Week_1_Finance_Concepts

Concepts of Week One FIN/571 Corporate Finance Professor Thomas Jemison March 28, 2011 Concepts of Week One In today’s global economy, there is one language that unifies all countries; this is the language of accounting. Any type of business operation will have the very basics of accounting in place and Guillermo Furniture Store of Sonora, Mexico is not exception. This paper will discuss the concepts in week one and how they relate to context of the Guillermo Furniture Store Scenario. To make good business decisions, one must understand human behavior (Emery, Finnerty, & Stowe, 2007). The first concept reviewed will be that of the principle of self-interested behavior: people acting in their own financial self-interest. This concept is basic; however, important to understand that when doing business, the other person is after improving their self interest. It is obvious that Guillermo wants to keep up with the competition, and it would seem that the simple decision to adapt to the new business environment or consolidating into a larger organization by merger or acquisition as his competitors are would be the easiest thing to do. Because the success of his company is important, Guillermo values his time with his family and is looking to find a way to keep his business from becoming acquired. One option Guillermo has is switching his operation from manufacturing to distribution. In this example of self-interested behavior, by moving his company to primarily distribution, Guillermo can help one of his competitors expand their distribution channel by using his own distribution channel and also keep some of his high-end work in production. This will avoid becoming acquired by another company and keep his personal family time and his own business, which is what is most important to Guillermo. The next concept reviewed is the behavioral principle: when all else fails, look at what others are doing for guidance. There are two appropriate applications of this behavioral principle: (1) the case when there is a limit to our understanding and (2) the case when its use is more cost-effective than the most accurate method (Emery, Finnerty, & Stowe, 2007). It can be assumed that Guillermo was limited to what he understood to be his new world of manufacturing in his town of Sonora, but it is the second case in which Guillermo probably exercised this behavioral principle. Guillermo did some research on his competition to see how they are handling changes. What he found was that they are consolidating into larger corporations and acquiring high priced tools that assist in keeping labor costs down. This concept is not a violation of any rules. Business oftentimes look to their competitors and simply mirror what they have done. Obviously there is a certain amount of prestige that comes from being the first in the market with the latest and greatest, but for smaller organizations, this concept is beneficial, especially because money for research and development is not usually a luxury for the smaller organization. Although not much went into Guillermo finding what the ways of his competitors were, he ultimately found the answer to keep his business alive if he chooses to stay in the manufacturing world. While the two reviewed concepts may be considered basic in the way, they are practiced, they are what I believe to be part of the basics of economics. Understanding that people act in their own self interest and knowing when to look for guidance from your competitors can be beneficial in running an organization. While Guillermo has a lot to consider before deciding on where to apply his efforts, he has shown that he is definitely going in the right direction in surviving his business. References Emery, D.R., Finnerty, J.D., & Stowe, J.D. (2007). Corporate Financial Management (3rd ed.). New Jersey: Prentice Hall.