additionally, others put their content online for free but offer special bundled content bonuses just to subscribers.

According to the July 2000 issue of Bank Technology News, 35 percent of finance professionals in an Arthur Andersen survey felt that a primary effect of cannibalization would be the decline of traditional channels:

19 percent cited an affect on middlemen
13 percent expected an increase in direct marketing
12 percent stated that cannibalization would lead to more price competitiveness
11 percent thought that all existing channels would be affected
8 percent pointed to inter-industry conflict
7 percent thought it would lead to an overhaul of market strategy
6 percent expected greater labor mobility
and 5 percent thought that retail banking operations would be affected.

Despite the harshness of the term, cannibalization is sometimes viewed as a good, or at least necessary, business practice. In these cases, the implementation of new operations or new business channels at the expense of existing ones is deemed an acceptable means of gaining a foothold in changing market conditions. This was particularly true in the relatively rapid transformation from a strictly bricks-and-mortar world to the modern day clicks-and-bricks economy. Getting products and business operations online often was viewed as an absolute market necessity in the late 1990s and early 2000s. Because of this, many companies deliberately cannibalized their existing operations and channels in order to establish an online presence. The alternative was to be completely squeezed out of the game by more Internet-savvy competitors.

Planned cannibalization, however, must be carefully considered and delicately executed. Eating away at existing operations may be a necessary step for restructuring. However, if not mediated the results can quickly devolve into internal chaos that can bring a company's productivity and earnings tumbling. Even where cannibalization is viewed as an advisable strategy, analysts agree that over the long run, businesses and industries would do well to limit the degree of attendant cannibalization, as it inevitably involves suboptimal efficiency and lower profits.