The art of competing against yourself: are you a cannibal? (Strategic Marketing).(research into how latecomers to an industry en

According to the American Heritage Dictionary (2000), cannibalism is the act of depriving something of its vital elements. When executives reduce a critical part of the work environment or product, such as personnel, equipment, or funding, and redeploy these resources elsewhere, they are committing an act of cannibalism. Although this definition is quite different from the common perception of cannibals as savages who eat human flesh or animals that prey on their own kind, it represents a practice that many managers engage in on a regular basis.

One example of cannibalism is when the executives at Wall Street Journal decided to offer its complete newspaper online free for a limited time; this move clearly are into the journal's paid-subscription market. Even now that the journal is charging for the online version, which offers the full contents of the paper plus more in-depth coverage of key stories, the price for a one-year subscription is just one-third of the cost of the paper version. U.S.A. Today engages in a similar cannibalistic practice when it gives free copies to hotel and motel guests across the nation. General Motor's Saturn division is yet another example. Saturn not only introduced new cars that compete with its own existing brands, it also launched a whole new way of manufacturing, selling, and servicing automobiles. What about the mass marketing of DVD technology? This too has eaten away at the market for VCRs and related products.

What are these companies thinking? Are they giving away their businesses? Not at all. In fact, they are aggressively pursuing new business opportunities that will eventually enhance their firm's bottom-line performance.

A recent article, entitled "Will and Vision: How Latecomers Grow to Dominate Markets," reports the findings of research that the authors conducted on 66 markets as they evolved over several years (Tellis and Golder 2003). Among the major findings is that relentless innovation that caters to the market's needs, even at the risk of cannibalization, is one of five key principles in enduring market leadership. With markets and technology both in a constant state of change, even the most entrenched firms are at some risk. One may even argue that an established business cannot survive a major change in its environment without risking its old business model. However, the decision is often made to not pursue a venture that has the potential to cannibalize portions of the existing business because of concerns related to investments in existing assets such as plant, people, and equipment. Do you remember the railroad industry's steadfast commitment to focussing on the transportation infrastructure it created? That industry's unwillingness to invest in other modes of transportation almost resulted in its demise.

Judging by the experience of Starbucks, which has more than 4,500 locations in North America alone, it is easy to conclude that the risks of cannibalization are minimal and the rewards are handsome. According to Howard Schultz, the entrepreneur that acquired Starbucks in 1987, this market strategy came about in the early 1990s (Washington Post 2002). Faced with the prospect of having to temporarily close a small store for renovations, Schultz opened a larger store just 30 yards away. To his delight, both stores thrived, and the model that Starbucks has perpetuated was born. A new Starbucks location often eats away some of the business of an existing store, but within a year, sales at the original store typically recover. The worst-case scenario is that the company loses some business to itself rather than to a competitor.

Healthcare organizations can reap the same benefits from cannibalization as have companies in other industries. Take an area in which there has been a significant population growth or perhaps even a section in the outer perimeter of the primary market area. Then consider the following questions:

* Can current customers (i.e., physicians and patients) be expected to continually use existing services and facilities, or can a new presence in that same market be developed to stimulate the area? If some of the existing volumes of service were lost temporarily, will that create a problem? Obviously, Starbucks didn't think so.

* What if existing capabilities (facilities in particular) were constrained? Given the rapid growth in ambulatory volumes and the changing customer-service demands of consumers, will continuing to invest in existing services and locations make sense, or should decompressing the current situation by moving some activity to a new location be considered an option? Is the development of an urgent care center an effective way to divert traffic from an overcrowded emergency department? How different is that move from the Wall Street Journal's decision to offer news through electronic media?

* How should the acquisition of new clinical technology that replaces older approaches be dealt with? Can we afford not to employ new technology, even if it hurts or competes with our existing services? Even if an open MRI or new PET scanner is not purchased, isn't someone else likely to do so? Do we then try to play catch up? Do the companies that market DVDs worry about declining VHS sales?

* When do we consider development of a specialty service, such as cardiology or orthopedics, as either a freestanding entity or a hospital within a hospital? Will this addition allow us to provide existing services in a new way? Of course, this will eat away at current volumes and revenues, but those concerns didn't stop General Motors from investing in Saturn.

Clearly, each of these questions needs to be studied, and the financial impact of various scenarios has to be determined. Critical questions regarding the potential gains to be achieved or the losses that can be minimized must be addressed as well. The probability of growth in a related area must be evaluated, and regulatory, quality, and service delivery issues have to be explored. However, successful pursuit of the underlying strategy of organizational growth will continue to challenge us to act as if we are cannibals.

References

The American Heritage Dictionary of the English Language, 4th Edition. 2000. Boston: Houghton Mifflin Company.

Tellis, G. J., and P. N. Golder. 2003. "Will and Vision: How Latecomers Grow to Dominate Markets." [Online article; retrieved 5/8/03.] www.marketingprofs.com.

Washington Post. 2002. "Pouring It On." Washington Post (August 25): H 1-4.

For more information on the concepts in this column, please contact Howard Gershon at hgershon@psiarista.com.

Howard J. Gershon, CHE, principal consultant, PSI Arista, Fairfax, Virginia