“Nothing endures but change.” – Heraclitus
At Egen, we often work with companies that are unsure how to future-proof their business. Innovation in your marketplace is commonly paired with the fear of failure, which even top-level brands experience. If we think back we can remember Amazon’s Fire phone, The Google Glass, and as of more recently, Samsung’s Bixby, which was marketed as the “next great digital assistant”. Brands fail, and they do it often, but such doesn’t have to be the end-all, be-all, of your business. Businesses need to keep an open mind and can’t be afraid to take risks. There are ways you can get ahead of technology, and failure, as a way to future-proof your business with cannibalization, continuous improvement, hedging, and strategic bets.
In marketing terms, cannibalization is the reduction in sales volume, sales revenue, and market share as a result of the introduction of a new product by the same producer. In short, your new product takes customers away from an existing product or service. A great example of a brand that went the route of cannibalization is Netflix. Founded in 1998, they were strictly sending DVDs by mail for people’s enjoyment with 30 employees and 925 titles available to be sent.
By 2005, there were 35,000 different films available, and Netflix shipped 1 million DVDs out every day. However, they discovered how rapidly YouTube was making popular streaming services and that the sale of DVDs was beginning to decline. In fact, consumer spending on DVDs fell 4.8% by 2007. Despite so much success, the notion of streaming was coming to a forefront, and they began working on their own concept, which was designed and completed by the end of that same year. Upon launch of their new streaming concept, they only had about 1,000 titles for users to choose from. Fast forward to March 2018 and their stock price reached a new all-time high of $301.05 with roughly 118 million subscribers and over 5,000 titles.
Another example of cannibalization of a business is the introduction of Amazon allowing outside companies and other users to sell items on their platform. The idea of inviting competitors to Amazon was put into place in 2000 once Bezos launched Marketplace. Now, independents sell 44% of all items on Amazon worldwide, with sales growing faster than those on their individual host sites. Now, Amazon is the third most valuable public company in the world (behind only Apple and Alphabet), the largest Internet company by revenue in the world, and after Walmart, the second largest employer in the United States.
While cannibalization is deliberately killing your own business to start new, the method of continuous improvement centers around changing your business, its strategy, and what it has to offer based on technological advancements. In 2013, Adobe pivoted from selling their software as versioned CDs to a subscription model delivered over the cloud. The subscription model came with an initial backlash from its user, however, Adobe’s director of product marketing, Heidi Voltmer, stated that moving their products to the cloud pushes faster iteration, saying, “All the product teams [Illustrator, Photoshop, etc.] are going toward the model of what makes sense to them. Some might have quarterly updates. Some have already had more than one update per quarter–like two or three small features or updates.” Despite the outcry, Adobe moved over 500,000 cloud subscriptions in just under a year post-launch. While revenue decreased 8% after the launch, revenue was $5.9 billion in 2016, up from $4 billion in 2013, with about 80% of that came from subscriptions and other recurring sources.
A different instance of a company making the most of continuous improvement is when IBM went from selling products to selling services. Those products were huge mainframe computers that they sold to large organizations all over the world. However, with the introduction of personal computers, servers, and client-server technology, no one had much interest in mainframes any longer. Because of this, IBM took note and changed its course. Instead of selling mainframes IBM made the move to sell services that go with this new age of PCs, which then took them to IT consulting.
A hedge is an investment that protects your finances from a risky situation. A good way to think of hedging is with insurance. For example, when we decide to hedge, we are ensuring ourselves against a potentially negative event. It doesn’t prevent the event from happening, but if it does, the impact will be reduced.
Caterpillar invested in Yard Club as a hedge in 2017. Yard Club was founded to make more efficient use of construction equipment by allowing companies to rent what they need. As part of the investment, Yard Club began working with the dealers in Caterpillar’s extensive network as they help them rent, as well as sell, equipment to contractors and construction companies. There is also the case of Yahoo investing $1 billion for 40% stake in Alibaba, the Chinese e-commerce site, in 2005. At the time, this investment was both expensive and risky but became an extremely profitable decision by Jerry Yang, Yahoo’s co-founder. In today’s prices, that deal would be worth more than $80 billion.
While these two investments turned out to be profitable for all parties involved, there are many deals that never happen. For instance, imagine if Hyatt had invested in Airbnb. Although Airbnb doesn’t own physical hotels, like the Hyatt does, it has grown to own the hospitality industry. The same can be said when you consider what would have happened if Hertz had invested in Zipcar or Uber.
Placing a strategic bet is something you should consider more than just when betting on your favorite sports team. Sometimes to future-proof your business you need to think about taking high risks that could potentially lead to high rewards. Oftentimes, that bet may be on you and your business idea in of itself.
For instance, the founders of Whole Foods Market took a big bet by acting on their idea to focus on natural and organic products. While natural food stores are now found throughout metropolitan areas, that certainly wasn’t in the case back in the 1970’s. Regardless, the co-founders left their grocery store businesses to invest in a supermarket that steered away from the food trend of frozen and ready-made meals with only 19 employees in 1980. Taking this risk paid off, as Whole Foods changed the entire culture of grocery shopping and food preparation and became one of the most successful supermarkets with over 400 locations, which was purchased by Amazon for $13.7 billion in 2017.
Let Egen Help Future-Proof Your Business
No matter what sort of business you run, being ready for what the future could hold is a must if you want to remain ahead of the game and relevant to your customers. It’s important that you can adapt your business for when new innovations could be on the horizon, whether that be through cannibalization, continuous improvement, hedging, or by making strategic bets. At Egen, our team of engineers, product managers, and designers will help you discover the innovative ideas for your business to place a strategic bet on, and a platform that can help you future-proof your business. If you’re interested in having us take a look at your business and finding ways to ensure you’re ready for the future, Contact us today.
- Digital Transformation