Guillermo’s Furniture Store Scenario, Essay Example

This paper analyses Guillermo’s Furniture Store Scenario. In this case, the store is involved in the manufacture of furniture in Sonora where the supply of timber of a variety of types is available. Previously labor was inexpensive and Guillermo sold its furniture at a premium price. It is after some time that competition intensified following the entry of a foreign competitor into the market that offered similar products at lower prices and could produce using low cost due to the use of modern technology. Competition from within also increased with one of the largest retailers in the neighborhood increasing their influence. The locality also experienced an influx of people translating to a considerable increase in  labor costs. All the above factors contributed to the decline of profit margins for Guillermo.

After undertaking market research, Guillermo found out most of the competitors were forming mergers. This idea was not ideal to Guillermo because it felt that the entity would be acquired and later on disposed. In a merger, two or more entities combine together to form a new company. This process can be undertaken in two ways; either through acquisition and takeovers or by amalgamation. Through takeover or acquisition, an entity will offer securities or cash in exchange for a majority shareholding of the other business. Where businesses of equal size decide to amalgamate, they submerge their corporate identity forming a single firm in a friendly atmosphere. Businesses merge in order to benefit from economies of scale, better utilization of funds, diversification, access to scarce resources, entry into new business lines, cheaper than setting a new venture and rehabilitating poorly performing businesses. It is however a common fact that mergers gives rise to monopolies and coordination as well as control of activities is complicated in a merger (Machiraju 2007).

Guillermo analyzed the competitors and the technology they used. The use of computer controlled laser and robots is seen to reduce  production costs for furniture manufacturers. This means that the cost of producing Mid-Grade and High-End furniture would drastically reduce. The costs of the new technology are also high but production costs would reduce. This means that the company can adopt modernization strategy. This will be achieved by upgrading the technology of Guillermo in order to reduce costs, improve quality and reduce wastage. This will involve installing new machines and equipment. Guillermo can undertake this strategy either through full strength therefore achieving internal growth or at a low pace therefore maintaining its market position. If Guillermo uses modernization, its productivity and efficiency will improve, profit margins will grow, it will become more competitive, it will not affect the normal operations and workers will acquire modern skills. However, the strategy will involve huge initial outlays, responsibilities of the management will increase and the current staff are likely to lose their jobs (Machiraju 2007).

Guillermo can enter into a joint venture with a second competitor. The competitor is currently operating in Norway and has been searching for distribution channels in North America. The competitor relies on chain distributors. A joint venture allows businesses to partner for a specific operation (Vonortas 1997).

Guillermo patented its coat creating processes. Market for the flame retardant is available but the market for the finished product that is derived after further processing of the flame retardant is negligible. The company has an option of buying another product that adds the same value. This means that Guillermo can diversify its operations by increasing its products variety.  This may also involve adding totally different products that may be complementary. Guillermo can diversify its operations because the flame retardant is more profitable than the finished products and trying to expand the business will not generate adequate profitability. By diversifying its operations, the firm will be in a position to increase its sales thereby becoming more competitive, minimizing risks, utilizing its resources and benefitting from economies of scale. This strategy may not be good for the business because it requires huge amounts of funds, increases the responsibility of management, leads to further financial risks because of unknown products and it involves technology and new markets (Vonortas 1997).

References

Machiraju H.R. (2007). Mergers, Acquisitions and Takeovers. New Age International. From < http://books.google.co.ke/books?id=-nCcmGBwyyEC&printsec=frontcover#v=onepage&q&f=false>.

Vonortas S.Nicholas, Yongsuk Jang, (1997). Virtual Diversification in Research Joint Ventures. From < http://www.gwu.edu/~cistp/assets/docs/research/papers/Vonortas&Jang%20-%20Virtual%20%28Working%20Paper%29%201997.pdf>.