Fin_571_Week_1

For many years Guillermo Navallez made furniture near his Sonoran home in Sonora, Mexico. Guillermo had an advantage of inexpensive labor costs and an ample supply of timber; Guillermo had the option to be able to price his hand crafted products at a slight premium. Until the late 1990’s, business was good for Guillermo until he faced two major issues businesswise. This paper will explain the finance concepts regarding the Guillermo scenario as they relate to the obstacles the company is faced with. Guillermo’s first issue consisted of new overseas competitors using high tech manufacturing approaches at rock bottom prices. He realized that their high tech solutions utilizes a computer controlled laser lathe to produce precise cuts in the wood with the use of very little labor as robots performed precise movements on assembly (University of Phoenix, 2013). The second issue the company faced was an influx in population which in return made the company’s cost of labor and material cost increase. These factors may make a company consider relocation and becoming a free rider; and because Guillermo’s competition was an international company, there were no worries about a zero sum game, while Guillermo’s company is now at risk for opportunity cost. Guillermo started realizing that the company’s operating costs were becoming too high to manufacture a quality product, and the personal craftsmanship of the handcrafted furniture would suffer with a reduction in the labor force. The principle of risk-return trade-off indicates the possibility of a good outcome is accompanied with a bad outcome (Emery, Finnerty, & Stowe, 2007). Competition causes people to make a trade-off between the risk and return of an investment (Emery, Finnerty, & Stowe, 2007). Guillermo had to decide what changes he should make to ensure the survival of his company because the company cannot afford the cost of transforming to a high tech process, although the production costs would decrease. Throughout the research process, Guillermo used The Principle of Self-Interested Behavior because he wanted to make the best decision that would benefit him financially as well as logically (Emery, Finnerty & Stowe, 2007). With the rapid development of new technology businesses are always looking to stay ahead of the competition. Guillermo examined his competition and their high-tech solutions developed to handle the changes in the furniture manufacturing industry. One option for Guillermo would be to look for guidance in what companies similar to his have done in mirrored situations. According to Emery, Finnerty, and Stowe (2007), observing other companies, known as the behavioral principle, is a direct application of the signaling principle, known as actions convey information. The Behavioral Principle is the second-best option to adhere to; however, Guillermo has no clear and accurate course of action to take. The Behavioral Principle leads to approximate solutions in the best of situations and, in the worst, to imitating the errors of others (Emery, Finnerty, Stowe, 2007). In other words, a company can look at what another company is doing to help inspire new ideas. Guillermo is using this concept by researching how his competitor has lowered costs. Guillermo had an idea that appealed to him after speaking with some of his distributors. He found that one of his competitors that currently operate in Norway is looking for channels to distribute in North America (University of Phoenix, 2013). Guillermo has the idea of becoming a representative for this other manufacturer by using his network of distributors. This would be valuable for both companies in that the company from Norway would expand its products to the North American market and Guillermo could move his company from primarily manufacturing to primarily distribution. This would in effect lower his operating costs by reducing labor and production cost. The Principle of Comparative Advantage creates economic efficiency. We pay others to do what they can do better than we can, and they pay us to do what we can do better than they can (Emery, Finnerty, Stowe, 2007). The principle of incremental benefits indicates that the value of an alternative or idea is determined by the net extra, which could be a decrease in costs or an increase in revenue (Emery, Finnerty, & Stowe, 2007). However, for the principle of incremental benefits to be applicable the costs and benefits cannot occur unless the course of action occurs. This principle is evident through many of the ideas that Guillermo is considering. After completing his research of the competition, Guillermo considered using principle-agent relationships to gain feedback on what his distributors wanted from his organization. By doing this, he began looking into changing his business from a manufacturing to a distribution company. With this concept in mind, Guillermo was using The Principle of Valuable Ideas. New ideas may take the form of improved business practices or marketing (Emery, Finnerty & Stowe, 2007). Guillermo had an idea that could coordinate his existing distributor network and become a representative for the foreign manufacturer that wanted to distribute within North America (University of Phoenix, 2013). The concept of diversification relates to the thought of becoming a furniture distributor for the furniture company in Norway. Understanding finance concepts are vital to a company’s success. In the Guillermo Furniture Store Scenario diversification, risk-return trade-off, and observing what others are doing directly relate to the company issues. The concept of risk-return trade-off relates to the idea of converting Guillermo’s production to the model used by the competition. Lastly, Guillermo also patented a process for creating a coating for his furniture. First the coating creates a flame-retardant and then a final coating that is stain resistant. The first part of the process, the flame-retardant coating, had marketability; however the final coating did not. So instead of taking his idea and marketing it, there’s another product Guillermo could buy and apply to his furniture and add the same amount of value (University of Phoenix, 2013). References Emery, D. R., Finnerty, J. D., & Stowe, J. D. (2007). Corporate financial management (3rd ed.). New Jersey: Pearson-Prentice Hall. University of Phoenix. (2013). Guillermo furniture store scenario. Retrieved April 20, 2013 from University of Phoenix, rEsource, FIN571 – Corporate Finance Web site.