Week_1_Guillermo_Furniture_Store

Introduction Guillermo Navallez is an entrepreneur in the furniture market within a University of Phoenix business scenario. He faces a shrinking profit margin due to other companies entering the marketplace and a changing local demographic. These two elements have resulted in lower sale prices and higher labor costs. This paper will explore the application of the following financial principle genres to his situation; competition in an economic environment, creating value and economic efficiency, and finally the observation of financial transactions. Competition in an Economic Environment The most blatant application of competition is “The Behavioral Principle: When all else fails, look at what others are doing for guidance” (Emery, 2007, Page 23). Guillermo has already accomplished this task in the scenario as he realized the profit loss and researched what the other companies were doing to compete. The principle of self-interested behavior is evident here as well “this principle says that when all else is equal, all parties to a financial transaction will choose the course of action most financially advantageous to themselves” (Emery, 2007, Page 20). Guillermo is ultimately attempting to increase his profit margins. Guillermo is also weighing the opportunity cost associated with all of his alternatives available, or the “difference between the value of one action and the value of the best alternative” (Emery, 2007, Page 20). The principle of two-sided transactions becomes a factor specifically where Guillermo is selling his furniture to a buyer. The give and take in every transaction and usually results in a zero-sum game, one can only gain at the expense of another (Emery, 2007, Page 22). Acting in their own self interest, buyers will benefit if the price goes down while Guillermo will suffer from a lack of profit margin. Creating Value and Economic Efficiency The concept of creating value can quickly be realized because of Guillermo’s patented fire and finish coating process. This represents a new idea, thus extraordinary returns are achievable if the value of the idea is properly protected and exploited; however, new ideas don’t represent the true value of Guillermo’s company. Guillermo has cornered the principle of comparative advantage. His expertise in furniture making process creates a large amount of value. Should he be able to maximize use of the latest technologies to minimize labor costs he will reap the benefits in the marketplace. In other words he is doing what he does best and creating a basis for trading services. “The Principle of Incremental Benefits says the value derived from choosing a particular alternative is determined by the net extra—that is, incremental—benefit the decision provides compared with its alternative...The incremental costs and benefits are those that would occur with a particular course of action but would not occur without that course of action” (Emery, 2007, Page 26). The scenario demonstrates the use of incremental benefits to determine financial decisions. Each alternative can show a path toward incremental benefits and some of the alternatives selected together but in a specific order would in and of themselves be incremental. For example the investment in mechanizing the process would require the development of capital, possibly in the form of primary market shares. Development of the capital would be the first increment, followed by mechanizing the process and establishing quality control, reducing labor costs over time, having the ability to reduce purchase price resulting in more sales and ultimately more profit. Observation of Financial Transactions Finally the observation of financial transactions comes into play. After researching the available technology Guillermo finds sufficient reason to invest in such alternatives; however, the risk associated with this sunk cost is substantial. Perhaps the market plummets, the ability for mass production entities to stay afloat is next to impossible, and local merchants are flexible enough to succeed. It is the observation that “when all else is equal, people prefer higher return and lower risk” (Emery, 2007, Page 26). Diversification exists to minimize risk and Guillermo can add distribution to his repertoire to diversify his business opportunities. Of all things one of the best tools at Guillermo’s disposal is the ability to determine present and future values of what his business may become. Profit amounts required to cover an investment in technology, merger acquisition, distribution opportunities, can be determined through the time value of money. Conclusion Per the above discussion the opportunities for Guillermo to capitalize on the alternatives before him exist. If these alternatives translate into an acceptable profit based upon the financial principles Guillermo will have an educated decision to make. Most likely he will make the self interested decision to maximize his profits, minimizing his risk, and maintaining his independence. References Emery, Finnerty, Stowe. (2007). Corporate Financial Management(3rd ed.). New Jersey: Pearson-Prentice Hall. University of Phoenix. (2004). Guillermo’s Furniture Store Scenario. Retrieved from University of Phoenix, FIN571 – Corporate Finance website.