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Guillermo Furniture Store Concepts FIN/571 October 31, 2011 Guillermo Furniture Store Concepts This assignment sets out to explain the pertinent financial concepts and principles found in chapters two and three of the text Corporate Financial Management by (Emery, Finnerty, & Stowe, 2007) and how they relate to the context of the Guillermo’s Furniture Store scenario. Guillermo’s was a leading furniture manufacturer who enjoyed inexpensive labor and convenient supplies of raw material next to his location in Sonora, Mexico, until in the late 1990s when his downturn started.
An overseas competitor from Norway entered the area with a high-tech approach to the furniture manufacturing business. They offered to make product to exact specifications and at an all-time low price. Besides, challenge came from the burst of development in the area and an influx of people. This hindered the safe economic environment Guillermo’s enjoyed. Profit margins diminished as Guillermo’s was placed in a competitive environment. He applied the behavioral principle, which states that when all else fails look at what others are doing for guidance.
He researched his competition and found that they were consolidating into larger organizations through merger or acquisition. However, because of his independent nature, he did not delight in such an idea. His take on the trend was quite the opposite of the Self-Interested Behavior principle, which 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, Finnerty, & Stowe 2007, p. 20).
The course of action that was most financially advantageous to the company was to research his competition’s approach and explore new approaches to the business. Taking another principle into consideration, the Principle of Two-Sided Transactions, which states that understanding financial transactions requires that we not become self-centered? One may want to argue that Guillermo did quite the opposite of this principle, which led to his rejection of the consolidating approach and research of the foreign ompetition. In Norway their high-tech solution utilized computers that man the production line. This gave way to reduced labor cost, increased precision in cutting, and robots assembling the furniture. With the aim of coming up with the best decision, Guillermo assessment of the situation after his investigation had to have been one that evaluated the cost, economic benefits, financial benefit, and value among other things of the various options available.
From his Norwegian research he learned that technology is very costly. However, it would dramatically reduce his production cost. From discussion with his distributors he learned he could have serve as a representative for a different manufacturer and move his company from primarily manufacturing to primarily distribution. Then there was his patented process for creating a coating for his furniture. With this option he had a market for flame resistant furniture but not as much as much for finished coating.
To determine the best decision Principle such Incremental Benefits, Risk-Return Trade-off, and diversification should be taken into consideration. The Principle of Risk-Return Trade-Off says that if you want to have a chance at some really great outcomes, you have to take a chance on having a really bad outcome. In a financial transaction, we assume that when all else is equal, people prefer higher return and lower risk (Emery, Finnerty, ; Stowe, 2007). Having to take risks is anticipated when managing a business.
In conclusion, to determine the best concept, create value and economic efficiency, Guillermo needs to come up with a new idea, establish comparative advantage, or make customers order to specification. The competition utilized the latter and has forced him into this state. Observing financial transactions involves risk and taking a risk is a chance Guillermo would have to be ready to take. Determining the best return often helps with decision-making process.
The other great financial option is to diversify. Putting all his eggs in one basket may lead him to a worse position in the future. Nevertheless, the principle of self-interested behavior will in the end lead to the best decision. Reference Corporate Financial Management, Third Edition, by Douglas R. Emery, John D. Finnerty, and John D. Stowe. Published by Prentice Hall. Copyright ©2007 by Pearson Education, Inc. Guillermo’s Furniture Store Scenario, University of Phoenix