Strategies for product cannibalism

Abstract

This paper explores the question of when (or if) a market leader firm is best off with a strategy of product cannibalism: introducing a new product designed to supersede and hence destroy its own current bestseller before a rival does. Particular attention is given to the payoffs of various superseding product strategies and, given these strategies, whether the leading firm can be expected to invest at least as much in innovation as a challenger. A patent‐race game with a stochastic invention process is presented. The result is that when the leading firm deliberately decides to forgo being first‐mover in the new market, developing and then ‘shelving’ its new product until the current bestseller is challenged successfully by the rival, the leading firm may spend more than its challengers on R&D, thereby retaining a competitive advantage in innovation of new‐generation products. The paper concludes with a discussion of the practical implications of the model.

The Underemphasized Role of Established Firms as the Sources of Major Innovations

“…Substitutes may provide opportunities for new companies and diversifying entrants to enter an established market. This result has not only found support in empirical studies (Tushinan and Anderson, 1986;Henderson and Clark, 1990) but has also been derived in theoretical models of product cannibalization (see Reinganum, 1985;Conner, 1988). Coupled with the previous discussion of technical change, therefore, this research stream suggests that new companies will be common sources of substitute innovations that require substantial new knowledge and diversifying entrants will be common sources of substitute innovations that require knowledge reconfiguration.…”

Masters of War: Rivals' Product Innovation and New Advertising in Mature Product Markets

“…Both product innovation and new advertising are likely to positively affect the financial market value of the firm by triggering business stealing from competitors (Kekre and Srinivasan 1990) and/or expanding demand by either stimulating purchase acceleration (Chaudhuri and Holbrook 2001) or attracting new customers (Lancaster 1984). On the other hand, some authors have argued that these positive effects must be weighted against the risk of jeopardizing existing income streams (Conner 1998). Most of the empirical works have, however, found a positive impact of a firm's actions along these two dimensions on its financial market value.…”

The Penguin Has Entered the Building: The Commercialization of Open Source Software Products

“…Typically, profits from new products are uncertain, and a firm is relatively unwilling to jeopardize existing, stable income streams by making risky investments (Conner 1998). The industrial organization tradition predicts that an incumbent has fewer incentives to introduce new products because they erode profits in existing lines of business (Ghemawat 1991).…”