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Evolution of a Firm: Linear Regression Essay

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Updated: Jul 12th, 2020

Making a choice related to the further evolution of a firm is not an easy task. When choosing between the real estate and the franchise, one should consider the former due to the higher benefits that it has to offer. Though real estate involves higher risks, it also has great advantages. While the investment into the real estate is fraught with major consequences in case of an unsuccessful outcome, the chances of winning a significant amount of money are still much higher than in the instance of a franchise with Just Hats.

As the table below shows, the option that involves the choice of a real estate investment is much more profitable than the one that presupposes the creation of a franchise with Just Hats. Despite clearly having more risks to deal with (Libava 11), the investment into real estate provides a larger payoff and at the same time as opposed to a relatively safer (Alhabeeb 34) yet more mediocre (Pollard and Daly 1818) option of creating a franchise.

Option A Option B
Market level High Medium Low High Medium Low
Probability 0.5 0.3 0.2 0.75 0.15 0.1
Payoff 5 2 0 3 2 1

Additionally, the U-value (Aumann 316) should be brought up. According to the calculations provided above, the U-value of the franchise is considerably lower than the one of the real estate-related option. Therefore, it is strongly suggested that the second option should be considered as the most reasonable solution in the specified scenario (Rokach 5).

While one must give the other opportunity credit for providing the chance for the organization to expand further and explore new opportunities, the amount of risks that the company will be subjected to is still far too large to consider a franchise with Just Hats a possibility. Also, but should be noted that the difference between the outcomes is quite small. However, these are the possible negative outcomes that define the choice. While the first option presupposes a minor benefit in the worst-case scenario, the second option does not involve any income at all. Therefore, the choice must be made in favor of real estate.

It should be noted that the two options could theoretically be made equal (Ruegg and Marshall 373). In this case, the U-value of the first option should be reduced so that the chances, which the firm would be provided within the case of following the above-mentioned strategy could be equal to those that the other solution suggests. Alternatively, the U-value of the second approach could be increased so that it could be equal to the one that the real estate business has to offer.

Investing is a complicated task, which one should approach from a variety of perspectives. The two solutions that the company in question has presupposed similar outcomes. However, the real estate business should be favored as opposed to the real franchise because of the risks involved.

Works Cited

Alhabeeb, Mohammad J. Entrepreneurial Finance: Fundamentals of Financial Planning and Management for Small Business. New York City, New York: John Wiley & Sons, 2014. Print.

Aumann, Robert J. Collected Papers. Vol. 2. Boston, Massachusetts: MIT Press, 2000. Print.

Libava, Joel. Become a Franchise Owner!: The Start-Up Guide to Lowering Risk, Making Money, and Owning What you Do. New York City, New York: John Wiley & Sons, 2011. Print.

Pollard, Alfred M. and Joseph P. Daly. Banking Law in the United States. Vol. 1. 4th ed. Huntington, New York: Juris Publishing, Inc., 2014. Print.

Rokach , Lior. Data Mining with Decision Trees: Theory and Applications. Hackensack, New Jersey: World Scientific, 2007. Print.

Ruegg, Rosalie and Harold Marshall. Building Economics: Theory and Practice. New York City, New York: Springer Science & Business Media, 2013. Print.

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