Fin 571 Week 1

For many years Guillermo Navallez made furniture near his Sonoran home in Sonora, Mexico.   Guillermo had an advantage of inexpensive labor costs and an ample supply of timber; Guillermo had the option to be able to price his hand crafted products at a slight premium.   Until the late 1990’s, business was good for Guillermo until he faced two major issues businesswise. This paper will explain the finance concepts regarding the Guillermo scenario as they relate to the obstacles the company is faced with.
  Guillermo’s first issue consisted of new overseas competitors using high tech manufacturing approaches at rock bottom prices.   He realized that their high tech solutions utilizes a computer controlled laser lathe to produce precise cuts in the wood with the use of very little labor as robots performed precise movements on assembly (University of Phoenix, 2013).   The second issue the company faced was an influx in population which in return made the company’s cost of labor and material cost increase.   These factors may make a company consider relocation and becoming a free rider; and because Guillermo’s competition was an international company, there were no worries about a zero sum game, while Guillermo’s company is now at risk for opportunity cost.
Guillermo started realizing that the company’s operating costs were becoming too high to manufacture a quality product, and the personal craftsmanship of the handcrafted furniture would suffer with a reduction in the labor force. The principle of risk-return trade-off indicates the possibility of a good outcome is accompanied with a bad outcome (Emery, Finnerty, & Stowe, 2007).   Competition causes people to make a trade-off between the risk and return of an investment (Emery, Finnerty, & Stowe, 2007).     Guillermo had to decide what changes he should make to ensure the survival of his company because the company cannot afford the cost of transforming to a high tech process, although the production costs would...