Growth is always essential for the existence of a business concern. A concern is bound to die if it does not try to expand its activities. There may be a number of reasons which are responsible for the expansion of business concern. Predominant reasons for expansion are economic but there may be some other reasons too. Following are the reasons for expansion.
1. Existence: The existence of the concern depends upon its ability to expand. In a competitive world only the fittest survives. The firm need to control its costs and improve its efficiency so that it may be achieved if the activities of the firm are expansion is essential for the existence of the firm otherwise it may result into failure and may be out of business.
2. Advantages of large scale: A large scale business enjoys a number of economics in production, finance, marketing and management. All these economies enable a firm to keep its costs under control and have an upper hand over its competitors. A large scale concern can also withstand the cyclical changes in the demands of their products.
3. Use for higher profits: Every businessman aspires to earn more profits. The volume of profits can be the expansion of business activities. Undoubtedly, profit is the main motive behind all types of expansions. The incurring of higher costs at the time of expansion may not be associated with the higher profits. If a new concern is purchased at a higher price without considering economic aspects, it will not be wise expansion plan. One should be very careful while planning expansion scheme and economic factors should be the motivating force to enable a concern to increase its profits.
4. Monopolistic Ambitions: One of the important factors behind business expansion is the monopolistic ambition of business leaders. They try to control more and more concerns in the same line so that they may be able to dictate their terms. So expansion also results out of monopolistic ambitions.
5. Better management: A bigger business concern can afford to use the services of experts. Various management functions can be efficiently managed by these persons who are qualified for such jobs. On the other hand, a small concern is generally managed by the owners themselves and they may not be experts in all departments of the business.
6. Natural Urge: The expansion is also a way of life. As everybody wants to go higher and higher in his private life and this is applicable to a business concern too. Every businessman wants to expand its activities in a natural way. It not only gives him more profits but also gives him satisfaction.
Forms of expansion
The expansion of a concern may be in the activities or acquisition of ownership and control of other concern. Thus, expansion may be;
- Internal Expansion
- External Expansion
(i) Internal Expansion
Internal expansion results from the gradual increase in the activities of the concern. The concern may expand its present production capacity by adding more machines or by replacing old machines with the new machines with higher productive capacity. The internal expansion can also be undertaken by taking up the production of more units or by entering new fields on the production and marketing sides. Internal expansion may be financed by the issue of more share capital, generating funds from old profits or by issuing long term securities. The net result of internal expansion is the increase in business activities and broadening the present capital structure.
(ii) External expansion or Business combination
External expansion refers to business combination where two or more concerns combines and expand their business activities. The ownership and control of the combined concerns may be undertaken by a single agency.
Business combination is a method of economic organization by which a common control, of greater or lesser completeness is exercised over a number of firms which either is operating in competition or independently. This control may either be temporary or permanent, for all or only for some purposes. This control over the combining firm can be exercised by a number of methods which in turn give rise to various forms of combinations.
In the process of combination, two or more units engage in similar business or in different related process or sages of the same business join with a view to carry on their activities or shape or shape their polices on common or coordinated basis for mutual benefit or maximum profits. The combination may be among competing units or units engaged in different processes. After combination, the constituted firm pursues some common objectives or goals.