Running head: GUILLERMO FURNITURE STORE CONCEPTS
Guillermo Furniture Store Concepts
Guillermo Furniture Store Concepts
Business owners like Guillermo Navallez are responsible for making good business decisions. Guillermo??™s furniture manufacturing business was doing great with a good supply of timber and inexpensive labor. Afterwards, a new competitor with high-tech approach offering lower prices entered the furniture market. In addition, the communities in the town of Sonora began to soar. The town had an influx of people and jobs raising the cost of labor. Guillermo??™s profit margin consequently diminished (University of Phoenix, 2010). This paper will explore useful financial principles relating to competitive economic advantage, value and economic efficiency and observing financial transactions to guide Guillermo??™s decision making process. Principles of finance are the foundations on which financial management is built (Emery, Finnerty & Stowe, 2007).
The principle of self-interested behavior says that when all else is equal, all parties to a financial his business model to primarily distribution or use his patented furniture coating. For example, if Guillermo decides to use the high-tech solution he would cut labor costs but converting his production to this model would be expensive. This opportunity costs is large and the cost of not making the best choice is large. The principle of self-interest behavior poses a conflict of interest in principal-agent relationship. Guillermo??™s (principal) decision to cut labor costs in the high-tech approach with robots will ultimately affect the employees (agents) as their jobs will be price to avoid over or under pricing the product. It was a wise choice for Guillermo to use the behavior principle and examine a foreign competitor and their high solution. Business owners are constantly in search of ways to create value and economic efficiency.
The principle of valuable ideas means new products or services can create value. Guillermo??™s patented process for creating a furniture coating with a flame retardant should yield big returns. patented furniture coating. The smallest chance of a positive payoff at any time in the future gives the option some positive value (Emery, Finnerty & Stowe, 2007). So, if he chose the high-tech solution and his net income increase 10% the option is favorable. Last, the principle of incremental benefits implies that converting his production to the high-tech model would be expensive, but he could also decrease dramatically his production costs. However, without a course of action nothing would occur. By observing financial transactions, a business owner can make good decisions.
The risk-return trade-off principle involves people who are willing to take less return in exchange for less risk. Guillermo could choose to use his patented coating. This would probably yield less return because of the high-tech solution on the market. However, he would sustain less risk. Diversification is beneficial for Guillermo, too. Guillermo could coordinate his existing distributor network and essentially become a representative for this other manufacturer. While he may retain some of the high end custom work, he could move his company from primarily
Emery, D. R., Finnerty, J. D., and Stowe, J. D. (2007). Corporate Financial Management. (3rd Ed.). New Jersey: Pearson-Prentice Hall.
University of Phoenix. (2010). Week One supplement: The Guillermo Furniture Store Scenario. Retrieved February 16, 2007, from University of Phoenix, Week One, FIN/571??”Corporate Finance Course Web site.