Guillermo s Furniture. Michelle Pate. Sundar Shankar. Mani Vannan. Osvaldo Perez. Niaz Tavakoli FIN571. University of Phoenix

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1 Guillermo s Furniture 1 GUILLERMO S FURNITURE Guillermo s Furniture Michelle Pate Sundar Shankar Mani Vannan Osvaldo Perez Niaz Tavakoli FIN571 University of Phoenix November 2009

2 Guillermo s Furniture 2 Introduction During the history of furniture, designing trends have correlated to society s changes. Today, because we have access to different fabrics, textures and technology advancements, people have a variety of furniture to choose from. Historians have a record of the year and technique in which furniture was made. Presently, you can find hand-made furniture at auctions, historic places and museums. They have a higher value and are looked at as a work of art because they are created by an artist s imagination. Furniture makers often use oak wood in their furniture, since it is stronger and will last longer than other wood. It would be more difficult to create custom hand-made furniture using an automated machine because it takes the art out of the furniture, though it is less expensive. It takes more time and money to create hand-made furniture and get it ready for the selling stages than to create automated furniture or become a distributor. Guillermo s Furniture Store is going through changes and he needs to adapt new strategies that would help him overcome the market s competitors and stay in business. Guillermo s Furniture Store is located in Sonora, Mexico and is one of the biggest companies that manufacture furniture in North America. This area has a large supply of material for the diversity of chairs, tables and other furniture produced by Guillermo s company. However, times are changing and competition has arrived in the area, causing his company major economical problems. The purpose of this paper is to evaluate Guillermo s furniture alternatives and determine their outlook for success by ensuring capabilities to match the industry s conditions and develop

3 Guillermo s Furniture 3 compatible units that can be converted into a competitive advantage. This report will strive to solve questions such as: (1) does Guillermo s Furniture has enough of a lead to maintain its status as the market leader in the regional player furniture industry and (2) is he is able to translate their leadership into the industry and strategic plan for the new challenges? The following are some of the solutions for Guillermo s Furniture Store in order of importance, based on previous classes and corporate finance analysis, the most important step for Guillermo s Furniture Store will be the partnership with the company in Norway, the next step will be the new technology and the last step will be the patent process; we recommend these solutions for the following reasons: Guillermo recommendation Partnership Guillermo would benefit from creating a partnership with the Norwegian furniture company in North America. Guillermo can take advantage and coordinate his developed distributor market network and essentially be the most important representative in North America after a merger with the Norwegian Company. The process is simply called mergers and acquisitions (abbreviated M&A). The brief understanding of M&A refers to the aspect of corporate strategy, corporate finance and the way management will be dealing with selling, buying and using a combination of other different business. This may help Guillermo s business grow financially in an industry that is rapidly expanding without dealing with the problems and issues involved in creating a new business product. Before we start talking about this recommendation we have to understand the difference between mergers and acquisitions. M&A are two different ways of doing business. An

4 Guillermo s Furniture 4 acquisition simply means new ownership taking over and buying out a company. However, a merger means that two companies decide to work with each other peacefully because they understand the advantage of working together as one business rather than competing with each other. In the case of Guillermo Furniture Store, our recommendation is to merge for the purpose of distribution and cooperation within the two companies. It will be beneficial to both of these companies to work together and rather than compete against each other which will reduce their profitability and line of production. To come to the conclusion of cooperation we will mention some of the benefits of merging the two companies. We have to start with the term Synergy used in M&A, which means that by combining business different activities, the performance will improve and operation costs will be reduced. In Guillermo Furniture Store scenario, it is beneficial to increase performance and decrease costs. If they increase performance this means they can sell more product (and the merging company s product) in the market rather than inventing new ideas to compete with other companies in the market. Furthermore, they reduce costs because they do not spend the initial money to buy the equipment needed to upgrade their business to compete with the company from Norway. Secondly, we will diversify and sharpen the business focus. By diversification, Guillermo Furniture Store reaches their goal of becoming the distributer of the Norwegian company in the region, and by sharpening the business focus, it would help them maintain revenues on custom made items and continue to take orders for more custom products. By doing so they achieve both organization s goals and they have the market and capability to manufacture all units made by both of the companies.

5 Guillermo s Furniture 5 This is beneficial because the profits are being shared by both companies. In the future, both companies benefit if they want to expand their products by merging with another company. Larger corporations are always seeking to merge with businesses that have a deeper and existing market penetration in the key activities of their market. The third reason that leads Guillermo to merge with the Norwegian company is the opportunity to grow. Since we already know that the Norwegian company has far greater chance to take over the market and simply run Guillermo Furniture Store out of business, it would be critical to the existence and growth of Guillermo Furniture Store to seek partnership with the Norwegian company in any way possible. The final and the most important part of merging companies is the elimination of competition and price controlling. If we merge two companies together, we eliminate competition which guides us to more profit. With competition, not only do we have to sell at a lower price, but we also lose the control over what is being sold in the market and at what cost. Since we are now the sole producers of furniture products, we have control over mass production. For example, if we think selling a pink chair would be more profitable to our company than selling a brown chair, we stop the production of the brown chair or lower its production and increase the production of the pink chair that would bring more profit to our company. By doing so, we control what is being sold as well as the item price because there is no one else making the same product in the market and no competitors. These are the reasons why Guillermo Furniture Store needs to consider merging with the Norwegian company in order to stay in business, grow, and be profitable. By doing so, Guillermo will enhance his ability to produce customized goods, and become stronger by

6 Guillermo s Furniture 6 merging with the most powerful company in the market rather than competing with them and losing their business. Guillermo s recommendation laser equipment Another option mentioned is Guillermo buying laser equipment for his company and utilizing it around the clock which will benefit the growth of his company and keep him competitive in the marketplace for years to come. He will likely decide on the course of action that makes him the most money and according to forecasts, the laser equipment option will do this. Guillermo is a seasoned furniture maker as are most of his laborers. On a professional fulfillment level, to keep his employees happy and loyal, he will need to continue his business in a similar fashion. Since building furniture is what he enjoys best, Guillermo will likely choose an avenue where he can continue doing that, following the principle of self-interested behavior as well as the principle of comparative advantage (Emery, et al, 2007). Buying laser equipment will allow his furniture makers/laborers to continue working in the manner they are best fit, along with staying competitive in the quickly changing marketplace. Guillermo has experienced a larger demand of mid-level furniture, where in the past he was popular for making only high-grade furniture. But times have changed, and Guillermo must change as well to continue making a profit. As the demographics of the area change, the midlevel furniture demand will only keep continuing to grow. Mid-level furniture is where the demand is, so the focus of the company needs to be in manufacturing mid-level furniture. He needs to sell what people are going to buy, following the principle of two-sided transaction (Emery, et al, 2007)

7 Guillermo s Furniture 7 The initial outlay for the equipment will raised fixed costs, but the cost for labor will decrease dramatically because the equipment will do the work that laborer used to do. Laborers will still be needed to run the laser equipment plus assemble and finish the product. The laser cut furniture will be manufactured around the clock, creating more furniture to sell to consumers as a lesser cost. Guillermo s recommendation patent A third option would be for Guillermo to apply his patent process for the creation of a coating for his manufactured furniture (This process will create a flame-retardant and stain resistant) and take the benefits of a patent owner. This gives him the right of ownership of the flame retardant as a patent would for anyone who patents a discovery or invention of any new and useful machine, process, composition of matter, article of manufacture, or new and useful improvement. Guillermo knows there is a good market for his flame retardant, but there is a bigger opportunity in the market for the finished coating. Consider the following, Every decision made in a business has financial implications, and any decision that involves the use of money is a corporate financial decision (Emery, Finnerty, & Stowe). Guillermo knows money is at stake whatever decision he makes. Considering some of the additional qualifications in utility patent used today in the United States to distinguish it from different types of patents, it should not be confused with models patent in other countries in the world. Guillermo can take advantage of his process creates a flame-retardant and stain resistant and enjoy the following benefits;

8 Guillermo s Furniture 8 Reduce the number of competitors in the market Increase the value of the company Cross-licensing, joint-development, or joint-marketing for needed technology or marketing resources Create revenue from licensing Confidence for venture capitalists or other investors In the case of liquidation, can sell the IP portfolio separately Financial Principles to Consider in Decision Making Process Self-Interested Behavior This principle says that when all else is equal, all parties to a financial transaction will choose the course of action most financially advantageous to themselves. An opportunity cost provides the indication of a relative importance of a decision. Guillermo s Furniture can take advantage of the new opportunities by creating the coating for the companies furniture and evaluate the cost. (According to Emery, Finnerty, & Stowe, Ch 2). The way for procedure granting patents, the different requirements used on the patentee, and the way they will guarantee exclusive rights is going to vary between countries defined by national and international laws, as well agreements made. New ideas, products and services can create value, so if one has a new idea, he can transform it into extraordinary positive value for himself. For example, Guillermo s

9 Guillermo s Furniture 9 Furniture can apply the patent and take advantage of his idea to the benefit of his company. (According to Emery, Finnerty, & Stowe, Ch 2). An application for a patent can include many claims defining the idea or invention which has to be new, useful, inventive or industrially applicable in this case Guillermo s Furniture should take advantage of his patent and reorganize and be a leader in the furniture industry. Diversification The investment is divided among many firms; the entire investment will not be lost unless all of those firms fail, Guillermo s Furniture can use, the patented process to diversify his opportunities and investment (According to Emery, Finnerty, & Stowe, Ch 2). In countries around the world, some subject areas will be excluded from the patents, like mental acts and business methods. The guaranteed exclusive rights that go along with the patentee in majority of the countries in the world will be the right to protect and prevent others companies from distributing, selling, using, or making the patented idea or invention without the owner permission. Comparative Advantage If everyone does what they do best, we will have the most qualified people doing each type of work; this creates economic efficiency. Guillermo s Furniture can use his comparative advantage to survive in the new market therefore, and he will have success with his patent (According to Emery, Finnerty, & Stowe, Ch 2).

10 Guillermo s Furniture 10 Conclusion With the presentation of the above alternatives for Guillermo s Furniture, and the elements of corporate finance, we compare and contrast the best alternatives in the industry and Guillermo should adopt the partnership, new technology and patent. These are alternatives that will help to solve and understand problems in which the company faces and find solutions to overcome and adapt to the new challenges in the market and success in the furniture industry once again.

11 Guillermo s Furniture 11 References Blackburn, Graham (2009), throughout history, furniture design pays tribute to its patrons and Popular designers, A Short History of Furniture Periods, paragraph 2 & 3. Accessed from the internet on December 2, Emery, Douglas R., Finnerty, John D. & Stowe, John D. (2007). Corporate Financial Management (3 rd ed.), Ch 2, p New Jersey: Pearson-Prentice Hall. Emery, Douglas R., Finnerty, John D. & Stowe, John D. (2007). Corporate Financial Management, Ch 3, p New Jersey: Pearson-Prentice Hall.