STRATEGY

Cannibalisation the only way to beat cheaper competitors, says professor

PUBLISHED : Friday, 20 March, 2015, 8:51pm
UPDATED : Friday, 20 March, 2015, 8:51pm

The only way traditional businesses like newspapers and even the Harvard Business School can survive the threat of cheaper competitors is to cannibalise themselves, according to a professor at the august institution.

"What causes successful companies to fail is competitors come into the market, not with a better product but a worse product, but it is so affordable so many more people buy that product," said Harvard Business School professor Clayton Christensen during a recent visit to Hong Kong.

Japan prospered from the 1950s to the 1970s because Japanese firms like Toyota Motor Corp made cars that were so affordable even college students could buy one, Christensen said.

"In the 1990s, Japan stopped investing in making cheap products, and then its economy levelled out," he said. "It's the same reason why China has become prosperous. Chinese companies like Huawei [Technologies] came in at the bottom of the market and disrupted companies like Cisco Systems. It's always the low end that wins."

Cisco was one of the pioneers of the internet, having invented the router, which links computers to the internet. Huawei came in with a lower-quality but more affordable product, Christensen said. "People who couldn't afford a router now can."

To ward off cheaper competitors like Huawei, Cisco kept improving its products. "Every time Cisco developed a better product, its profitability improved. In order to survive, you keep making better products," Christensen said. "If Cisco goes to the bottom of the market like Huawei, it will kill Cisco's profit margins."

Technology pioneers are not the only ones affected by this trend, notes Christensen. "In North America, several newspapers are dead. These newspapers were killed not by better newspapers, but by online players who are not as good as The New York Times," he said.

Corporate universities, which act as in-house universities for companies, were doing the same thing to the Harvard Business School, Christensen added.

A Harvard MBA costs US$250,000 while courses at corporate universities are much cheaper. "These corporate universities are bringing in the masses, many of whom could never get into Harvard," he said.

Christensen added: "The newspaper business is the same. Much more news is read today than 10 years ago because the news is online."

The only way for a company to deal with cheaper competition was to set up a different company with an "invitation to kill its parent", he said.

Scott Anthony, a managing partner of Innosight, a US consultancy co-founded by Christensen, cited Apple as an example of a corporation cannibalising its own products not only to survive, but to thrive.

In an article in the Harvard Business Review, Anthony wrote that some analysts were worried the iPad would eat into sales of Apple's higher-priced products. Yet the firm has sold more than 200 million iPads. He quoted Apple chief executive Tim Cook as saying: "If this is cannibalisation, it feels pretty good."

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