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120 Cards in this Set
- Front
- Back
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foreign exchange market
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used to convert currency from one country into that of another
helps hedge against foreign exchange risk |
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foreign exchange risk
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adverse consequences of unpredicted changes in exchange rates
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currency conversion - when companies use the foreign exchange mkt.
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when payments they recieve from licensing, exports, investments, etc. is in a foreign currency
when they must pay a foreign company is their currency when they want to invest in foreign mkts. currency speculation |
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currency speculation
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short-term movement of currency from one currency to another in hopes of profiting from shifts in exchange rates
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insuring against foreign exchange risk
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can be used to protect against foreign exchange risk -- hedging
using forward exchange rates using currency swaps spot exchange rate has an effect |
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spot exchange rate
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rate at which one currency is changed into another on a certain day
changes continually depending on supply and demand |
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forward exchange rate
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to hedge against adverse movement of exchange rates
when two parties agree to execute a deal and pay eachother at some date in the future forward exchange rate is the rate governing these transactions |
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currency swap
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purchase or sale of a given amount of foreign exchange for two seperate dates
transacted between business and their banks, between banks, when it is desireable to move one currency into another for limited period without incurring risk |
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nature of the foreign exchange mkt.
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network of banks, brokers, and foreign exchange dealers connected through electronic communication -- many locations
most important are london, NY, tokyo, and signapore mkts. are always open somewhere in the world no significant difference between rate quotes at the different centers if not, there would be an opportunity for arbitrage -- buying low and selling high most transactions involve dollars on side, along with euro, british pound, and yen |
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prices and exchange rates
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3 factors that affect inflation: mkt. psychology, inflation, and interest rate
law of one price: identical products in competitev mkts. w/out low trade barriers and transportation costs should be the same price when expressed in the same currency purchasing power parity (PPP): in efficient mkts. price of basket of goods should be fairly equal; predicts that changes in prices will result in changes in exchange rates; accurate in long run and for countries that have high inflation and underdeveloped capital mkts. positive relationship between money supply and inflation rate: when growth of money supply is greater than output inflation occurs a country with high inflation will see it's currency depreciate |
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international monetary system
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institutional arrangements that companies adopt to govern exchange rates
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floating exchange rate system
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when country allows foreign exchange mkt. to determine the relative value of currency
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pegged exchange rate system
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when a country fixes the value of their currency relative to the value of another currency
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dirty float
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when a country tries to hold the value of its currency within some range of a reference currency
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fixed exchange rate
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when countries fix their rates against eachother
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european monetary system (EMS)
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prior to introduction of euro
some countries operated with a fixed exchange rate within in context of EMS |
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gold standard
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dates back to ancient times when gold was a medium of exchange
paper currency was eventually adopted because it was easier to use when trading -- was still linked to gold at a fixed rate defined as pegging currencies to gold adopted in 1880s; exchange rates were easy to determine b/c gold was worth roughly the same in different countries US dollar = 22.32 grains of pure gold |
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gold par value
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amt. of currency needed to purchase an ounce of gold
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balance of trade equilibrium
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income people earn from exports = the amt. people pay to other countries for imports
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period b/t wars: 1918-1939
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gold standard worked fairly well until the start of WWI
countries financed war through printing extra money which = inflation people started doubting value of money and demanding gold in exchange, which was not possible -- this killed the gold standard |
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Bretton Woods system
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1944 in Bretton Woods, NH; 44 countries attended
goal: to design new econ. system to help ecourage new economic growth after war rules: - fixed exchange rate est. - only currencies fixed to gold but only US dollar was directly convertable - devaluations were not to be used for competition unless emergency -- 10% max. -- if more approval was need from IMF created IMF and world bank to police monetary system |
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international monetary fund (IMF)
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executed main goal of bretton woods: tried to stop the chaos that had occurred during the world wars
through discipline: need to maintain fixed exchange rate put brake on competitive devaluations and increased stability; curtailed infaltion through flexibility: rigid discipline could be harmful; IMF would lend currency to help countries during time when rapid tightening of economy would be hurtful -- mainly during fundamental disequilibrium; if countries borrow too often they be under supervision |
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world bank
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called international bank for reconstruction and development (IBRD)
1. under IBRD money is raised from bond sales in int. capital mkt.; borrowers pay mkt. rate of interest - lower than normal bank's rate 2. through int. development association; loans go only to poorest countries; raised through subscription ; 50 yrs. to repay |
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collapse of fixed exchange rate system
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bretton woods worked until 1960s
increases in welfare programs and vietman funding were done through inflation under johnson other countries increased their currency values relative to the dollar after rumor that dollar was being devalued since system centered on dollar it could not go one any longer; balance of payments was off, there was high inflation and trade deficits; countries refused to revalue to save system b/c it would make their goods seem to expensive; floating system was created as a temp. response |
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floating exchange rate regime
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in 1976 after collapse of bretton woods, countries meant in jaimaca to formulate this policy that is in place today
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jamaica agreement
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under agreement:
- floating rates were considered acceptable; IMF member could enter foreign exchange mkt. to even out fluctuations - gold was abandoned as a reserve asset; IMF members could sell their gold reserves at mkt. price - total IMF quotas -- amt. member countries contribute -- increased to $41 billion |
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fixed vs. floating rates
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many countries are disappointed with fixed system
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case for floating exchange rates
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two elements: monetary policy autonomy and trade balance adjustments
removing obligation to hold exchange rates increases control; countries were limited under the fixed system; with fixed system IMF had to improve devaluation help adjust trade imbalances |
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case for fixed exchange rate
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issues: monetary discipline, speculation, uncertainty, trade balance adjustments
fixed system insures against inflation speculation associated with floating rates increases uncertainty little help in adjusting trade imbalances |
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exchange rate regimes in practice
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majority of countries use more flexible systems
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pegged exchange rates
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pegs the value of a currency to another major one
popular among smaller nations help to curb inflation can sometimes fail in small nations since they cant keep up with nations they are pegged to more rigid |
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currency board
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countries commit to converting domestic currency into another on demand at a fixed rate
in order to be credible currency board holds reserves of foreign currency = at fixed exchange rate to at least 100% of domestic currency issued Hong kong board is a popular example |
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crisis mgt. by IMF
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after bretton woods IMF has redefined its mission
now focusing on lending to countries in crisis sometimes this has worsened to situation in these countries |
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financial crises post bretton woods
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data suggests that developing countries
2x as likely to experience currency and banking crises; sometimes multiple ones can occur simultaneously currency crisis banking crisis foreign debt crisis |
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currency crisis
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speculative attack on exchange value of currency results in depreciation of value or forces authority to expend large vols. of int. currency reserves and increases interest rates to defend against prevailing exchange rates
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banking crisis
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loss of confidence leads to run on banks as people try to withdraw their money all at once
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foreign debt crisis
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country cannot service its foreign debt obligations, whether public or private
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currency management
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current system is a floating one; speculative buying or selling can create volatile movements in mkt.
invtervention can help drive the mkt. |
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business strategy and currency
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exchange rates hard to control but can have a competitve impact on business
managers need strategic flexibility |
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benefits of global capital mkts.
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functions shared by both global and international capital mkts.
global mkts. offer some things not found in capital markets |
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functions of generic capital mkt.
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brings together investors (corps., people, non-bank ints.) and borrowers (people, companies, and govts.)
-- between these two groups are mkt. makers: they connect the two groups and include commercial banks (indirect) and investment banks (direct) commercial banks: they take money from corps. and people and pay them a rate of interest; they lend money at a higher rate and make a profit b/c they lend at higher rate than the interest rate; investment banks: direct; bring investors and borrowers together and charge a rate for doing so equity loans (stock) or debt loans (bonds of debt loans) investors --> mkt. makers --> borrowers |
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attractions of global capital mkt.
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borrowers benefit from:
- additional supplies of funds - lower cost than domestic mkts. (cost of capital) investors benefit from: - wider range of choices, lower risk through diversification (only about 27% as risky as normal stock) - movements in stock prices across countries are not totally correlated (due to diff. macoreconomic policies and trade restrictions) |
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cost of capital
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price of borrowing money, or the rate that borrowers pay investors
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growth of global capital mkts.
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grow at a rapid rate
2 factors: 1. growth of tech. of int. communications and data processing; 24 hr./day trading; when a shock occurs it can spread fast but have s/t impact 2. deregulation of govts.: in the past countries regulated the amt. of of equity foreign companies could invest in companies and amt. of foreign investment citizens could make; since the 1980s this has been decreasing in response to eurocurrency mkt. and financial pressure; deregulation began in the US and has spread capital controls have been dismanteld making it easier for outward investment; trend is spreading and global mkt. is expecting to go |
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eurocurrency mkt.
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currency banked outside of its country of origin
eurodollars (dollars banked outside the US) account for 2/3; others are euro-yen, euro-pound and euro-euro |
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genesis and growth of the eurocurrency mkt.
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began in 1950s when eastern bloc countries thought that the US may seize their dollar holdings -- deposited holdings in europe esp. london; additional dollar deposits w. european banks and companies that exported from the US
in 1957 mkt. surged again after change in British laws -- british banks could no longer use pounds to finance foreign investment; they began financing this using dollars in 1960s the mkt. grew again when US banks were discouraged from lending to non-US residents; would-be borrowers turned to the eurocurrency mkt. next surge came in 70s during oil price increases; OPEC avoided confiscation of dollars by investing in London |
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global bond mkt.
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most common-type is fixed rate bond
grew rapidly in the 1980s and 1990s two types: 1. foreign bonds: sold outside borrower's country and denominated in the currency of the country in which they are ussed 2. eurobonds: underwritten by syndicate of banks and placed in countries other than the one in which the currency is denominated; sometimes not offered in their own country |
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global equity mkt.
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largest equity mkts. are US, japan, and britain
many people invest in foreign equities to diversify their portfolios countries are now listing their stock in mkts. of other nations -- tapping liquidity of foreign mkts. and reducing the cost of capital can be used to satisfy stock options for workers in other locations that the company has |
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foreign exchange risk and the cost of capital
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adverse exchange rates can increase the cost of foreign currency loans
is not always favorable to borrow from other countries once exchange risk is factored in companies can hedge this by using forward exchange rates and locking in the rate, but this can increase costs companies must weigh the benefits lower interest rates vs. exchange rate risks |
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strategy
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actions that mgt. takes to meet the goals of the firm
usually the goal is max. value |
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profitability
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rate of return that a firm makes on its invested capital (ROIC)
expaning internationally can increase this |
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profit growth
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% increase in net profits over time
expanding internationally can increase this |
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value creation
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measured as the difference b/t V(price that firm can charge for a product given competition) and C(cost of production)
the more value customers place on a product, the higher that can be charged profits can be increased by: - adding value through differentiation - lowering costs with a low-cost strategy Porter: superior profitability goes to the firms that can create superior value by lowering cost structure of differntiating so that they can charge more |
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strategic positioning
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Porter: firms need to choose either differentiation or low cost and then configure firm to go with that choice
to max. l/r return on invested capital firms must: - pick a viable position of efficiency frontier - configure int. operations to support that - have the right structure to execute that strategy strategy, operations, and org. must be consistent with each other to achieve this |
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operations
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value chain composed of series of distinct value creation activies (i.e.: production, marketing, materials mgt., R & D, HR, info. systems, human information structure)
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primary activities
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deal with design, creation, and delivery of the product
R & D, production of sales, customer service |
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support activities
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allow primary activities to occur; just as important as primary activities if not more so
information systems, logistics, HR |
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global expansion, profitability, and growth
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firms can:
- expand mkt.: in domestic product offerings by selling in foreign mkts. - realize location economies: by dispersing individual value creation activities to places where they can be performed most efficiently and effectively - realize cost economies: from experience effects by serving global mkt. from a central place, reducing costs of value creation - earn a greater return: leveraging valuable skills from foreign ops. and transferring them to other entities within network of operations |
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expanding the market: leveraging products and competencies
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firms can increase growth by selling goods/services from at home internationally
success depends on goods and services they sell and core competencies (skills that cannot easily be matched or imitated) core competences are the source of competitve advantage they enable firm to reduce costs or create value |
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location economies
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when firms base production in a place where econimic, political, and cultural conditions are conducive to good performance
economies that arise from performing activities at optimal location by achieving this firms can: - lower costs of value creation and achieve low cost position - differntiate product offering firms should create a global web of value creation activities different stages of production are sent to locations where cost is minimized and value is maximized |
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cautions about location economies
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transportation costs, trade barriers, and political risks can complicate
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experience curve
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systematic reduction of costs that have been observed over life of a product
production costs decline about each time that cumulative output doubles by moving down experience curve firms reduce the cost of creating value to get down it fast, firms can use a single plant to serve global mkts. |
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learning effects
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cost savings that come from learning by doing
when productivity increases people learn more efficient ways of doing tasks and mgt. learns how to manage new operations more efficiently more significant with technologically complex tasks learning effects usually disappear in time; seen mostly during the start-up phase |
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economies of scale
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reductions in unit cost achieved by producing a large volume of a product
sources: - spreading FC over large volume - utilizing production facilities more intensely - increasing bargaining power with suppliers |
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leveraging subsidiary skills
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mgt needs to:
- valuable skills that can be applied elsewhere can arise anywhere in global network -- not just corp. center - establish incentive systems that make employees want to acquire more skills - have a process of identifying whether new skills are valuable - must reward people who come up with new skills and not punish those who take risks to do so |
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summary of expansion issues
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may be good to price low in the beginnin to gain mkt. share
complex relationship b/t profitability and profit growth |
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two types of competitive pressures
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pressure to reduce costs
pressure to be locally responsive these are conflicting demands cost reductions require lowering of costs while localizing can increase costs |
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pressures for cost reduction
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good for industries whose products serve universal needs -- price is the main competitive weapon
- when major competitors are based at cost efficient locations - when there is persistent excess capacity - when consumers are powerful and face low switching costs greater competition of today had increased cost pressures |
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pressures for local responsiveness
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arise from:
- differences in tastes and preferences - differences in traditional policy and infrastructure (ex: electronics, cars in great britain) - differences in distribution channels (ex: pharmaseuticals) - host govt demands: economic and political demands may cause a need to local responsiveness; threats of protectionism, nationalism, and local content rules |
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choosing a strategy
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depends on pressure for cost and local respsonsiveness
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global standardization
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increases profitability and growth from cost reductions due to economies of scale, learning effects, and location economies
when cost pressures are high and local responsiveness pressures are low to pursue a low-cost strategy on a global scale common in industrial products HQ maintains control over decisions high need to integrating mechanisms strong organizational cultures encouraged worldwide division structure is common |
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localization strategy
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high pressure for local responsiveness, low cost pressure
focusing on increasing profitabilty by customizing goods and services so that they meet the tastes of int. mkts. makes sense when there are substantial differences on needs and tastes across countries and when cost pressures are not too intense increases value in the local mkt. so firms can get away with higher prices firms still must be efficient as possible low need to for inegrating mechanisms low performance ambiguity low cost of control worldwide area structure common |
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transnational strategy
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high pressures for cost reductions and local responsiveness
tries to: - tries to achieve low cost through location economies, economies of scale, and learning effects - differentiate product offering across mkts. to account for local differences - foster multidirectional flow of skills through global network not easy to pursue due to conflicting demands some decisions are centralized and some are not high need for coordination array of formal and informal integrating methods are used cost of control is high strong culture is encouraged matrix structures are common |
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international strategy
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low cost pressures and low pressures for local responsiveness
taking domestic products and selling them internationally with only minimal customization usually for companies that serve a universal need but have few competitors need for control is moderate need for integrating mechanisms is moderate low cost of control low performance ambiguity worldwide product division structure is common |
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evolution of strategy
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international may not be viable in the long-term
to survive firms need to go to a global standardization or transiational strategy due to competition with localization, it may start out being good, but if competition grows, the firm may need to shirt to a transitional strategy |
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organizational architecture
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totality of firm's organization including formal structure, incentives, control systems, processes, organizational culture, and people
to be most profitable firms must be sure: - different elements of org. structure are internally consistent - organizational architecture fits strategy of firm - strategy and architecture are consistent with eachother and competitive conditions |
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organizational structure
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formal division of org. into subunits
location of decision-making responsibilities within stucture - central vs. decentral integrating activities to coordinate subunits |
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control systems
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metrics used to measure performance of subunits and make sure managers are running subunits properly
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incentives
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devices used to reward appropriate managerial behaviors
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processes
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manner in which decisions are made and work is performed
processes used in making the decision itself ex: deciding on strategy, choosing how to allocate resources, etc. |
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organizational culture
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refers to norms and values shared among employees
affect how a company operates |
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people
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refers not just to employees
also refers to how people are recruited, compensated, retained, etc. also refers to the type of people they are in their skills, values, and orientation |
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vertical differntiation
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location of decision making responsibilities within structure
determines where power in concentrated centralized vs. decentalized decision making can be worthwhile to centralize some decisions and decentralize others may make more sense to centralize decisions on overall strategy and decentralize decisions on operations |
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centralized decision making
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faciliates coordination
ensures that decisions go along with firm's objectives give top-level mgt. means to bring about change avoids duplication of activities |
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decentralized decision making
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relieves decision-making burden
increases motivation increases flexibilty can result in better decisions can increase control within units |
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horizontal differentiation
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the design of structure
concerned with how the firm decides to divide itself into subunits decision normally made based on function, type of business, or geographical area firm splits in to functions regarding value creation activities functions typically coordinated and controlled by top mgt. and decisions tend to be centralized firms may switch to a product divisional structure where each division is responsible for a product line worldwide product division structure worldwide area structure global matrix structure internation division |
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international division
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part of horizontal differentiation
when firms expand internationally, they often group all activities dealing with that into an international division in time it may be more viable to manufacture product within countries firms with a functional structure at home may replicate that into operations in each country creates potential for domestic and foreign conflict in operations |
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worldwide product divisional structure
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adopted by diversified firms that have a domestic product division
each division is self-contained and autonomous with its own responsibility for value creation activities value creation should be coordinated worldwide worldwide coordination of value creation activities for each division realizes location and experience curve economies |
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worldwide area structure
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tends to be adopted by undiversifed firms whose domestic structures are based on functions
world is divided into geographic structures each division is self-contained decentralizes decision making facilitates local responsiveness can result in fragmentation consistent with localization facilitates transfer of foreign competnecies does not support localization |
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global matrix structure
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minimizes limitations worldwide division and area structure
allows for differentiation among product division and geographic area dual decision making: product division and geographic location and have equal weight in making decisions can be bearucratic and slow can result in conflict between areas and product divisions can result in finger-pointing between decisions when something goes wrong |
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types of control systems
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4 main types:
personal: control by personal contact with subordinates -- more widely used in small firms bereaucratic controls: control through procedures and rules that direct actions of subunits -- most important are budgeting and capital spending rules output controls: setting goals for subunits and expressing them through performance metrics; acheived by comparing actual performance against targets and intervening to take corrective actions cultural controls: when employees buy into norms and value systems; organizations with strong culture have less need for other forms of controll |
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incentive systems
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devices used to reward behavior; usually closely tied to output controls
should vary depending on employee and nature of work should promote cooperation b/t subunits should reflect natl. differences in institutions and cultures can have unintended consequences |
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control and incentive system strategies
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key to understanding relationship b/t international strategy, control systems, and subunits is performance ambiguity
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performance amiguity
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common when one subunit's performance depends on another
lowest in firms with localization strategy higher in international firms higher in global standardization firms highest in transnational firms |
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organizational culture
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systems of values and norms shared among people
changes very slowly |
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creating org. culture
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comes from:
founders and important leaders national social culture company history decisions that result in high performance |
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maintaining org. culture
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hiring and promotional practices
reward strategies socialization communication strategies |
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organizational culture in internaional business
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strong culture: people have consistent set of values and understand its impact on the work performed
not always good may lead to high performance sometimes not good at all times companies with adaptive cultures have the highest performance |
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basic entry decision
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1. which mkts. to enter
2. when to enter 3. on what scale |
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which mkts. to enter
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depends on long run profit potential
good mkts. are politically stable developing and developing nation with free mkt. systems and low inflation and private sector debt bad mkts. are politically unstable and developing with mixed or command economies, and excessive levels of borrowing mkts. are also attractive when product satisfies an unmet need |
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timing of entry
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early = firm enters the mkt. first
late = firm enters the mkt. after other firms have already established themselves in the mkt. first mover advantages |
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first mover advantages
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ability to pre-empt rivals and establish brand
ability to build up sales vol. and ride experience curve creating switching costs that make it hard for later entrants to steal business |
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first mover disadvantages
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pioneering costs: when foreign business system is different from that of the firm's home; firm must dedicate time and effort into learning the rules of the game
- costs of failure to the firm due to ignorance and mistakes - cost of promoting and establishing brand and educating clients |
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scale of entry
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entering the mkt. on a large scale chanes the playing field
if on a large scale, a strategic comittment must be made -- long-term and hard to reverse small-scale entry allows the firm to learn about the mkt. while limiting the exposure |
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exporting
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common first step in international expansion process for many manufacturing firms
pros: avoids costs of establishing local operations cons: there may be lower cost manufacturing observations, high transport costs and tariffs make it uneconomical, agents in other countries may not act in exporter's best interstests |
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licensing
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licensor grants rights to licensee to intanigable asset or other property for a spec. period of time in return for royalty
may include: patents, processes, inventions, trademarks, etc. pros: no development costs of starting up in foreign mkt., no barriers to investment, firm with property can capitlize on mkt. opportunies without developing applications itself cons: firm does not have tight control of production, etc. required for realizing experience curve and location economies, limits ability to coordinate strategic moves in countries with money made in the foreign mkt., intangible assets could be lost risks can be reduced through cross-licensing agreement |
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cross licensing agreement
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firm may license intangible property, but requests that in exchange firm licenses them some of their intangible property on top of the royalties that they must pay
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franchising
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specialized form of licensing where licensee uses intangible product but also follow a strict set of rules and guidelines on how it does business
primarily service pros: firms avoid risks of opening on their own in global mkt., can still build a global presence cons: inhibits firm's ability to take profits out of one country and direct them into another mkt., faraway location can make it hard to detect poor quality on part of licensee |
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joint venture
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establishment of a firm that is owned by two independent firms; usually 50-50
pros: can benefit from partner's knowledge of the country and mkt., costs and risks are shared, good when political issues make it the only feasible entry mode cons: firm risks giving control of its technology to the partner, firm may not have control that subsidiaries need in order to realize experience curve or location economies, shared owenership can lead to conflict |
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wholly-owned subsidiary
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firm owns 100% of stock; can establish through starting new operation or through acquitistion
pros: reduces risk of losing control over core competencies, gives tight control for gaining strategic coordination, may be required in order to realize experience curve and location economies con: firm bears full cost and risk |
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core competencies and entry mode
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entry mode depends somewhat on firm's core competencies
if competency is tech. know-how, firm should avoid licensing and joint-ventures if competecy is mgt. know-how, there is not much risk of loss of that, and getting brand name out there is important |
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pressures for cost reduction and entry mode
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when pressure is high firms are more likely to pursue combo. of exporting and wholly owned subsidiaries
this allows firms to keep control and to gain over manufacturing and distribution and to acheive location and scale economies firms pursuing global standardization or transnational prefer wholly owned subsidiaries |
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pros of acquisition
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quick to execute
enable firms to preempt competition less risky than greenfield |
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cons of acquisitions
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can fail when:
firm overpays for acquired firm cultures of firm and acquired firm clash attempts to realize synergies run into roadblocks and take much longer to forecast inadequate preacuistion screening to avoid to these issues: firms need to screen acquisitions well integration plan needs to implemented fast |
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pros and cons of greenfield
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pro: gives firm greater ability to build exactly what it wants
cons: risky, slower to establish |
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choice b/t greenfield and acquisition
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depends on firm's situation
acquisitions are good when there is already competition and firm wants to build mkt. presence greenfield is better when firm needs to transfer competencies, skills, culture, etc. |
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strategic alliances
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cooperative agreements b/t actual or true competitors
range from formal short ventures to contractual agreements amt. of strategic alliance has exploded in recent decades |
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pros of strategic alliances
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facilitate entry into foreign mkt.
allow firms to share FC of developing new products or processes bring together complementary skills and assets can help firm establish tech. stds. for industry |
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cons of strategic alliances
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can give competitors low cost routes to new technology and mkts., but sometimes one firm can give too much
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making alliances work
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success is function of: partner selection, alliance stricture, how alliance is managed
good partner: helps firms achieve goals, shares vision, unlikely to oppotunisticly exploit partner structure: needs to hard to transfer tech. that is not meant to be, contractual safegaurds, allow for skills and tech. swaps and equal gains, minimize risk of opportunism sucessful mgt. requires good interpersonal relationships major determinant of gains is ability to learn from partners |
