Guillermo Furniture Store For many years, Guillermo Navallez has owned and operated a small and profitable wood furniture making company in beautiful Sonora, Mexico. He has enjoyed an abundance of raw materials, low labor costs, and limited competition. This has recently changed due to a few significant events (1) new competitors from overseas, using high-tech automation manufacturing processes, resulting in exact furniture specifications at rock bottom prices and (2) Sonora, Mexico labor cost have dramatically increased due to emerging new industries and companies.
Guillermo Furniture has been forced to reconsider his current business model and implement a change in strategy to remain in business and competitive (ACC561, Guillermo, 2009). Guillermo Furniture SWOT Analysis Prior to addressing the outlined questions we must understand Guillermo Furniture Store’s current; Strengths, Weaknesses, Opportunities and Threats (SWOT). Managers use accounting information for many different types of decisions. Information uncovered in accounting provides; scorekeeping, attention directing and/or problem solving, but we first need to understand our current environment (Horngren, 2008).
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The first course of action for Guillermo Furniture is to have an objective SWOT analysis performed in order to have a clear picture of the company’s current position in the market and among the competition. Of course, a more detailed SWOT analysis would be needed for a more specific focus and direction. Strengths: Strengths identified during the SWOT analysis is an abundant supply of raw materials, inexpensive labor, and a market that allowed a price premium for quality. Weaknesses:
The Guillermo Furniture Company was shown to be weak in manufacturing process and technology when a larger competitor started operations in direct competition. This made the company’s market position uncompetitive due to lack of manufacturing automation and labor costs. Guillermo also would like to remain independent, thus he would not benefit from the strengths of merging or having his small company acquired to facilitate growth. Opportunities: Guillermo has multiple opportunities to improve his company’s future.
First, the company could expand the selection of furniture produced through new manufacturing processes. Second, the patented furniture coating product, could easily become the driving force behind Guillermo growth and competitive advantage. And finally, Guillermo could develop a new business unit division, and combine it with an investment in technology for the coating manufacturing to further improve his unique selling proposition. Threats: The Guillermo Furniture Company faces a myriad of threats. A new and large competitor that uses advanced technology and automation.
Rising labor costs, declining sales due to competition, eroding margins, and declining revenues with sales losses. The current climate of mergers and acquisitions in the furniture industry is producing stronger competition with more economies of scale and leveraging of power in the marketplace. Budgets and Performance Reports The basic purpose of accounting information is to help make strategic decisions. Regardless of who is making the decisions, understanding accounting information allows for a more informed, and better decision (Horngren, 2008).
Accounting reports are classified into two types; Accounting and Financial reports. Budgets and performance reports are vital information for a company that is looking to survive, compete and expand in their marketplace. Guillermo would benefit immensely by using these reports to see data trends in different business segments. For example, a performance report showing real versus budgeted sales would identify the most viable and profitable business segments in both short and long-term.
Guillermo could then use these data trends to build a 5-10 year forecast for individual business segment manufacturing viability. Guillermo must evaluate each business unit taking into account fixed and variable costs associated with the fixed assets required for operation. Once this evaluation is completed, business models for revenue, costs, profit margin, and resource investment could be compared for each of the proposed business units. • Manufacturing as currently in place • Manufacturing with investment in new technology • Broker Business Segment Product Coatings Business Segment Lastly, Guillermo could use performance reports to identify growth segments for immediate and future resource investment. He could identify declining segments and begin to diversify or limit future investment in these segments. For example, demand for moderate furniture is growing while the demand for high-end furniture is on the decline. While limiting further investments in declining segments, use them as sources of income for the higher profit margins they do produce.
The proceeds from this could be re-invested in the growing market segments. Ethics and Accounting Decisions Regulation of accounting systems seeks to ensure the reliability of the information that accounts provide. “However, no regulation can be as effective in ensuring liability as holding accountants to high ethical standards” (Horngren, 2008). Organizational and individual ethics influence critical decision-making processes, with potentially negative results affecting the bottom line. Ethics are based in part on core values imparted on individuals throughout a lifetime.
Each person perceives right and wrong based upon ethics and consequently his or her actions will follow these parameters. Technology also promotes organizational ethics; however, ethical and moral conflicts will increase work-related stress amongst employees. This behavior negatively influences organizational behavior. Guillermo must decide whether to transition from manufacturing to distribution, and if he does remain in manufacturing, are there potential ethical violations if he continues to broker as well.
This author believes Guillermo would have the personal ethical dilemma of continuing to employ human labor from his city, or transition to a more automated production thus saving him money from his bottom line, and making the company more efficient and effective. The current economy has been shaped with bad ethical decisions in accounting practices. One only needs to look as far as Tyco, Enron and WorldCom to understand how pressure to perform and expand can corrupt a company. The bottom line for Guillermo Furniture Company will be how Guillermo responds to the competition and how his desire to remain ndependent affects his decision making process. Relevant Accounting Information and Decision Making The most relevant accounting information for Guillermo to consider would be the following examples. • Short and Long-Term Demand Forecasts, Revenue Generation, Pricing, Cost, and Profit Margin for each Business Segment. • ROI in months / break even when determining the ROI on New Technology Investment • Compare Expected Revenue, Margins and Net Income from all three business opportunities.
Forecasting demand for each segment, pricing and production costs for each opportunity • Assets Management…. Develop a plan to support assets that are profitable, and a plan to divest the underperforming. Conclusion The Guillermo Furniture Company has enjoyed years of profitability without constructing a business dynamic plan. With the larger direct competition moving in, this has shown the weaknesses in the Guillermo Furniture Company. Guillermo must immediately change the course of direction in order to remain solvent in the current marketplace.
The statistics available through accounting practices will give him the necessary tools to make both short and long-term decisions to remain a viable company in today’s global economy. References ACC 561 Course handout: Scenario: The Guillermo Furniture Store. Retrieved July 19, 2009 from the material section of the course description page. Brealey, R. ., Myers, S. . & Marcus, A. J. (2007). Fundamentals of Corporate Finance (5th ed. ). Boston: McGraw-Hill Irwin. Horngren; Sundem; Stratton. (2008). Introduction to Management Accounting (14th ed. ). Upper Saddle River, NJ: Pearson / Prentice Hall.