Hi Tech

Foreign Competition & Labor Costs Recommendations

Guillermo has been successful in his current location for several years with labor being inexpensive and having a prime location. For years Guillermo has had a monopoly on the market and could charge top dollar for this custom made furniture. A competitor with a cheaper method of producing furniture has entered his market creating a challenge for Guillermo to continue to charge top dollar and earn new business. This forces Guillermo to consider cutting his prices to remain competitive; however it is very important that he understand what cutting prices will do to his business. To keep the same profits levels, Guillermo must find a more cost-effective way to produce furniture. Guillermo is facing two issues he did not have to deal with prior to the larger company entering his market with their hi-tech machinery producing furniture at low costs. First, Guillermo will have to alter his pricing structure if he wants to remain competitive with the new company. Guillermo realizes that to remain competitive in the furniture business he has to make some changes to his operation. Guillermo’s management team has done some research and found that their competitors are using a high tech approach providing furniture to the exact specifications at very low prices (UOP, 2011). He understands that “a firm's value depends only on the size of its expected future cash flows and the required return on those expected future cash flows",( Emery, Finnerty, & Stowe, 2007).

Predicting future sales is difficult because many factors could affect the market, but Guillermo's competitor can produce high quality furniture at a fraction of the cost of Guillermo. In addition, labor costs are rising in Sonora and Guillermo's time in the furniture market is limited. To make even a modest profit, Guillermo will have to set his prices significantly higher than that of his competitor. This strategy is quite risky because Guillermo's sales...