Guillermo Furniture Concepts

Guillermo Navallez has been manufacturing and selling high quality furniture for years near his home in Sonora, Mexico. Life was good for Guillermo until late 1990s when Sonora’s market changes. New competitor from oversea entered the furniture market and the sleepy communities in Sonora woke up. The two forces combined caused a large dent in Guillermo’s business. Guillermo watched his profit margins shrink as prices fell and cost rose. In order to stay in this market, Guillermo needs to understand some of the financial principles that related to his situation before he could make the most important decision for his business.

After doing some research on his competition, Guillermo has seen that many of them are consolidating into larger organizations by merger or acquisition. This action is defined as the “Behavioral Principle”: when all else fails, look at what others are doing for guidance (Emery, Finnerty, and Stowe, 2007). This is not an option that he prefers because he does not relish the idea of being acquired by a larger competitor and then retired as the new company squeezes every peso it could out of the overhead costs (Guillermo Scenario, 2010). The merging of business might send the wrong signal to consumer. This presents the “Signaling Principle”: actions convey information. According to Emery and etc, “a firm’s decision to enter a new line of business may reveal something about the firm’s position and its belief in the venture’s potential” (Emery, Finnerty and Stowe, 2007).

Expanding his management responsibilities is also not Guillermo’s choice because that could affect his time with his family. This decision is lead by the principle of “Self-Interested Behavior”: people act in their own financial self-interest (Emery, Finnerty, and Stowe, 2007). Under this principle, Guillermo has to carefully calculate the opportunity cost of his decision so he could choose the best alternative. Guillermo has spent time looking at the foreign competition...