May 10, 2016

Embracing cannibalisation - on incubation as a tool for digital transformation, part 1

Gunnar Tolf

Lead Consultant, Business and IT Transformation, Tieto

Digitalization, and the extreme speed at which new services and business models gets global reach, is putting a new emphasis on an old challenge of established and historically successful companies across industries and geographies.

It can be telecoms operators or manufacturers trying to find attractive services based on machine-to-machine communications or the internet of things or banks looking for new attractive mobile or payments services: To succeed in commercialising new services made possible by new technologies.

The incumbent’s dilemma

That many successful established companies have challenges in commercialising new technologies is well-known and has been described by many people, not least by Clayton Christensen in his modern classic “The innovator’s dilemma” (where he coined the phrase “disruptive technologies“, which is widely used and misused today ). One of Christensen’s main points is that many successful companies fail in introducing new product or service categories (especially the ones that he characterises as disruptive) not despite but because of their previous success: Companies that know their current customers very well and are optimised in terms of process, culture, cost structure etc. to meet these customers’ needs have many obstacles to overcome if they are to start satisfying other needs and often other customers.

Incubation as a solution

As Christensen’s theories have gained acceptance, and as practical examples on successful innovation have become well-known, the concept of incubation is gaining momentum: Organising the commercialisation of new categories in new businesses, organisationally – and preferably also physically and geographically – separated from the parent business. One fairly well-known Swedish example of the latter is when Ericsson started its mobile phone business in Lund in southern Sweden rather than at the head office in Stockholm. The purpose is to let the new business start growing, shielded from the culture and business rules and that would always give it a low priority within a large, successful organisation.

Crying “cannibalisation” – the best way to kill new opportunities

While more and more companies have adopted the idea of incubation in theory, it is much harder to implement the concept in practice. It is especially easy to fall for the temptation to hold on too much and just separate the new business half-heartedly. Such partial separation is often justified with seemingly rational arguments of synergies and economies of scale, but often ends up hugging the new business to death.

I will argue that a very clear warning sign for such insufficient separation is the use of the word “cannibalisation”. Especially within an established and historically successful business it is very easy to regard a new product or service as a competitor that “cannibalises” the existing business. The knee-jerk reaction – especially of executives who might have built their careers on the existing product or service – is then often to protect the old business at the expense of the new one. Executives who take a holistic and long term perspective on the other hand, will argue that: “if we do not do this, someone else will, and then it will be an external competitor instead of a subsidiary who takes our market share”. Of course, taking a holistic and long term perspective is always easier said than done, but looking out for – and challenging – the use of the word and the idea of “cannibalisation” will be a good start.

 

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