Explain Internal expansion and External expansion as part of growth and development of an Enterprise.

Question

Accepted Answer

Growth of an enterprise can occur through two main methods: Internal Expansion and External Expansion.

**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 new machines with higher productive capacity. 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. It 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. For example, a bakery opening a chain of similar bakeries in other towns is an example of internal expansion.

**External Expansion or Business Combination**: External expansion refers to business combination where two or more concerns combine and expand their business activities. In the process of combination, two or more units engage in similar business or related processes or stages. Sometimes stages of the same business join to carry on their activities or shape their policies on a common basis or in coordination for mutual benefit or maximum profits. The main forms of external expansion are franchising, mergers, and acquisitions. For example, when two competing companies merge to form a larger entity, it is external expansion.