Cost Drivers

In: Business and Management

Submitted By Lborchers
Words 582
Pages 3
Scenario: The Guillermo Furniture Store

While many people recognize Sonora, Mexico as a beautiful vacation spot, it is also a large furniture manufacturing location in North America. Guillermo Navallez has made furniture for years near his Sonoran home. The area had a good supply of timber for the variety of tables and chairs produced by his company. Labor was also relatively inexpensive. In addition, he priced his handcrafted products at a slight premium for the quality they represented. Overall, life was good for Guillermo.

Unfortunately for Guillermo, in the 1990s two events combined causing a large dent in his business. First, a new competitor from overseas entered the furniture market. Using a high-tech approach, this foreign competition provided furniture to exact specifications and did so with rock-bottom prices. Second, the sleepy communities in Sonora woke up as one of the largest retailers in the nation’s headquarters emerged nearby, and its influence had expanded considerably. With inexpensive housing, mild weather, beautiful scenery, traffic-free roads, a new international airport, and plenty of development, an influx of people and jobs raised the cost of labor substantially. Guillermo watched his profit margins shrink, as prices fell and costs rose.

After doing some research to see how his competitors were handling the changes, it was clear that many of them were consolidating into larger organizations by merger or acquisition. Being independent, Guillermo did not relish the idea of being acquired by a larger competitor, only to retire as the new company squeezed every peso it could out of the overhead costs. Guillermo also did not intend to expand his management responsibilities by acquiring another organization either; as this decision would affect his time with his family in ways that he would not enjoy.

Guillermo spent some time looking…...

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