The Cannibalization Effect

When Growth Starts Competing With Itself

Healthcare leaders are trained to look for growth.

Another location.

Another specialty.

Another physician group.

Another digital channel.

Another acquisition.

Another service.

The assumption is straightforward:

More should create more.

But what if it doesn't?

What if the new business is not creating incremental value for the enterprise—but simply moving value from one part of the organization to another?

That is the Cannibalization Effect™.

When Growth Doesn't Create New Value

Consider a healthcare group opening a new clinic in a nearby location.

Patient volume increases.

The new clinic looks successful.

But much of its volume comes from patients who previously visited another clinic in the same network.

At the unit level:

Growth.

At the enterprise level:

Redistribution.

The same phenomenon can appear elsewhere.

A new specialty competes for the same scarce physicians.

A digital channel shifts patients away from encounters that previously generated greater contribution.

A new service competes for the same capital.

An acquisition takes patients, talent and referrals from an existing business.

Two locations compete for the same patient population.

Every individual initiative may report success.

The portfolio may not be creating proportionate incremental value.

This is the uncomfortable question:

What if some of your growth initiatives are not creating new value—but moving value from one part of your organization to another?

That is a very different question from:

“Is the initiative growing?”

The Growth Illusion

Cannibalization is not necessarily a reason to reject growth.

Sometimes shifting demand is strategically desirable.

A digital channel may deliberately replace an inefficient physical encounter.

A new location may take demand from an overcrowded facility and improve the patient experience.

A new service may replace a lower-value offering.

An acquisition may deliberately consolidate fragmented operations.

The issue is therefore not whether internal substitution occurs.

The issue is whether leadership understands the economics and strategic consequences of that substitution.

Harvard Business Review's work on growth strategy has long emphasized that companies need to distinguish genuine growth from moves that simply shift existing demand or create activity without proportional economic value. More recent strategy research similarly emphasizes evaluating growth investments according to the value they create rather than treating expansion itself as evidence of success.

The executive question becomes:

Is this growth incremental—or substitutive?

The Unit Can Win While The Enterprise Loses

This is where traditional healthcare reporting can become misleading.

Imagine two clinics.

Clinic A loses 100 patients.

Clinic B gains 100 patients.

Clinic B celebrates its growth.

The enterprise reports:

Clinic B +100

But the organization may actually have:

Enterprise +0

Now add the cost of building Clinic B.

New rent.

New staff.

New technology.

New marketing.

New management.

New regulatory requirements.

New leadership attention.

The organization may have invested heavily to produce zero incremental demand.

That is not necessarily a failure of execution.

It may be a failure of portfolio visibility.

McKinsey has emphasized the importance of looking at growth and performance at the portfolio level rather than evaluating individual businesses in isolation, particularly as healthcare organizations become more integrated and diversified.

This creates an important distinction:

Business-unit performance asks:

“Did this initiative grow?”

Enterprise performance asks:

“Did the organization become more valuable because it grew?”

Those are not the same question.

Who Loses When This Business Wins?

Cannibalization becomes even more interesting when the scarce resource is not patients.

It may be talent.

A new specialty attracts the organization's strongest physicians.

An expansion consumes scarce nurses.

A new digital initiative absorbs the technology team's capacity.

A new acquisition requires senior executives to spend months integrating it.

A high-growth initiative receives disproportionate marketing support.

Meanwhile, another strategically important business becomes constrained.

The visible initiative wins.

The opportunity cost is largely invisible.

That creates another provocative question:

Who loses when this business wins?

Not because organizations should prevent internal competition.

Healthy competition can improve performance.

But leaders need to know whether they are creating enterprise value or simply creating winners and losers inside the same portfolio.

The Acquisition Problem

The issue becomes particularly important after acquisitions.

Healthcare organizations may acquire a clinic, specialty practice, technology company or adjacent service because the target appears to add revenue, patients or capabilities.

But integration can change the economics.

The acquired business may compete with an existing location.

Physicians may be redistributed.

Referral patterns may shift.

Patients may move between facilities.

Back-office functions may duplicate each other.

Technology investments may overlap.

Leadership capacity may become fragmented.

The acquisition can therefore produce apparent growth while creating internal competition.

McKinsey's healthcare M&A research has increasingly focused on capability-driven transactions and the need to connect acquisitions to a broader strategic thesis rather than treating deal activity itself as evidence of value creation.

The question is not:

“Did the acquisition add revenue?”

It is:

“Did the acquisition increase the value of the enterprise?”

The Cannibalization Effect™

At Phoenix MedStrategy, we define the Cannibalization Effect™ as:

The unintended erosion of existing enterprise value when a new growth initiative competes with, substitutes for or redistributes demand, talent, capital or leadership capacity from an existing business.

The word unintended matters.

Strategic substitution can be valuable.

Unexamined substitution can be expensive.

Before launching a major growth initiative, leadership should therefore examine five dimensions:

DEMAND

Is the initiative creating new demand—or relocating existing demand?

TALENT

Is it expanding organizational capability—or reallocating scarce people?

CAPITAL

Is it creating new economic value—or shifting investment between existing businesses?

CAPACITY

Does it increase enterprise capacity—or redistribute utilization?

LEADERSHIP

Is it expanding strategic capability—or consuming attention needed elsewhere?

That creates a more sophisticated growth conversation.

The Cannibalization Test™

Before celebrating growth, ask:

1. Incremental Test

How much of this volume is genuinely incremental?

2. Substitution Test

Which existing business could lose volume?

3. Contribution Test

Does enterprise contribution increase after accounting for the new costs?

4. Resource Test

What scarce resources are being redirected?

5. Portfolio Test

Does this initiative strengthen the portfolio—or simply move value within it?

And perhaps the hardest question:

If we measured the entire organization as one business, would this still look like growth?

That question can change the conversation entirely.

When Cannibalization Is Strategic

There is an important nuance.

Not all cannibalization is bad.

A healthcare organization may intentionally move patients from expensive settings to lower-cost care.

It may shift routine consultations from physical clinics to digital care.

It may replace an aging service with a more scalable model.

It may deliberately consolidate locations.

In each case, one business may lose volume while the enterprise becomes stronger.

That is not a failure.

It is strategic migration.

The problem occurs when leadership measures the success of the new initiative without measuring what the enterprise surrendered to create it.

The goal is therefore not to eliminate cannibalization.

It is to make it intentional.

The Executive Test

Healthcare leaders should stop asking only:

“How much did we grow?”

Ask instead:

“How much of that growth was genuinely incremental?”

Then go further:

Who lost when this business won?

Could two successful initiatives undermine each other's economics?

Are we rewarding business-unit growth that weakens the overall portfolio?

Are we measuring enterprise value—or individual-unit performance?

And ultimately:

Did we create new value—or simply move value around the organization?

At Phoenix MedStrategy, we help healthcare leaders evaluate growth initiatives at the enterprise level—before expansion creates hidden competition for patients, talent, capital, capacity or leadership attention.

Because growth is not automatically value creation.

The real strategic question is whether the organization becomes stronger because it grew.

Sources

Porter, Michael E. Competitive Strategy: Techniques for Analyzing Industries and Competitors. Free Press.

Ansoff, H. Igor. “Strategies for Diversification.” Harvard Business Review, 1957.

McKinsey & Company. “The Future of Healthcare: Finding the Opportunities That Lie Beneath the Uncertainty.”

McKinsey & Company. “Healthcare M&A: The Next Wave of Value Creation.”

McKinsey & Company. “Portfolio Strategy.”

Christensen, Clayton M. & Michael E. Raynor. The Innovator’s Solution. Harvard Business School Press.