Which statement best describes cannibalization risk in a diversification strategy?

• A. Diversification expands overall profits.
• B. Diversification draws demand from existing products, potentially reducing total profits.
• C. Diversification has no effect on demand.
• D. Diversification always increases market share.

Answer: (B)

Cannibalization is about internal competition for the same customers. When a firm diversifies, the new product can attract sales that would have gone to its existing products, rather than expanding the overall market for the firm. The risk is that those shifts in demand reduce the total profits if the gains from the new product don’t outweigh the loss from the old one. So the best description is that diversification draws demand from existing products, potentially reducing total profits. Diversification can fail to increase profits, and it doesn’t guarantee no effect on demand or a guaranteed increase in market share.