January 14, 2013
Christopher Kubik, DBA
Guillermo Furniture Store Recommendation
The Guillermo Furniture Store success can be credited for the focus on quality and the handcrafted furniture manufactured sold at a premium. In the late 1990s, Guillermo’s business model started to change when two new events brought change to Guillermo’s business environment. The first event came in the form of a competitor from overseas. The new competition brought a high-tech approach to making furniture that used exact specifications and produce products that resulted in rock bottom pricing. The second event that took place resulted from development in the area that brought an influx of people and jobs. This created a rise in labor costs that resulted in a decrease in profit margins for Guillermo Furniture Store. As the new competition took sales away Guillermo’s profits fell and cost started to rise quickly. Guillermo has to choose among alternatives to compete in this new business environment. Choosing the right alternative will return profit levels to optimum levels. Alternative One
The first alternative Guillermo must face is the current situation or alternative. This basically states that he will not change a thing and continue running his business as usual. The decision Guillermo makes will determine how successful he will be moving forward. Guillermo must choose the best alternative if he wants to continue success in this market. Based on the alternatives, it is quite clear that very little analysis needs to be done to see that the alternative for making no changes will not succeed in such a market. This recommendation can be supported by the existing state of the economy within the market, and the lack of competitive advantage that Guillermo has over his competitors. There is little he can do to change the outcome of the situation by not making any changes. Guillermo must change his focus to another alternative and gain competitive advantages, reduce his risks, and increase his cash flow and profits.
The second choice is the alternative to move to high-tech. This alternative would put into operation a high-tech method that would lower his cost and produce a high output of custom furniture. Guillermo Furniture has the option to go high-tech by leasing or purchasing laser-cut machinery for their furniture. The cost for purchase would come in the form of investing $4.5 million shares worth of stocks or bonds. Guillermo takes pride in his profession by handcrafting his furniture. There are those who will purchase his high-end furniture because of the detail put into his work and unique features that also gives the furniture character. To compete with other furniture stores Guillermo must adapt to the changing ways and produce furniture at a lower price to keep with the price demands of the consumer. There are several benefits to laser cut technology. Emery, Finnerty, and Stowe states, “The lessee realizes this value as if it were cash, because it gets the exclusive use of the asset without having to purchase it” (2007, p. 610). The high-tech production reduces the labor costs and increase production with the precision cuts to the exact specifications. Guillermo Furniture must analyze the advantages and disadvantages of leasing the equipment or to purchase. There are two disadvantages of leasing the laser-cut equipment. If Guillermo decides to lease the equipment they will not have the tax deductions if they purchased the equipment. The second disadvantage is the cost benefits of leasing. According to Emery, Finnerty, and Stowe, “Leasing is only beneficial when the present value of the benefits of leasing exceeds the present value of the costs of leasing” (2007, p. 612). Guillermo can issues shares as indicated in the pro-forma budget cash flow to raised funds for this project. Guillermo could also enter into a financial lease with...