Section e: Destroy your - 'Eat lunch or be lunch' is a proven tenet of corporate survival, but self-cannibalisation takes it to the limit. Why would an established enterprise set out to consume itself? To stop a greedy upstart from killing it

Section e: Destroy your - 'Eat lunch or be lunch' is a proven tenet of corporate survival, but self-cannibalisation takes it to the limit. Why would an established enterprise set out to consume itself? To stop a greedy upstart from killing it

Last Updated: 31 Aug 2010

It was a trick often used by wily bosses to wake up their businesses - and it used to work. What you had to do was imagine the worst competitive threat you might suddenly face and then devise strategies in advance to counter it. But if the trick is still going to work in the digital business age, it needs a new twist. Having identified the potential threat from an upstart, low-cost competitor, you might have to go the whole hog and start one up yourself.

Established businesses have long realised that offering their existing services via the internet isn't enough. The smart ones are using the new technologies to establish ventures with complete freedom of action. These new operations set their own prices and are encouraged to trade head-on against the parent company to see what happens. Many even use the parent's brand name.

You say that's suicidal - now you're getting it. It's cannibalism or, to be more precise, self-cannibalism. One of the earliest exponents of this singularly drastic management style was Jack Welch, the legendary chairman of General Electric. He's the man credited with coining the expression Destroy Yourself.Com - the mantra of corporate cannibals everywhere.

Although his reputation and results were built on his undiminished appetite for reorganisation, Welch is an unlikely internet pioneer. He's a year or two off retirement and few expected him to turn things upside-down so near the end of his reign. He'd spotted how all his people were going online and asked for lessons to explore cyberspace for himself, turning almost overnight from being a self-confessed technological Neanderthal into a powerful advocate of the web as a means of reaching and winning customers.

What amounted to virtual in-house competitors were soon set to work across the entire company. Once each was proven, Welch relentlessly cut out the middlemen and women who did the job in the old way. In procurement, for example, GE stages daily auctions with suppliers. Nothing stands in the way of change.

Would-be cannibals looking for a little bedtime reading might start with a 1997 book by IT specialist turned Harvard professor Clay Christensen.

Like many American management books, the title of his original thoughts on all this almost says it all: The Innovators' Dilemma: When New Technologies Cause Great Firms to Fail. Taking his own industry as an example, Christensen charted how each successive development in the disk-drive industry caused particular grief to the current market leader. He points out, for instance, that not one of the leading makers of radio valves graduated to selling transistors.

His message was that managers who concentrate on super-serving their best customers with the most profitable products may be unwittingly consigning their companies to oblivion. There are times when it may not be right to listen to customers: managers have to break with convention and invest in developing lower-performance products delivering thinner margins.

And since experience suggests that one senior manager can't get a new business model up and running while simultaneously running an old one, Christensen says the only answer might be to set up a separate company to cannibalise the parent.

So much for the theory. But who's doing it in practice? The most obvious are the many high street banks and former building societies, which are rapidly rolling out separately branded internet operations. As one analyst puts it, bankers no longer wake up at night worrying about bad loans; they worry about which of the new financial service players will pinch their customers for loans, mortgages, credit cards, savings and pensions.

In the US, the retailers Sears, Toys 'R' Us and Petsmart are among many previously troubled corporations now undercutting themselves online.

But the textbook example of a business that has actually come through the self-destruction phase and transformed itself in the process is Charles Schwab, the US-based private client stockbroker. Since taking over Sharelink, it has taken pole position in online trading in the UK. Until the mid 1990s, Schwab was branch- and telephone-based, with a minority of computer-literate customers doing their trades on special software that linked up with the company's networks.

Towards the end of 1994, president David Pottruck read that more PCs had been sold in the US than televisions for the first time in history.

He was the first to spot the potential for offering investment services to millions more Americans. He knew it had to be different - and that Americans love a bargain. Just a year later, he'd launched e.Schwab, a separate, stand-alone division that offered no-frills online trading for dollars 29.95, but with no access to branches or service. Demand exceeded anyone's wildest dreams.

But soon customers of the full-service side discovered they were paying about twice as much to do their trades, and the new no-frills clients often turned up in the branches but couldn't easily be sold the more profitable value-added services. The solution was staring Pottruck in the face; Schwab bit the bullet and folded all its services into e.Schwab; all deals were done for dollars 29.95.

'We knew that we couldn't build a high-growth successful company on the basis of unhappy customers,' recalls Pottruck. 'We estimated that the revenue and pre-tax profit implications of this move were between dollars 125 million and dollars 150 million. To a company that earned dollars 250 million in 1997, this was a substantial impact. The price of our stock went from dollars 41 to dollars 28. I wasn't a very popular man.' His popularity improved when Schwab gained a million new customers in a year and earnings began to recover.

Schwab's strategy is in contrast to that at Merrill Lynch, which has belatedly gone into online broking but also hopes to maintain its premium-priced brokerage business.

One service industry being transformed - in some cases decimated - by the internet is recruitment. People looking for work have been logging onto job boards posted by dozens of new web-based agencies, which are challenging traditional employment organisations. The response of one UK player, the quoted BNB Resources with 47 offices worldwide, has been to take on an extra building west of London, where it's basing an entirely new internet business. Staff from its existing operation were invited to join the launch team, and as many as 200 people could be working on the project by the end of the year.

BNB's chief executive Graham Durgan says his team have developed new software that is not only fast but is better at matching candidates exactly with employer requirements. BNB also claims that it has addressed the lack of confidentiality that is an issue in many online matching services. Yet Durgan insists there is no plan to reposition the entire business round the internet; he claims products will reach customers on a wide range of platforms - for example, digital TV may be another important channel in the future.

Throughout, BNB has had the help of internet consultants Rubus. Its founder, Michael Walton, warns that running a net business is entirely different from operating a traditional one. 'Since speed is a way of thinking, you do need to get away from the nine-to-five culture. You have to have the buzz of a start-up, separate from the mother ship, so you can attract and motivate staff.'

The creation of what amounts to a new fast-track elite may cause personnel difficulties. Longstanding, loyal staff get upset when they see people who have been on board for five minutes being offered share options. They may resent not being invited to join the Says BNB's Durgan: 'The main problem we found was that we had to keep our plans secret even within the organisation. That has caused tensions and at times bred suspicion.'

When it comes to destroying the old and creating the new, the man licensed to kill at Charles Schwab is Bob Duste. Once chief technologist, he's now CEO Europe. In the end, Duste had to wave goodbye to about 200 people, but says the current UK payroll of 1,000 is now four times as large as when the company took over.

'In the US we'd learned to recruit a mindset - we'd generally hired individuals with a passion for life-long learning. When we bought Sharelink in the UK, we didn't have that luxury. Some British workers do worry an awful lot about their jobs. But once they could see what we were doing and how we were retraining them, more than three-quarters made the transition.'

In retail, traditional new and used motor dealerships have been among the earliest victims of the price transparency of the digital marketplace.

Whipped into a bargain-hunting frenzy by the 'Rip-off Britain' campaign, customers have discovered how easy it is to locate cheaper sources of supply. If vast car supermarkets and personal import merchants don't get to potential buyers first, the manufacturers will as they tool themselves up for direct online selling - leaving the dealers with a few crumbs.

It is forecast that, by 2005, 15% of all motor transactions will start with the net. What's more, the price customers will be prepared to pay may be such that the successful sellers of the future will be those who can strip out the additional costs incurred by bricks-and-mortar dealers.

So which road do you take? One dealership that is managing not to run round like a headless chicken is the Yorkshire-based Dixon Motors - a plc with 58 showrooms for most of the major marques, plus Carnell, the market leader in motorcycle sales. It is one of the first of the mainstream dealerships to experiment with something new, and its web site ( has won awards and done much to drive the business forward.

Dixon has joined Direct Line to launch - Direct Line is investing pounds 15 million in marketing it over the coming year. Hundreds of car-related sites have been launched, yet this one claims to be the first to allow users to buy used and new cars entirely online - all prepared and distributed through the existing pounds 11 million Dixon Distribution facility.

Managing director Simon Dixon says, whatever the outcome of the current pricing debate, jamjar will take the cost out of traditional buying patterns.

That may be true for today's customers, but such an operation won't take the cost out for the owners of the business if most of the original infrastructure is left in place. It's one of the reasons why the internal market was judged a flop in the health service and the BBC. In-house departments won less business, but most of them continued in some form.

So for Dixon, inevitable channel conflicts lie ahead. What if all the Dixon Motors customers insist on jamjar prices? Will the company continue to invest in the dealer network, which it is committed to continue expanding?

Not all new economy gurus are enthusiasts for Tony Robinson, a partner leading the e-business strategy group at Arthur Andersen Business Consulting, has helped several clients start new online ventures. 'As a concept it's a bit overhyped. The truth is that most corporations seem to peer over the edge of the cliff and then decide not to jump, at least not yet. My clients like using the internet to force their suppliers to cut prices. But they're not so keen to use it against themselves.'

Understandably, organisations worry about what will happen to their people.

There are so many reasons for inertia, especially if the business model has worked for decades. Ordering a virtual strike on everything that has been built up must rank as one of the most difficult decisions any senior manager could take. It almost certainly means inflicting serious initial damage on earnings and the share price with no certainty that they will recover. Intel's Andy Grove, the man who cheerfully predicted that only the paranoid would survive, calls this phase 'entering the valley of death'.

But which is worse, being a cannibal yourself, or ending up in another cannibal's pot? The failure of some of the first wave of merchants is making some boardrooms complacent. Those who aren't willing to double-click the destruct button now may find the next wave of digital competition far more deadly.

Nigel Cassidy is business correspondent of Radio 4's Today programme.

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