IB 300 Exam 3

International monetary system

consists of institutions, agreements, rules, and processes that facilitate payments, currency exchange, and cross

Gold standard

 a monetary system that defines the value of its currency in terms of a fixed amount of gold (developed by Sir Isaac Newton)

Drawbacks of gold

• it is heavy, has transportation and storage costs, it does not earn interest, and is susceptible to theft

The Bretton Woods System

the international monetary system in place from 1945-1971, with par value based on gold and the U.S. dollar

The two newly created institutions were

• the International Monetary Fund and the World Bank 

The role of the IMF is to:

• oversee and regulate the international monetary system

The World Bank is responsible for

 funding reconstruction and development projects in war-impacted and developing nations

Reserve account:

contains funds that the country can utilize when needed to support trade, investments, or currency market interventions

what is the most used central reserve asset

• The U.S. dollar has been the most used central reserve asset

• Roughly 59% of the world’s reserve assets were held in dollars

The Smithsonian Agreements

were made as a result of two appents to agree on new sets of fixed currency exchange rates

Floating exchange rates:

exchange rates determined by supply and demand that allow currency values to float against one another

Exchange arrangement with no separate legal tender

a country does not use its own currency, but instead uses the currency of another country

Currency board arrangement

a country pledges to exchange its local currency for a specific foreign "anchor" currency at a fixed rate

Conventional fixed-peg arrangement

a monetary system where a country ties its currency value to a major foreign currency or a basket of currencies at a fixed rate (1%)

Stabilized arrangement

 a country’s central bank acts to keep its exchange rate within a narrow range against a major currency or basket of currencies (2%)

Crawling peg

allowing small, frequent, and planned adjustments (a "crawl") rather than a sudden, large devaluation

Bank for International Settlements:

an international organization of central banks that exists to build cooperation in order to foster monetary and financial stability

how do central banks intervene in the foreign exchange markets?

by buying and selling large amounts of a currency in order to affect the supply and demand of that particular currency

Ceteris paribus

• as supply increases, prices decreases, other things remaining constant

Intervention currency

a currency used by a country to intervene in the foreign currency exchange markets

Vehicle currency

 a currency used as a vehicle for international trade or investment

• Used for pricing and trading various goods in global commodity markets

Reciprocal currency:

in FX, using the dollar as the base currency, a currency that is quoted as dollars per unit of the currency instead of in units of currency per dollar

Spot rate

the exchange rate between two currencies for delivery within two business days

Forward currency market

 trading market for currency contracts deliverable 30, 60, 90, or 180 days in the future

Forward rate

 the exchange rate between two currencies for delivery in the future, usually 30, 60, 90, or 180 days

Causes of Exchange Rate Movement

1. Purchasing/selling bonds on the open market

2. Decreasing/raising the percentage of deposits that banks must keep in reserve

3. Lowering/increasing the federal target interest rate

Contractionary monetary policy: (designed to reduce inflation)

moderating economic activity and reducing employment levels. Involves reducing the money supply and can make borrowing more expensive. This creates disinflation but also tends to appreciate the domestic currency. Makes exports more expensive and imports cheaper.

Expansionary monetary policy: (designed to stimulate the economy)

increasing the money supply, which has the opposite effects of the contractionary policy. Depreciation of domestic currency

Fiscal policies

policies that address the collecting and spending of money by the government 

Law of one price

concept that in an efficient market, similar products will have similar prices

Arbitrage

the process of buying and selling simultaneously to make profit with no risk

As prices increase

the purchasing power of a currency declines

Fisher effect

 the relationship between real and nominal interest rates: the real interest rate will be the nominal interest rate minus the expected rate of inflation

Efficient market approach

assumption that current market prices fully reflect all available relevant information

Convertible currencies

can be exchanged for other currencies without restrictions

Nonconvertible currencies

ts value is arbitrarily fixed

• Typically at a higher rate

• The government imposes exchange controls to limit or prohibit the legal use 

• Limitations may also restrict the amount of domestic currency transferred into foreign currency 

• An underground market inevitably springs up 

Taxation

• If a corporation can achieve a lower tax burden than its competitors have, it can lower prices to customers or generate higher revenue

Inflation:

a sustained increase in prices

Balance of payments:

a record of a country’s transactions with the rest of the world

BOP Accounts

• Recorded in a double-entry bookkeeping form 

• Payments to other countries are tracked as debits, payments from other countries are tracked as credits

Deficits and Surpluses in BOP Accounts

• The BOP current account and capital account add up to the total account 

• Deficit in the current account is always accompanied by an equal surplus in the capital account

• Sooner or later, this will show up as a credit

International strategy

a plan that guides the way firms make fundamental choices about developing and deploying scarce resources internationally

a plan

• What products or services to offer

• Which markets to enter

• Ways to compete

For a company’s international strategy to be effective,

it needs to be consistent across all these functions, aligning with the company’s products and regional units and also demand

Strategic planning

the process by which an organization determines where it is going in the future, how it will get there, and how it will assess whether and to what extent it has achieved its goals. 

Strategic planning enables top management to

• proactively identify opportunities and threats on a global scale

• Formulate strategies to address them 

• Stipulate how to finance and manage the implementation of these strategies

Strategic plans help ensure that decision makers have a common understanding of:

• The business

• The strategy 

• The external business environment pressures

• Their own direction 

The Process of Global Strategic Planning

1. Analyze the company’s external environments

2. Analyze the company’s internal environment

3. Define the company’s vision and mission 

4. Set corporate objectives

5. Quantify goals

6. Formulate strategies

7. Make tactical plans

Value chain:

a set of interlinked activities that add value to the final product or service

The company’s mission, vision, and values communicate to involved members

• What the company is 

• Where it is going 

• The values that will guide the behavior of its members

Mission statement:

a broad statement that defines the purpose of a company’s existence, including its business objectives, and approach for reaching those objectives

Corporate Objectives

direct the firm’s course of action, maintain it within the boundaries of the stated mission and vision, and ensure its continuing existence

Quantify the Objectives

To develop a strategy for reaching its objectives, a company must quantify them

Competitive strategies

action plans to enable organizations to reach their objectives

Home replication strategy:

one in which a company replicates most or all of the business model and competencies it used in its home market when entering and competing in foreign markets 

Multidomestic strategy

when a firm adapts its strategy to fit the specific needs and preferences of different foreign markets, rather than taking a more standardized or global approach 

Contingency plans

plans for both best- and worst-case scenarios, as well as for critical events that could potentially have a significant impact on the firm

Tactical plans

 a requisite for spelling out in detail how the objectives will be reached

Sales forecasts

a prediction of future sales performance

• Provides managers with an estimate of the revenues to be received and the units to be sold

Budgets

itemized projection of revenues and expenses for a future time period

Policies

serve as broad guidelines and principles issued by upper management to assist lower-level managers in addressing recurring problems and guiding a company’s actions and decisions on a global scale

Performance Measures

1. Measures of the company’s success in obtaining and applying the required resources

2. Measures of the effectiveness of the company’s employees

3. Measures of the company’s progress toward achieving its vision and mission 

Balance scorecard:

a performance measurement approach integrating strategic planning and budgeting to track progress across financial, customer, internal processes, and learning and growth dimensions

Triple-bottom line accounting:

an accounting approach that measures a firm’s social and environmental performance

Time Horizon

the time horizon will vary according to the age of the firm and the stability of its market.

Level in the Organization:

Each organization level of the company will have its own plan

Top-down planning:

a hierarchical approach to orgazational planning

New Directions in Planning

• Who does the planning 

• How it is done

• The contents of the plan

Who Does Strategic Planning?

Top management, at the urging of strategy consultants is assigning strategic planning to teams of line and staff managers from different functional areas

How Strategic Planning is DOne

Less-structured formats and much shorter documents and accept that effective strategic planning encourages ideas to surfacr at any time 

Contents of the Plan

Many top managers are concerned with issues, strategies, and implementation

Market screening

an application of environmental scanning in which the firm identifies markets by using analysis of the environmental forces active in markets to eliminate the less desirable ones

Environmental scanning

a broader procedure in which a firm scans the world for changes in the environmental forces that might affect it

Initial Screening

• An initial screening based on the basic need potential is a logical first step because if the need for the good or service is lacking, no reasonable use of money or effort will enable the firm to successfully market goods

Second Screening

• A second screening based on financial and economic forces further reduces the list of potential markets

Market indicators

economic data used to measure relative market strength of countries or geographic areas

Market factors

economic data that correlate highly with market demand for a product

Third Screening

• The elements of the political and legal forces that can eliminate a market from further consideration or make it more attractive are many

Fourth Screening

A screening of the remaining candidates on the basis of cultural factors is next and is often a difficult process

Fifth Screening- Competitive Forces

1. The number, size, and financial strength of competitors

2. Their market share

3. Their marketing strategies

4. The apparent effectiveness of their promotional programs

5. The quality levels of their product lines

6. The source of their products- imported or locally produced

7. Their pricing policies

8. The levels of their after-sales service

9. Their distribution channels 

10. Their coverage of the market 

Final Selection of New Markets

An executive or company team should visit those countries that still appear to be good prospects

Segment Screening

When a company intends to do business in several countries, managers can choose two broad market screening approaches

Trade mission

• The purpose is to send executives from firms in the industry to a country or group of countries to 

  • learn firsthand about market,

  •  meet important customers, 

  • and make contact with people interested in representing their products

Social desirability bias:

the respondent’s desire to please that leads to answers designed to please the interviewer rather than reflect on the respondent’s true belief or feelings

Turnkey project:

an export of technology, management expertise, and possibly capital equipment where a contractor agrees to design and erect a plant, supply the process technology, provide the production inputs, train the operating personnel, and after a trial run, turn the facility over to the purchaser

Licensing:

a contractual arrangement in which one firm grants access to its patents, trade secrets, or technology to another for a fee

Management contract

an arrangement by which one firm provides management to another firm

Contracted manufacturing:

an arrangement in which one firm contracts with another to produce products to its specifications

Joint venture:

a cooperative effort among two or more organizations that share a common interest in a business undertaking

Strategic alliances

collaboration with competitors, customers, and/or suppliers that may take nonequity or equity form