In 2007, nobody could touch Nokia. They controlled 41 percent of the global mobile phone market. Enter Apple and and, in a mere 6 years, that global market share had plummeted to a measly three percent and they sold their handset business to Microsoft. Nokia was, effectively, done.
There are many reasons, widely debated and discussed, for Nokia’s dramatic fall. But one reason stands out, perhaps because it’s so common among large corporations - a reluctance to innovate for fear of cannibalizing their existing money-makers. But does that fear make sense?
Can cannibalizing your existing products and services actually be a good thing? And how can you do it without destroying your core business entirely?
Cannibalization as a strategy
Apple smashed Nokia not because they invented the smartphone - they didn’t - but because they were willing to compete against themselves. They launched the iPad despite the possibility that it could eat into MacBook sales. They integrated music player functionality and iTunes into iPhones, knowing it could kill the iPod. As they saw it, cannibalization was an opportunity; after all, it’s better to eat your own than be eaten by others.
“Our core philosophy is to never fear cannibalization,” then-CEO Tim Cook said in 2013. “If we don’t do it, someone else will.”
Apple is famous - notorious, even - for purposefully disrupting itself, but they’re not the only company who has embraced cannibalization as a strategy. Amazon, Netflix and P&G all operate under the assumption that as markets and technologies change they are constantly at risk of being outflanked, and as such they need to function much like the 2-faced Roman god Janus: facing inward, pursuing and executing sustaining innovations in their core business, while simultaneously facing forward, exploring and innovating for their future business.
The ambidextrous approach
So how to successful companies do it? Creating new businesses from inside an existing corporation isn’t easy - often, the core operation’s ‘immune system’ rushes to quarantine anything that might cannibalize it. The solution is to take an ambidextrous approach, exploring two separate journeys at the same time. In the Harvard Business Review, Charles A. O’Reilly and Michael L. Tushman put it like this:
We discovered that some companies have actually been quite successful at both exploiting the present and exploring the future, and as we looked more deeply at them we found that they share important characteristics.
In particular, they separate their new, exploratory units from their traditional, exploitative ones, allowing for different processes, structures, and cultures; at the same time, they maintain tight links across units at the senior executive level. In other words, they manage organizational separation through a tightly integrated senior team.
Accenture’s 2015 U.S. Innovation Survey calls this a 2-engine model:
With this dual model, innovation engine 1 is laser-focused on making existing products and capabilities continually better. Engine 1 supports a company’s steady pace of evolution, and is a critical enabler of the incremental changes that propel a business forward.
Innovation engine 2, on the other hand, drives big-bet innovations such as the introduction of entirely new product or service categories, an expansion into new markets, or the development of a new business model. Engine 2 efforts are disruptive and potentially game changing. When executed correctly, these innovations deliver a step-change improvement in organizational performance and competitive advantage.
Why does this approach work? O’Reilly and Tushman explain:
In almost every instance in which an ambidextrous structure was used, the competitive performance of the existing product either increased or held steady. By contrast, the results of the traditional operations frequently declined where functional designs, cross-functional teams, or unsupported teams were employed.
At a theoretical level, it’s easy to explain why ambidextrous organizations would outperform other organizational types. The structure of ambidextrous organizations allows cross-fertilization among units while preventing cross-contamination. The tight coordination at the managerial level enables the fledgling units to share important resources from the traditional units—cash, talent, expertise, customers, and so on—but the organizational separation ensures that the new units’ distinctive processes, structures, and cultures are not overwhelmed by the forces of “business as usual.”
At the same time, the established units are shielded from the distractions of launching new businesses; they can continue to focus all their attention and energy on refining their operations, improving their products, and serving their customers.
So what does this ambidextrous approach look like in the real world? Companies that sell physical goods, like P&G, create brand families as a survival strategy, competing with themselves on supermarket shelves. But companies you wouldn’t necessarily expect, like Amazon, Netflix, and even Facebook, have been able to maintain a dual (or multiple) focus by creating their own unconventional brand families.
Building an unconventional brand family
Amazon has grown by continually cannibalizing itself, going from a focus on retail goods to digital. And while the Kindle stands out as an example, they also built the world’s largest cloud computing enterprise, Amazon Web Services, in parallel and as a completely separate division. But Amazon also has a big extended family of 40+ subsidiaries, where their branding is minimal; separate brands like Zappos.com, Audible.com, Pets.com and IMDB.com. This family has helped them reach revenues of over 88 billion as of 2014.
Netflix successfully shifted its core business from a company that shipped DVDs to consumers into a streaming media service that works on all devices. Their first foray into a brand family, however, was a disaster; they attempted to split the DVD rental arm into a separate brand, Qwikster, and customers turned up their noses. Netflix quickly realized that their delivery was merely a commodity and, just like networks, it was their content that mattered - and networks like HBO cannibalized their content all the time. Netflix began developing original content, each new series becoming a member of their brand family.
Facebook’s Little Red Book devotes an entire page to this phrase: “If we don't create the thing that kills Facebook, someone else will.” In 2015, Mark Zuckerberg formally announced their Family of Apps strategy - but they’d been doing it for a long time before that. It has kept apps like Instagram, WhatsApp and even Messenger as independent, standalone apps.
Rather than have one platform, they have five, each with the potential for over a billion monthly active users - and each constantly undertaking sustaining innovation while their Creative Labs face forward, creating new brands and testing new innovations for future markets.
Don’t let fear stand in the way of opportunity
The fear of cannibalization isn’t ungrounded; however, being overly guarded against the possibility can blind you to real opportunities and growth strategies. In today’s marketplace, sustainable growth comes from aggressively seeking to kill your cash cow before someone else does - your need to be willing to cannibalize your existing market in order to survive long-term. So, when fear rears its ugly head, consider three things:
The threat of cannibalization can be turned into an opportunity.
This is especially true when you have an unmet needs in an emerging market. Are there potential customers who currently are not using your products, or any products in your market, because the current offerings are either too complicated or too expensive? The iPad did eat away at some of Apple’s higher priced offerings, but this was more than offset by the $10 billion in revenue… and introducing the entire Apple ecosystem to 15 million new users.
Do something legitimately different.
If you use the same approach, marketing vehicles and distribution, it can be hard to bring new benefits to different customers. In India, P&G successfully introduced a custom laundry brand, Tide Naturals, targeted to lower-income consumers who wash clothes by hand and suffer irritated skin as a result. Following their ‘delight, don’t dilute’ mantra, P&G didn’t just lower their price on their regular midmarket products - they came up with a unique, distinct product that fit the needs of the market.
Similarly, WalMart’s reverse innovation of ‘small marts’ in Latin American markets, where the big-box model doesn’t fit the way people shop, also proved successful in large U.S. cities like New York, where the big-box approach is less popular and the real estate required is expensive. Rather than cannibalizing their traditional stores, the smaller stores proved to be an alternative business model that worked in specific markets.
Remember that cannibalization is, ultimately, out of your control.
If you can see a way to cannibalize your current business, chances are someone else has seen it too - and views it as a potential opportunity for them. And if that opportunity is large enough, they’ll find a way to act on it. Consider whether the risk of cannibalization outweighs the very real risk of being outflanked by a competitor.
If Nokia had been willing to take more risks and engage in a little friendly competition with itself, you’d probably be reading this on one of their smartphones right now.
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