Guillermo Furniture Store Financial Principles 1Guillermo Furniture Store Financial Principles Jennifer Alden University of Phoenix FIN/571 Corporate Finance Group: PD11MBA08 Instructor: Phil Winner October 29, 2012 Individual 1
Guillermo Furniture Store Financial Principles The Guillermo Furniture Store is a large manufacturer of furniture in Mexico thatwas successful in producing handcrafted furniture for several years. This continued until thelate 1990s when Guillermo’s overseas competitor entered the market. The new competition hadlatest state-of-the art manufacturing technology, which enabled them to sell its furniture at areduced price because of lower cost of production (University of Phoenix, 2011). With factorssuch as low housing costs and increase in labor costs, Guillermo profit margin decreased. Thispaper will discuss the finance principles that Guillermo faced in his new economic market. Whenreading through the scenario, many of these concepts were developed within the story. Theseconcepts found were: the principle of valuable ideas, the principle of comparative advantage,competitive advantage, and the principle of risk-return trade-off. Guillermo has a patent on his process for creating a coating for his furniture andthere is a market for the flame retardant part of the coating. This is in line with the principle ofvaluable ideas. “The ability to hold a patent granting the exclusive rights to produce a uniqueproduct coating further enhances the product’s value” (Emery, Finnerty and Stowe, 2007). The Principle of Comparative Advantage is a theory suggests that there has to beefforts in order to obtain economic efficiency and it is essential that people are working in areasor fields in which they are best at. Guillermo’s ideas of improving his production line and thepatent for his product coating can give him the comparative advantage he needs in the market. In order to have a competitive environment, the organization must have a desire tohave a competitive advantage over their competition. According to "Investopedia" (2012) thedefinition of competitive advantage is, "An advantage that a firm has over its competitors,
allowing it to generate greater sales or margins and/or retains more customers than itscompetition.” Guillermo has process for creating a coating on his furniture and has a patent toadd value to his furniture. This could give him the competitive advantage above his competition. Machinery can produce the furniture at a more efficient rate, reduce labor costs, produceproducts on a 24-hour basis and decrease his production costs. This too will give Guillermo acompetitive advantage against his competition. The Principle of Risk-Return Trade-Off is a theory suggests when taking risk, a person ismore likely to choose an alternative that has a higher return and when the return is the same, theperson is more likely to choose an alternative that offers less risk. Competition forces people tomake a trade-off between the return and the risk of their investment. (Emery, Finnerty, andStowe, 2007). Converting Guillermo’s production model would be expensive however; thetrade-off from the risk would benefit his company. Conclusion Competition can bring the best out of business. Competition has made Guillermowant to step up his production to a higher level by acquiring machinery to boost thequality of its furniture. The company’s biggest challenges are trying to reduce productioncost to meet up with competition and maintaining the appropriate profit margins. Thechange in production would line up with Guillermo’s other needs of not wanting toexpand his management responsibilities and continuing to spend the his time with hisfamily.
References:Competitive Advantage Definition. (2012). Retrieved from http://www.investopedia.com/terms/c/competitive_advantage.asp#axzz2AYt4CkP0Emery, D. R., Finnerty, J. D., & Stowe, J. D. (2007). Corporate financial management (3rd ed.). Morristown, NJ. Wohl Publishing Inc.