The real option, as per the case study, is a well-established firm. This assertion is supported by the fact that it is currently at the peak of expansion a factor brought about by increased demand. However, expansion, as observed in other markets and business organizations, presents several dilemmas. A decision taken by the management at the moment could shape the destiny of the firm in two ways. Increased demand for the firm’s products could lead to expansion and more profits. The management could alternatively choose to maintain the status quo but lose the benefits of expansion. Below is a possible tree diagram that could influence the management’s decision making.
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Any decision taken by the management can only lead to either an overwhelming success or total failure. This explains why it is important to carry out extensive market research before any strategy is implemented (Keeris, 2008). The decision arrived at should not result from a boardroom meeting, but rather, one which puts to test all the practical aspects and their presumed outcomes weighed to scale and accepted to be in line with the vision and mission of the company.
First and foremost, there is a need to evaluate the demand for additional aircraft or the industry profile. The available demand must be one that can be sustained and should surpass the cost of expansion. A bigger plant will come with an additional cost like the actual purchasing of equipment and installation cost, a bigger land will have to be purchased and this will be followed by the need for increased personnel to maintain the new plant. Technical operators will also be required to supervise day to day manufacturing and assembling of the aircraft. After evaluating the total cost of this undertaking, the total average value of the demand is then broken down.
The main reason for the setting up of any business, i.e. making profits must also be considered. Businesses exist with the sole purpose of making profits and the more profits they make, the more sustainable they become (Guest, 1964).
From the industry profile, a Real option has had minimal competition given the fact that not so many aircraft manufacturing firms are in operation in the region. This explains the increased demand. Minimal competition alone should be enough motivation for the expansion of the company.
Maintaining the status quo, while retaining the current size of the firm is nonprogressive. Furthermore, it is not in line with the vision of the firm. However, it has a higher possibility of ¾. Should the demand fail to sustain the cost of expansion then the firm will incur losses and possibly stall its operation. Using the current assets of the company to expand with the hope that they will make profits in the future to cover up for the cost is also a risky undertaking. Should the demand fall immediately after the completion of the expansion then the company will become bankrupt.
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According to the company profile, a Real option is a small scale company but its vision allows for expansion thus the need for expansion. This is a decision adopted by a fearful management team, however, it is the most secure given the current situation. If the company maintains the status quo and the demand increases, there will be no difference in the number of profits. Future small scale operations of the firm are also secure if the status quo is maintained. However, the firm will not be able to maximize profits if the demand for its products goes up. The current operations and profits will be maintained (Kraft, 2012).
However, without taking risks, the business loses its flavor. It is advisable to take the bold step of expansion. A series of management strategies following expansion will ensure that the company gets enough customers to support the expansion process. For example, the company could pursue aggressive marketing strategies. Advertising creates awareness among possible customers about the firm’s products. With extensive advertising, the company will attract the attention of the market and ensures that it gets enough customers to keep its machines running (Bines, & Thel, 2004).
In deciding whether to build a larger plant or a smaller plant, the management must asses such data as the market research findings. Determining the level of the demand helps the company come up with ways of tackling its demise. It is recommended that the company determines its target market and comes up with tailor-made products for each market segment, this builds a customer loyalty base from which the company can later obtain a stead demand.
With an effective assessment of the market given the industry profile, a Real option has a great opportunity to expand and it will, as a result of the expansion build its own market base thus assures itself of demand for its products. Building the larger plant just as discussed above must be accompanied by other marketing and management strategies because given the facts at present it is advisable that the company builds the larger plant.
Bines, H., & Thel, S. (2004). Investment Management Law and Regulation. London: Aspen.
Guest, P. (1964). Brand loyalty revisited: a twenty-year report. New York, NY: New York Times.
Kraft, F.I. (2012). Research and markets; kraft foods inc.KFT. company profile and SWOT analysis-2012. News RX, 49(01), 826-837. Web.
Keeris, G. (2008). A different look on risks by property investments. Journal of European Real Estates Research, 26(1), 154-158.