Guillermo Furniture Store Analysis
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Guillermos Furniture (GF) store is facing shrinking profit margins, and increasing cost because of industry competition. The author will review finance concepts from the readings and how they relate to the context of the scenario.
A review of the Guillermos (GF) financial information indicated high taxation on net income, slow growth of 1%, under production by 50%, increasing labor costs, price reduction due to competition, aging and outdated equipment requiring higher maintenance cost, higher insurance rates. Furthermore, GF retained earnings appear inadequate to handle a downturn in price and increased labor cost and have the firm survive against competition with greater technological efficiencies (University of Phoenix, 2009).
Production utilizes a computer controlled laser lathe to produce exact cuts in the wood. Highly automated, the plant in Norway uses very little labor as robots even perform the precise movement and assembly functions. The cost of the technology is immense, as is the reduction in the labor needed for production (University of Phoenix, 2009).
GF needs to re-evaluate its role in the industry to maintain sustained competitive advantage. Hard assets like buildings have a value in terms of depreciation but do not provide liquidity, which is important to handle fluctuations in the marketplace and continuous competition. Furthermore, inventory if not pre-sold can tie up cash.
A competitor, currently operating only in Norway, has been looking for channels to distribute in North America. Guillermo could coordinate his existing distributor network and essentially become a representative for this other manufacturer. Guillermo also has a patented process for creating a coating for his furniture. There is a market for the flame retardant but not as much of a market for the finished coating (University of Phoenix, 2009).
The aforementioned observation highlights the principle of self interested behavior, and the principle of two sided transactions. The opportunity cost for GF in becoming a distributor, or agent for the Norwegian competitor is the best alternative and affords the best financial advantage for GFs survivability and maintaining independence and prosperity for the founder, and fulfills a strategic goal and need of the Norwegian firm. GF demonstrates the behavioral principle of finance through environmental scanning to determine cost efficient processes and GFs capital capability to invest in new equipment. Furthermore, the patents available to GF address the principle of valuable ideas, “new products or services can create value and transform it into extraordinary value” The Principle of Capital Market Efficiency involves the return associated with simply purchasing part of an opportunity that has become known to everyone (Emery, Finnerty & Stowe, 2007).
GF by becoming a distributor employs the principle of comparative advantage in doing what he does best; The principle of incremental benefits states