Microsoft Word XXXXXXXXXXQS Cannibalization Kookabura Bats Case Exercise Intro.doc
©2017 KELLOGG SCHOOL OF MANAGEMENT AT NORTHWESTERN UNIVERSITY 1
QS CANNIBALIZATION: KOOKABURA BATS – CASE INTRODUCTION
MARKETING
Quantitative Marketing Skill: Cannibalization
Kookabura Bats
Case Introduction
It is a humid November morning in New Delhi, India, and you’re finishing your
first week of work as the Indian cricket bat category manager for the Kookabura,
a leading provider of cricket bats to professional and amateur cricket players.
You’ve just joined Kookabura after spending several years as the country product
manager for Adidas’s cricket equipment line in Sri Lanka.
Cricket is a bat-and-ball game that was first played in England in the sixteenth
century. It now enjoys popularity around the world, and some claim that cricket is
the second-most popular sports game in world (next to soccer).
For many years Kookabura has been successfully selling two bat products, and
combined sales are nearing a million units a year. One of Kookabura’s products
is a top-of-the-line model called the Kookabura Kahuna. The Kahuna is made
with wood from English willow trees, which are indigenous to England, and which
Kookabura has successfully transplanted to India. The Kookabura Kahuna bat is
a high-performance product, and it is a “Grade 1” bat, which means it is the best
looking (no blemishes in the wood). Over the years, Kookabura has been able to
gain endorsements from a number of prominent cricket players, who often
appear in Kookabura’s advertising.
Kookabura’s second bat is a lower quality model called the Kookabura Blade.
The Blade is made with wood from Kashmir willow trees, which are indigenous to
India and Pakistan, and which cracks or splits more easily than English willow,
especially if the bat is not oiled periodically. Kookabura Blade bats are “Grade 3,”
which means they are cosmetically less attractive than the Kahuna. They are
therefore priced significantly lower than the Kahuna.
The Kahuna accounts for 65% of the company’s unit sales and 74% of its
evenue, with the remainder coming from the Blade. The table below reports the
company’s annual financials* when you joined the firm. Sales and costs have
een steady for the past couple of years.
Kahuna Blade Total
Total unit sales XXXXXXXXXX
Total revenue (Rs. 000) ₹ 1,240,928 ₹ 428,714 ₹ 1,669,642
Total cost of sales (Rs. 000) ₹ 645,210 ₹ 188,708 ₹ 833,918
Advertising / Sales (Rs. 000) ₹ 135,396 ₹ 35,583 ₹ 170,979
©2017 KELLOGG SCHOOL OF MANAGEMENT AT NORTHWESTERN UNIVERSITY 2
QS CANNIBALIZATION: KOOKABURA BATS – CASE INTRODUCTION
Consumer promotions (Rs. 000) ₹ 88,106 ₹ 59,951 ₹ 148,057
Trade promotions (Rs. 000) ₹ 106,743 ₹ 36,877 ₹ 143,621
Other fixed costs (Rs. 000) ₹ 129,057 ₹ 36,441 ₹ 165,497
Operating profit (Rs. 000) ₹ 136,417 ₹ 71,153 ₹ 207,570
* the Indian cu
ency is Rupees ( )
Kookabura’s senior managers are nervous because global
ands like Nike and
Adidas are starting to compete aggressively in the cricket equipment category.
Within this increasingly competitive market, they are hoping to fortify and expand
their position, in part via new product development.
After cricket-bat wood is harvested for production, a manufacturer must
physically press the wood to increase its strength and durability. But if the wood
is pressed too much, it loses its natural spring and does not play well. As a result,
the bat manufacturing process must strike a balance between strength and
flexibility. On your first day of work, Kookabura’s managers revealed that they
have developed a new manufacturing process, which allows them to press wood
with higher pressure than before, but without sacrificing natural spring. The result
is a bat that sends the ball faster, straighter and further than most or all
competitor products.
An unexpected additional benefit of Kookabura’s new pressing process is that
the new bat does not require oiling and “knocking in.” When consumers first
purchase a standard cricket bat, they usually must rub it with oil and use a mallet
to round out the edges, which ensures better play accuracy and additional
durability. The new Kookabura bat is ready for use upon purchase, without
having to take these extra steps. Based on initial consumer testing, Kookabura’s
managers learned that this benefit is not desired by many or most individual
cricket players, who value the ritual of knocking in and caring for their bats.
However, Kookabura’s managers also learned that this benefit would be highly
valued by amateur and professional cricket clubs, who tend to purchase multiple
ats at once and who would save time and money if each new bat purchased did
not need to be oiled and knocked in. In fact, enthusiasm among organizational
uyers was so high that, during initial tests on the bat, several of those involved
with the test wanted to place immediate orders.
Kookabura’s managers hope the new product can be launched in a way that will
protect them from impending competition, but they are unsure about how best to
handle the launch. They are deciding between two strategies:
Strategy Option 1: One strategy would emphasize the new bat’s superior
performance. The aim would be to steal individual buyers from competitors
and to create a strong defense against potential entry by other companies
(like Adidas), who might also try to compete on performance. Kookabura’s
managers believe that a superior performance claim would be more credible if
the new bat were
anded similarly to the Kookabura Kahuna—a product
©2017 KELLOGG SCHOOL OF MANAGEMENT AT NORTHWESTERN UNIVERSITY 3
QS CANNIBALIZATION: KOOKABURA BATS – CASE INTRODUCTION
already widely associated with high performance. So, they would call the new
at the Big Kahuna. The company also anticipated that the Big Kahuna
would be endorsed by many of the same cricket players that cu
ently
endorse the Kahuna.
Strategy Option 2: A second strategy would emphasize that the bat is ready
to play (without knocking in). The aim would be to steal organizational buyers
from competitors. Organizational buyers tend to purchase large quantities in a
single order, and they include cricket clubs, professional cricket teams, and
municipalities that support youth cricket. These buyers are price sensitive,
which is why a significant percent of Kookabura’s Blade sales are to
organizational buyers. This strategy proposes that the new bat would be
called the Kookabura Readyplay. Although it would be significantly more
expensive than the Blade, the Kookabura sales team would emphasize how
much time and money organizations can save by not having to knock in and
oil a set of new bats, and that purchasing these bats would therefore result in
net savings to organizations that purchase them.
Under either launch scenario, the introduction of the new bat would have an
impact on sales of Kookabura’s existing products. Based on consumer research
and laboratory testing, Kookabura expects a cannibalization rate of 17 percent if
they pursue the Big Kahuna strategy and 7 percent if they pursue the Kookabura
Readyplay strategy. Managers also expect that virtually all cannibalized sales for
the Big Kahuna will be drawn from the Kahuna. Marketing communication for the
Big Kahuna would emphasize quality and performance, which are attributes
shared by the Kahuna. Both bats would also be endorsed in similar ways by
athletes already associated with the Kahuna.
On the other hand, managers expect that virtually all cannibalized sales for the
Readyplay will be drawn from the Blade. Organizational buyers do not tend to
have the budget to afford purchasing the Kahuna, but many see value in the
lower-quality Blade.
Because strategic cases could be made for either approach, the senior
management team has asked you to look at the financial ramifications of the
anding strategy choice. The initial financial inputs are detailed in the following
table:
Big Kahuna Readyplay
Year 1 Year 2 Year 1 Year 2
Predicted unit sales XXXXXXXXXX1700
Wholesale price per unit ₹ 2,550 ₹ 2,550 ₹ 1,850 ₹ 1,850
Variable cost per unit ₹ 1,208 ₹ 1,208 ₹ 1,208 ₹ 1,208
Predicted advertising / sales costs (Rs. 000) ₹ 53,550 ₹ 99,450 ₹ 188,700 ₹ 377,400
Predicted consumer promotion costs (Rs. 000) ₹ 31,684 ₹ 58,841 ₹ 78,625 ₹ 157,250
Predicted trade promotion costs (Rs. 000) ₹ 42,840 ₹ 79,560 ₹ 78,625 ₹ 157,250
©2017 KELLOGG SCHOOL OF MANAGEMENT AT NORTHWESTERN UNIVERSITY 4
QS CANNIBALIZATION: KOOKABURA BATS – CASE INTRODUCTION
Other fixed costs (Rs. 000) ₹ 46,410 ₹ 86,190 ₹ 133,663 ₹ 267,325
Based on the above information, please answer the following questions:
Question 1. Pre-Cannibalization Profit (answers in Rs. 000, not Rs.)
A. Calculate the predicted pre-cannibalization profit in years 1 and 2 for Big
Kahuna. To calculate this profit, you will need to first calculate total
predicted revenue, total variable costs, and total fixed costs. In your
answer, please highlight the cumulative profit for each proposed new
product over two years.
B. Calculate the predicted pre-cannibalization profit in years 1 and 2 for
Readyplay.
Question 2. Unit Contribution (answers in Rs. 000, not Rs.)
C. Calculate the contribution per unit for Kookabura’s existing product—the
Kahuna.
D. Calculate the contribution per unit for Kookabura’s existing product—the
Blade.
E. Now calculate the contribution per unit of the proposed new product—The
Big Kahuna. Please highlight these contributions per unit in your answer.
F. Calculate the contribution per unit for the proposed new product—
Readyplay.
a. As explained above, Kookabura expects that: (a) the Big Kahuna
will primarily cannibalize sales of the Kahuna, and (b) the
Readyplay will primarily cannibalize sales of the Blade. Looking
only at the contribution per unit figures you calculated, please
decide whether it is more financially attractive for the Big Kahuna to
cannibalize sales of the Kahuna or for the Readyplay to cannibalize
sales of the Blade. Once you have decided, please indicate one of
the following statements beneath your unit contribution calculations:
i. Answer option 1: It is more financially attractive for the Big
Kahuna to cannibalize sales of the Kahuna.
ii. Answer option 2: It is more financially attractive for the
Readyplay to cannibalize sales of the Blade.