604 CORPORATION FINANCE
additional resources made available through expansion. Even the plaudits
of the multitude do not constitute the chief spur to effort in such cases.
Self-satisfaction in accomplishment and self-expression are often more
powerful stimulants than praise.
Dangers in Expansion.—The common urge of businessmen to expand
their fields of operation does not always produce the desired results.
Various causes account for the failure to succeed on a large scale after enjoy-
ing success on a small scale of operations. The management may be well
adapted to small enterprises but be unable to grow fast enough in capacity
to assume the increased burdens of responsibility that accompany expansion.
Incidentally, the readjustments made necessary by expansion present strong
arguments for slow growth in contrast to rapid expansion.
Many expansion programs are not properly balanced. It is a common
fault of business leaders to provide new plant facilities without adding to
circulating capital. New fixed capital usually requires additions to both
permanent and temporary investment in circulating capital. Failure to
provide these increases may wreck the enterprise, however satisfactory the
new fixed capital may be. Frequently, the one who finally supplies the
additional circulating capital acquires control over the enterprise, together
with a large share of the profits to be derived from its future operation.
Limiting Factors.—Any of the economic reasons listed above as possible
advantages to be gained from expansion may also become limiting factors if
mistakes are made in expansion programs. For example, basic production
elements may cause the law of diminishing returns to become operative in
such manner that expansion programs are not economically justifiable.
This is particularly true in extractive industries where raw materials are
irreplaceable. The same situation may develop in manufacturing industries
as well,
Hoped-for economies in marketing may not materialize. On the side of
production, the unit cost of the article produced may be materially reduced
by expanded operations. This generally means a standardized product.
But, particularly where the style element is important, perhaps an unstand-
ardized article will sell more readily. In such cases, it is the whims of the
consumer rather than the low-cost production policies of an expanded indus-
try that will dictate the kinds and quantities of things to be produced. If
the expansion program will not lend itself to the production of style goods,
it may not be successful Costs of production, difficulties of transportation,
or any one of several other factors may hinder the marketing of the increased
quantity of goods made available by an expanded industry.
In the same manner, either lack of proper financing or administrative
weaknesses may become limiting factors in an expansion program. Among
other dangers to expansion programs is the failure to account for the part
to be played by others. The market might afford a demand for 10 per cent