Fin571_Week1

Guillermo Furniture Store Concepts Guillermo Furniture Store Concepts Guillermo store is located in Sonora, Mexico. The owner, Mr. Navallez, has made a variety of furniture for years. The wages for the employees have not been expensive. The prices on his furniture were determined by the quality of the furniture he makes (University of Phoenix, 2010). Guillermo had it made being the only company at the time that provided their customers with the quality furniture that they needed. This paper will discuss three financial concepts and how each relates to Guillermo’s Current challenges. These financial concepts are: 1) competitive economic advantage, 2) value and economic efficiency, and 3) observing financial transactions (Emery, Finnerty & Stowe, 2007). Competitive Economic Advantage First, we look at the principle of competitive economic advantage. Guillermo’s business became successful due in large part of the competitive advantage he had in Sonora, Mexico. He could provide a quality product cheaper than his competitors and took full advantage of that to build a profitable furniture manufacturing business (University of Phoenix, n.d.). The Principle of Self-Interested Behavior may have directed his original business decisions, but that same principle is causing him to reevaluate his situation and make adjustments because circumstances have changed that make his original set up to be unprofitable moving forward (Emery, Finnerty & Stowe, 2007). In addition, the Principle of Two-Sided Transactions was almost forgotten by Guillermo for a time. He had been operating without much thought for his buyers because of his competitive advantage. Since the situation has changed, he is forced to look at the factors that can cause his buyers to purchase their furniture from Norway (University of Phoenix, n.d.). In following Norway’s example, Guillermo is following the principle of looking to others for guidance. Because the manufacturer in Norway is successfully making furniture at a lower cost, than he can, he is wise to look into their processes and evaluate his options (Emery, Finnerty &Stowe, 2007). The options Guillermo is considering for his company are an example of the principle of self-interested behavior. Guillermo is looking to make a decision that gives himself and his company a better financial advantage. He is also looking into making a decision that can benefit him and his family and not completely dependent on increasing profits. Another financial concept that can be applied is the signaling principle. This concept explains how based on decisions what opinions or information would arise from that. Guillermo choosing to merge with another company may make it look as if it could not stand alone. Guillermo did not want to even consider being acquired by a larger competitor and end his career under that company while they collect a considerable amount of overhead costs. Initially the behavioral principle was applied to the Guillermo scenario. Guillermo’s information came from other competing companies. They used what other companies are doing to remain competitive as a guide for what possible decisions will be made. Guillermo has a profitable history and can also use techniques and methods used before that kept it profitable. The combination of following previous decisions that made the company profitable and researching what competitors are doing would be best to apply to this situation to provide a clear solution. Using the most cost effective method is one of the applications of the behavioral principle applied to this situation. Value and Economic Efficiency Second we look at ways Guillermo can create value and increase his economic efficiency. The Principle of Comparative Advantage is operating in this industry. The new competitor in Norway is using a laser lathe, at a lower cost than Guillermo. Although the equipment is expensive, the initial investment to purchase can be quickly recovered due to reduced labor costs (Emery, Finnerty & Stowe, 2007).   Additionally, Guillermo must tap into the income potential of his patented process for coating furniture. This is a valuable product that can have a broader market than is currently being tapped. Potentially, he can market this product to other manufacturers around the globe (University of Phoenix, n.d.). The lathe will have a huge initial cost to return ratio, but as long as operating costs can be kept at a minimum, the equipment’s potential to generate income only increases as the years go by. Once the equipment is paid for it can be operated at a net profit not realized by Guillermo even in earlier years when he had the competitive advantage (Emery, Finnerty & Stowe, 2007). Observing Financial Transactions Finally, we examine how observing the company’s financial transactions demonstrates how Guillermo can evaluate options. If Guillermo decides to purchase the laser lathe equipment, he will be taking a high risk. According to the Principle of Risk-Return Trade-Off, that risk has the potential to generate income greater than ever before as he will be able to produce greater quantities in less time than when performed by his skilled employees. Because of the Principle of Diversification, Guillermo simply must expand into additional arenas. If he can begin to market his patented coating process and become a distributor, he can spread out some of his risk and create greater financial stability (Emery, Finnerty & Stowe, 2007). Conclusion Guillermo is facing some tough financial and business decisions. However, by following the financial management principles discussed, he can make informed decisions that should help guide him during this important transitional stage in the business. Using these concepts he can address the challenges he faces in competition, efficiency, and managing complex financial transactions. * References * Emery Finnerty, Stowe (2007). Corporate Financial Management(3rd) ed. * NewJersey: Pearson-Prentice Hall. Retrieved September 7, 2010 from University of Phoenix, FIN 571 – Finances website. University of Phoenix. (n.d.). Scenario: The Guillermo furniture store. Retrieved September 11, 2010 from FIN 571 – Finances website.  *