December 10, 2012
Professor Susanne Elliott
Finance Concepts in the Guillermo Furniture Store Scenario The ultimate goal of any organization is to maximize shareholder value. Financial principles, financial markets, and business ethics guide management’s capital decisions to serve this goal (Emery, Finnerty, & Stowe, 2007). The following focuses on the financial principles and concepts that affect Guillermo’s furniture store and influence his decisions.
Competitive Economic Environment
Financial principles related to competition in an economic environment explain why new competition and increased labor costs threaten Guillermo’s profits and sustainability. The principles of self-interested behavior and two-sided transactions explain the decreased profit margins and increased costs (Emery et al, 2007). When profit opportunities in furniture manufacturing increase, opportunity costs for potential entrants increase and propel new competition. In Guillermo’s scenario, the new competitor could make furniture to exact specifications and offered it at a much lower price (UOPX, 2012). This new competitor and the market consumers acted in their own financial self-interest for profits and lower prices respectively. Guillermo’s loss of market share created downward pricing pressures diminishing profit margins. Market expansion increases labor demand pushing labor rates up and increasing opportunity costs for employees maintaining employment with Guillermo. Concerning the two-sided transactions principle, increased production and labor competition creates financial hardship for Guillermo who is on the selling-side of produced goods and the buying-side of labor (Emery et al, 2007).
The signaling principle helped Guillermo gather information and form alternative options to enhance its competitive position. He did not want to participate in merger or acquisition activities as many of his competitors have done. Using the behavioral principle, he looked at foreign competition for guidance (Emery et al, 2007). He considered imitating the high-tech solutions the competitor used, which would significantly increase capital costs and reduce production costs. Unless demand rises significantly, this is not the best solution because financial success requires mass production, magnified sales, and pricing battles to regain market share. The time to implement the high-tech solution would further benefit the competitor’s position in the marketplace.
Creating Value and Economic Efficiency
The principles of valuable ideas and comparative advantage influence Guillermo to think beyond imitation to advance business opportunities. He could scale down production focusing only on high-end custom work and specialize in distribution for a manufacturing competitor who relies on chain distributors (UOPX, 2012). Creating a business-to-business (B2B) partnership with this firm provides both firms comparative advantage because each specializes in what they do best. The options principle comes into play in the B2B contract giving rights to each party without obligations that limit risk and loss (Emery et al, 2007). Last, the incremental benefits principle is relevant to Guillermo’s decision to continue using his patented process for furniture coating versus buying an alternative that offers the same value. He must ignore the sunk costs in this evaluation and disavow emotional connection to his patent (Emery et al, 2007).
Consideration of alternatives involves the principles that emerge from observing financial transactions including the