Introduction
The case of Ongko Furniture is the classical case of a small to medium enterprise that is facing the global challenges brought up by globalization. Mr. Jaya Ongko has been manufacturing handcrafted furniture products for the past three decades and has witnessed his business expansion at an incredible rate during the first decade. Nevertheless, during the second decade of operations, a combination of internal and external factors leads to increasing problems for his small firm. We will try to describe all the finance concepts that undergo the story of his firm throughout these years.
Concepts found in the scenario
Rising competition is one of the major factors that influenced the small firm of Mr. Ongko during the 1990s. The realized return is the rate of return actually earned on an investment during a given time period. The realized return depends on what the future cash flows actually turn out to be. In the preceding return example, with the same $0.50 dividend but an unchanged stock price, the realized return would be 2.5% (= 0.50/20.00). Or, if the stock price had declined to $16.00, the realized return would be minus 17.5% (= [0.50 + (16.00 − 20.00)]/20.00). It is critical to understand that a realized return is an outcome, the result of having made the decision to invest. You cannot go back and change the realized rate of return. You can only make new decisions in reaction to it (Mullins & Walker, 2008).
Another concept is that of rising operating costs for Ongko Furniture. The expected return is the rate of return you expect to earn if you make the investment. If you expected to make 15% in our example investment, including an expected $0.50 dividend, you would be expecting the value of the stock next year to be $22.50 (15% = [0.50 + (22.50 − 20.00)]/20.00).
The ‘behavioral principle’ is another concept found in the case discussed. Practically it is a principle to look at what others are doing for guidance in what you should be doing (Emery, 2007). Mr. Ongko found out that competitor had been consolidating into larger organizations by merger and acquisition. Yet another important concept we find is that of product diversification (Resnick, 2007). Mr. Ongko found out that a second competitor, operating only in Denmark, was looking for channels to distribute in Asia. A positive NPV increases wealth because the asset is worth more than it costs. A negative NPV decreases wealth because the asset costs more than it is worth.
The net-present-value concept is important because it provides a framework for decision-making. NPV appears in connection with virtually every topic in this book, and most financial decisions can be viewed in terms of net present value. NPV measures the value created or lost by a financial decision. However, NPV is measured from the benchmark of a “normal” market return. Therefore, a zero NPV decision earns the required return and is “fair.” A decision that earns less than the required return is undesirable and has a negative NPV. Positive-NPV decisions earn more than the appropriate return.
Conclusion
The case of Ongko Furniture is the classical case of a company facing stiff competition from globalization and the internalization of trade. In the process of transformation that Mr. Ongko undertook to safeguard his business we find many finance concepts that many other firms around the world use today. They range from the concerns related to the rise of operational costs to the investments in research & development and innovative technology.
References:
Emery, D. (2007). Corporate Financial management. Prentice Hall, Pearson.
Mullins, J. W., Walker, Jr., O. C., & Boyd, H. W. (2008). Marketing management: A strategic decision making approach (6h ed.). Boston: McGraw-Hill Irwin.
Resnick, E. (2007). International financial management. The McGraw Hill Companies.