Guillermo Furniture Decision
March 14th, 2011
Guillermo is forced to make decisions on whether to continue business as usual or change his business model. He considers opportunity cost, sunk costs, depreciation, and mergers. Guillermo does not want to make his life more complex and this is the biggest hurdle he will overcome when stating his final decisions.
Guillermo owns a furniture store in Sonora, Mexico. This area is staring to grow in popularity and as a result new businesses, and new competition is popping up in the area. With the inflow of people and resources labor has become more expensive and is affecting Guillermo??™s bottom line. Many of his competitors are selling out or consolidating. However, Guillermo enjoys his life style and does not want to sell out nor does he want to expand via merger and acquisitions. After some research he lays out his options next to each other so he can compare and make a final decision on what will benefit him the most.
High Tech Approach
A new competitor swooped into Sonora using a high-tech laser that makes precise cuts. Guillermo looked into this scenario and it seems although this would be a great benefit the cost of the machine is pricey and he would have to hire an additional employee with expertise to operate the machinery. This will cost Guillermo a lot of money and has the potential to be a huge disaster. Guillermo has never operated on this level before and he desperately wants to keep his life as close to normalcy as possible. When looking at all the changes he would have to make for the high-tech approach to running a furniture store, Guillermo decides he is too risk averse for this type of change and decides to look at his other alternatives (Emery, 2007)
After further investigation Guillermo uncovered a much more interesting piece of fact. A second competitor from Norway actually wants to use chains like Guillermo??™s store to sell their product. This would allow Guillermo to continue his business as a distributor with a side business of customizing furniture. The risk for this alternative is greatly reduced and according to his calculations he may even be able to make more money. The only issue Guillermo may face would be handling adverse selection due to offering something completely different than what his customers are used to seeing. Although Guillermo will be selling a quality product, such a drastic change could cause alarm amongst his current clientele and give the impression he is offering something negative to the consumer (Emery, 2007)
Mergers and Acquisitions
Guillermo thought about the adverse selection previously mentioned regarding distributing and decided to use the behavioral principle (Emery, 2007). When all else fails, look at what others are doing for guidance (Emery, 2007). Guillermo determined others are selling their companies or buying other companies to compete with the newer businesses being drawn in to the growing community. After careful analysis this did not seem to be a good suit for Guillermo as he has no intentions on taking over the world through mergers and acquisitions, nor does he want to sell his company and retire at the moment. Guillermo is content with the amount of business he does and this allows him to provide for his family as well as find time with them.
After looking over all of his options it was obvious to Guillermo no matter what he decides to do he absolutely has to change his business model to survive. He finally settled on becoming a distributor for the Norway furniture store. This allowed him to maintain a normal life outside of work and continue to manufacture high end furniture for his special clients. Guillermo understands there may be some adverse selection as a result of this change, however, with such growth in the community he feels the change will be positively accepted.
Emery, D. (2007).? Corporate financial management. New York, NY: Prentice Hall, Inc. A Pearson Education Company.