Guillermo Furniture Store

Lori A. Poole FIN-571

Marcel A. Santiz December 12, 2011

Guillermo Navallez resides in Sonora, Mexico and has made a living for a number of years creating his own style of furniture. The area of Sonora, Mexico is not only known as a beautiful vacation spot, but it is also large furniture manufacturing location in North America. A good supply of timber is an available in this area that allows Guillermo to have access to a variety of wood to create tables and chairs for his company. For years, Guillermo has had the advantage of inexpensive labor cost and charged a premium for the quality of his handcrafted pieces of furniture (Guillermo’s Furniture Store, 2011). Guillermo eventually faced a challenge during the 1990s when two obstacles caused a dent in his business. The first obstacle was the entrance of a competitor located overseas into the furniture market. The second obstacle was the opening of a large retailer causing an expansion of an inexpensive housing market, plenty of development along with population growth that brought new jobs to the community of Sonora, Mexico. These changes raised the cost of living and Guillermo soon witnesses a decrease in the profit margin because of falling prices and rising cost. There will be an observation of three concepts that includes four principles surrounding the financial concepts pertaining to Guillermo’s Furniture Store. The 12 principles will help to provide some insight on the challenges that Guillermo faces regarding his furniture business. Guillermo will carefully be guided by these principles to help steer him on an informative path. The financial principles examined will allow Guillermo to make the best decision to sustain successfully his furniture business.

Competitive Economic Environment The principle of Self-Interested Behavior: People Act in Their Own Financial Self-Interest Guillermo is well aware of the two obstacles that lie before him that poses a threat to the survival of his business. It would be to Guillermo’s advantage to look into adapting the idea of using high-tech equipment similar to his competitors to remain competitive. Research has been conducted by Guillermo, and he is well aware of the act of competitors consolidating into larger organizations. However, Guillermo is not interested in becoming acquired by a larger company. Considering the principle of self-interested behavior, Guillermo is not interested in acquiring another organization, either. The Principle of Two-Sided Transactions: Each Financial Transaction Has at Least Two Sides Guillermo did contemplate a high-tech approach similar to his competitors to create his furniture. The acknowledgment of lower labor cost because of the use of robots functions on assembly lines is appealing. This is a good example of a two-sided transaction. Although the cost of the technology would be high, the reduction in the cost of labor would be offset. The Signaling Principle: Actions Convey Information The research conducted by Guillermo shows his interest in new approaches and methods to use to ensure the survival of his furniture store. Guillermo has taken interest in the actions and the workflow of the production of his competitors. There has also been interest shown by Guillermo in other forms of business operations. Guillermo has taken notice to his competitor in Norway that would need a distribution channel in North America. The potential to serve as a manufacturing distributing representative for his competitor who operates only in Norway could allow Guillermo to operate his business in another capacity. The Behavioral Principle: When All Else Fails, Look at What Others Are Doing for Guidance Until the 1990s, Guillermo was creating his furniture by hand. Guillermo’s handcrafted furniture allowed him the ability to keep labor cost low. The profit margin was favorable because he could sell his furniture at a premium because of his detailed craftsmanship. Guillermo’s competitors practice the use of high-tech machines to produce their furniture. Profit margins for Guillermo are declining causing him to consider the use of high-tech machines also to help in the production of his furniture. Values The Principle of Valuable Ideas: Extraordinary Returns Are Achievable with New Ideas Exploring new ideas to achieve high returns of profits is a concept that should be continual when operating a business. Guillermo realizes the importance of accompanying the ability to maintain relevance in the market of furniture making. Seeking new challenging techniques when producing furniture will help bring healthy competition among the furniture manufacturers. The Principle of Comparative Advantages: Expertise Can Create Value The coating that Guillermo uses to coat his furniture is his own patented creation. Guillermo has an advantage over his competitors because of his patented furniture coating product. This coating product is like no other giving Guillermo an advantage over other furniture manufacturers. The patented furniture coating that was created helps to bring more value to Guillermo’s furniture making process. The Options Principle: Options Are Valuable Throughout the Guillermo’s furniture Store scenario, Guillermo has continued to weigh out his options. He has looked at opportunities to produce his furniture using high-tech machines, becoming a distribution channel for a Norwegian competitor and also looking into the market to provide flame-retardant to other furniture makers. It is wise to look into other ways to stay in business in case the initial methods of running the business began to fail. The Principle of Incremental Benefits: Financial Decisions Are Based on Incremental Benefits There could be a substantial amount of incremental benefits obtained once Guillermo decides on what course of action would serve his furniture business the most purpose. Although it would be expensive to adopt a new production model, the cost of the production could be reduced as a result. The financial decision decided would have served the most benefit for Guillermo’s furniture making business. Financial Transactions The Principle of Risk-Return Trade-Off: There is a Trade-Off Between Risk and Return The new competition on the rise in Sonora, Mexico is creating a huge risk for Guillermo. The large competitor overseas along with a new large retailer moving into the area elevates the risk of Guillermo’s furniture store going out of business. The influx of people and jobs are driving up the cost of labor that can affect Guillermo’s ability to competitively pay workers. Guillermo could run the risk of continuing the operations of business without any changes and face the trade-off of losing his business. The Principle of Diversification: Diversification is Beneficial Guillermo is facing the challenge of remaining in business and competitively remain relevant. It is wise for Guillermo to consider doing more than just creating hand detailed furniture. A diversified portfolio is limitless. Possessing the ability to create superior looking furniture, operate as a manufacturing distributor for a foreign competitor while also selling his own patented product to other furniture makers is a skillful way of having many areas covered at one time. The Principle of capital Market Efficiency: The Capital Market Reflects All Information Quickly The observation of the current conditions and profitability of the furniture making industry can be witnessed through the sales trends of certain brands and styles of furniture. It is important that furniture makers like Guillermo are mindful to remain current on the new methods of furniture design and manufacturing. Capital markets can serve as an informational source to refer to when evaluating the efficiency of furniture making. Time-Value-of-Money Principle: Money Has a Time Value This principle of time-value of –money indicates that over the course of time, money can gain or lose value. Factors such as the amount of the investment, given the interest it is to earn over time it to be considered. In the case of Guillermo’s furniture Store, if he decides to make the necessary changes to invest in a high automated plant, similar to Norway’s he could reap the benefits of high returns in profits in the future. The 12 principles are resourceful financial guides for businesses such as Guillermo’s Furniture Store to use. Careful consideration of alternative approaches is to be examined before making drastic business decisions. Guillermo’s desire to remain in business along with his observations of his competitor’s business operations will ensure him enough insight to make informed and well thought out business decisions for himself and his furniture store. Reference Emery, D.R., Finnerty, J. D., & Stowe, J.D. (2007). Corporate financial management (3rd ed.) Upper Saddle River, NJ: Pearson Prentice Hall. University of Phoenix Material: Guillermo’s Furniture Store Scenario (2011)