To: hpeace who wrote (23571 ) 11/30/1997 12:16:00 AM From: Chuzzlewit Read Replies (5) | Respond to
Thank you for the URL re: cannibalization. The analysis is replete with logical errors, and it will take me some time to provide the thread with a complete analysis. However, here are a few items to consider: 1. We cannot know what the profit margins are like on the sub-zeros. Inferences do not work because there are simply too many factors varying at the same time. For example, decreasing component costs, decreasing ASP's for existing products and the introduction of new products. It could very well be that margins are significantly smaller on the sub-zeros and have expanded on the servers and desk-tops (judging from Dell's results, this is what I would have expected). 2. No one knows the demand characteristics of the consumer with any certainty. For example, what proportion of the sales of sub-zeros are substitutes for more expensive machines (cannibalization) and what proportion are from buyers who would not have bought a more expensive machine (price elasticity of demand). Precise marketing research is required to delineate these markets. 3. The analysis implicitly defines cannibalization as a loss of existing profit, but I think it is more properly defined as a loss of expected future profits. The function of any management is to maximize shareholder wealth, and towards that end they must maximize the present value of future cash flows. By focusing on loss of existing profits, we lose sight of this important point.
