Assignment:
Read the Ongko Furniture Store Scenario and write no more then a 700-word, APA-formatted, paper explaining the finance concepts found in the readings and how they relate to the context of the scenario.
Post your assignment as a Microsoft® Word attachment.
Emery, Finnerty, Stowe. (2007).
Corporate Financial Management(3rd ed.).
New Jersey: Pearson-Prentice Hall.
Ongko’s Furniture Scenario
While many people know that Bali, Indonesia is a beautiful vacation spot, it is also a large furniture manufacturing location in Southeast Asia. Jaya Ongko made furniture for years near his Bali home. The area had an effective 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. Ongko not only supplied the surrounding countries in Southeast Asia, but also exported his hand-crafted premium products to more than 20 countries worldwide. Overall, life was good for Mr. Ongko.
In the late 1990s, two forces combined to cause a large dent in his business. First, a new competitor from overseas entered the furniture market. Using a high-tech approach, the new foreign company provided furniture to exact specifications and did so with rock-bottom prices. Second, the sleepy communities in Bali woke up. One of the largest retailers in the nation’s headquarters was just a few miles down the road, and its influence had expanded considerably. With inexpensive housing, mild weather, beautiful scenery, uncongested roads, a new international airport, and plenty of development, an increase in the population and the number of jobs raised the cost of labor substantially. Ongko watched his profit margins shrink as prices fell and costs rose.
After researching his competition to see how they were handling these changes, Ongko saw that many of them were consolidating into larger organizations by merger or acquisition. Being independent, Ongko did not relish the idea of being acquired by a larger competitor and then forced out as the new company squeezed every rupiah it could out of the overhead costs. Initially, Ongko was not a big fan of forming a joint venture, as it would affect time spent with his family in ways that he would not enjoy. When one of his former suppliers in Brazil approached him for a possible acquisition deal, Ongko became interested in the option of expanding his management responsibilities by acquiring this supplier, who had been underperforming in the Brazilian market. One factor that concerned him was the political unrest in Brazil, accompanied by hyperinflation. Prices of goods fluctuated wildly on a daily basis. At the same time, the government kept issuing more paper currency in higher denominations. Banks would restrict the amount of money people could withdraw. The effects on businesses were also devastating. Companies did not want to buy any goods, because they were not sure what price they would pay, and salaries did not keep up with inflation.
Alternatively, Ongko observed the foreign competition and their high-tech solution. Essentially, their production utilized a computer-controlled laser lathe to produce exact cuts in the wood. Highly automated, the plant in Norway used very little labor as robots even performed the precise movement and assembly functions. The cost of the technology was immense, as was the reduction in the labor needed for production. In addition, the production, running on a 24-hour basis, could move between products quickly, as the shift-differentials were more than offset by the reduction in labor. Converting his production to this model would be expensive, but he saw how he could also dramatically decrease his production costs.
When talking to some of his distributors about their wants, he had another appealing idea. A second competitor, operating only in Denmark, was looking for channels to distribute in Asia. This second potential rival, however, did not operate furniture outlets, favoring instead to rely on chain distributors. Ongko could coordinate his existing distributor network and essentially become a representative for this other manufacturer. While he would retain some of the high-end custom work, he could move his company from primarily manufacturing to primarily distributing.
Ongko also had a patented process for creating a coating for his furniture. During production, the process first created a common flame retardant, and upon further processing, the coating is complete and stain-resistant. There was a market for the flame retardant, but not as much of a market for the finished coating. There was another product that Ongko could buy to apply to his furniture that would add the same amount of value to the furniture.