Guillermo Furniture Store Analysis

Guillermo Furniture Store Analysis

University of Phoenix

June 18, 2012

FIN/571

Bill Stokes

Guillermo Furniture Store Analysis

In the Guillermo scenario; Guillermo Navallez who is the owner of Guillermo Furniture store, which handcrafts furniture, is trying to determine the best possible option for future success in response to an ever-increasing competitive market. Guillermo enjoyed many advantages such as location, abundant timber, and low labor costs for a high quality of work produced for many years. These advantages dwindled with market competition and economic changes. (University of Phoenix, 2012). The objective of this paper is to analyze different alternatives available to Guillermo, including a sensitivity analysis. The optimal weighted average cost of capital (WACC) will be determined; the utilization of multiple assessment techniques in dropping risks will be discussed. Also the net present value (NPV) of future cash flows for each of the alternatives. (Assignment, 2012)

The Influences affecting business

The issue of globalization through foreign competitors moving into the area is threatening Guillermo's current sales and profits. This puts Guillermo in a position of assessing how to maintain a successful business practice yet remain competitive in a global market. According to the scenario, the new competition is a highly automated plant expanded from overseas that uses sophisticated computer controlled laser lathes to precision cut and mass produce furniture. They can produce and offer merchandise at the lowest prices and still incur a profit due to fewer employees (University of Phoenix, 2012).

Another issue Guillermo's experiencing is a changing local economy where the area is expanding and bringing in more businesses and with it more people and jobs, this is causing an increase in the local labor costs. As a result, Guillermo's profit margins are shrinking. Many competitors are consolidating into larger companies however; this would put a strain on his family life as well as take the life out of his company, (University of Phoenix, 2012).

Alternatives for Guillermo Furniture

Guillermo is considering three alternatives. One solution would be to redesign the business by adding new technology. In restructuring Guillermo's with automation that uses robots, the option could help the business decrease labor costs. The cost of moving to the new technology is expensive. However, the reduction in labor costs and the ability to shift between products quickly could offset this additional cost (University of Phoenix, 2011). This solution will provide an increase in company revenues, but it would no longer produce the handmade quality product the customers have come to expect, (University of Phoenix, 2012).

The next alternative to be considered is for Guillermo to become a broker by converting the company from manufacturing to mostly distributor and retail, maintaining just a side business of custom handcrafting. This could be done by contracting with a previous competitor that functions out of Norway. This company is in search of outlets to distribute their products in North America. Guillermo would need to coordinate with his current distributors and become the delegate for the company out of Norway, which would move the Guillermo Furniture Store to primarily distribution (University of Phoenix, 2012).

A third alternative would be to remain at his current position and rely on the new addition of his protective coating to the furniture to increase his sales. Guillermo has a patented process for this finish. This process creates a flame retardant coating for the furniture which is anticipated to be in high demand in the furniture industry. (University of Phoenix, 2012).

Sensitivity Analysis

A sensitivity analysis of each alternative would provide Guillermo with all the information he needs to make a rational business decision. The analysis should rank all the assumptions in order from most important to the least important. This will indicate which assumptions have the most influence, thus reducing the time required to compute estimates. "Sensitivity analysis is very useful when attempting to determine the impact the actual outcome of a particular variable will have if it differs from what was previously assumed. By creating a given set of scenarios, the analyst can determine how changes in one variable(s) will impact the target variable" (Investopedia, 2012)

Techniques in Reducing Risks

Risks are included in every decision that a business makes; however, there are various techniques that may be utilized to keep risks at a minimum. Because each alternative holds some risk, Guillermo must decide which alternative holds acceptable risks and identify what risks are too great to take on. There are several valuation techniques that can be applied to this scenario. For example the payback and discounted payback methods take on the investment concept of "getting your money back" "the expected number of years required to recover the original investment" (Emery, Finnerty, & Stowe, 2007).

Weighted Average Cost of Capital

The cost of capital is the weighted average of the current required returns on debt and equity, in which the weights are the