Man 3600 FSU Exam 3 Kim

Convertible currency

Can be readily exchanged for other currencies

Hard currencies

Most convertible currencies universally accepted

Hard currency examples

US dollar, Japanese Yen, Canadian dollar, British pound, and the European Euro are all examples

Non convertible currencies

Not acceptable for international transactions

Bartering

In some developing economies, currency convertibility is so strict that firms sometimes receive payments in the form of products rather than cash

Purchasing Power Parity

A localized measure of the amount of actual purchasing power that a consumer has for the purchase of everyday goods and services in the consumers home country In theory, and exchange rate will equalize the price of an identical product or service in two different currencies

Law of One Price

The exchange rate based on just one good or service

Effects of exchange rates for Japanese consumers

•costs of buying US imports increased

•less goods available for sale

•cost of living increases

•standard of life decreases

•less Japanese travel to the US

Effects of exchange rates for Japanese producers

•costs of manufacturing increases

•industries suffer

•Japanese can sell to US for less and still be profitable

•higher revenues

Factors influencing supply and demand of a currency

•economic growth

•interest rates

•market psychology

•government action

•trade balance (deficit or surplus)

Trade surplus

Countries exports exceed its imports- may result when currency is undervalued

Trade deficit

Nations imports exceed its exports- causing abbey flow of foreign exchange

Balance of trade

The difference between the monetary value of a nations exports and its imports

Reasons for growth in foreign currency trading

•deregulations of international capital flows

•gains in technology and transaction cost efficiency

Spot transactions

The exchange of currencies for immediate delivery

Forward transactions

The exchange of currencies on a future date at an agreed upon exchange rate. Forces an obligation to transact.

Forward outright transactions

Volume currency trades with maturities of 30 to 360 days.

Forward swap transactions

Agreements by two parties to trade currencies at a specified exchange rate for a specified length of time.

Options transactions

Give the holders the right but no obligation to buy or sell an underlying asset at a predetermined price at or until a certain time. It is not an obligation to transact.

Types of currency transactions in order of popularity

1. Swapping

2. Spot

3. Forward outrights

Exchange rate quotation: US Terms

Give the price of a foreign currency in the units of USD needed to purchase one unit of the foreign currency. Price is always given in USD.

Exchange rate quotation: European Terms

Give the price of a USD in terms of the foreign currency equivalent. Price is always given in the foreign currency.

Exchange rate quotation: Direct

The form when the currency is stated first.

Exchange rate quotation: Indirect

When the subject currency is stated second.

Exchange rate quotation: Cross Rates

Exchange rate stated without using USD as a reference currency.

Floating exchange rates

Exchange rates that respond quickly to currency market forces of supply and demand.

Fixed foreign exchange rates

•also known as "adjustable peg"

•currencies were linked to each other based on the Gold Exchange Standard

•a system of fixed exchange rates existed between participating countries

•"money" issued by a member had to be backed by reserves of gold

The Bretton Woods Agreement

•parties agreed to a fixed exchange rate among members

•established a fund of gold and constituent currencies available to members for currency stabilization through the IMF (International Monetary Fund)

•created the International Bank for Reconstruction and Development ("World Bank")

World Bank

Provides economic assistance for reconstruction and development of war-torn countries and developing countries.

Eurocurrency

Any foreign currency-denominated deposit or account at a financial institution outside the country of the currency's issuance.

Money market

A market for deposits, accounts, or securities that have maturities of one year or less. Often termed the Eurocurrency markets.

Eurodollars

US dollars in London bank

Euromarks

German marks in a Singapore bank

EuroEuros

Euro currency deposited in US institution

Prefix Euro

Means currency deposited outside of its original country

The Gold Standards three basic ideas

•a system of fixed rates of exchange existed between participating countries

•money issued by member countries had to be backed by gold reserves

•gold acted as an automatic adjustment

What is Strategy?

A plan of action that channels an organization's resources so that it can effectively differentiate itself from competitors and accomplish unique and viable goals. Managers decide which customers to target, what product lines to offer, and with which firms to compete.

Integration-responsiveness framework

The discussion about the pressures on the form of achieving global integration and local responsiveness. Summarizes two basic strategic needs: to integrate value chain activities globally and to create products and processes that are responsive to local market needs.

Global integration

Coordinating the firm's value chain activities across many markets to achieve worldwide efficiency, synergy and cross-fertilization to take maximum advantage of similarities across countries.

Pressures for Global Integration: Economies of Scale

Concentrating manufacturing in a few select locations to achieve economies of mass production.

Pressures for Global Integration: Capitalize on Converging Consumer trends and universal needs

Companies such as Nike, Dell, ING, and Coca Cola offer products that appeal to customers everywhere.

Pressures for Global Integration: Uniform service to global customers

Services are easiest to standardize when firms can centralize their creation and delivery.

Pressures for Global Integration: global sourcing of raw materials, components, energy, and labor

Sourcing of inputs from large-scale, centralized suppliers provides benefits from economies of scale and consistent performance.

Pressures for Global Integration: Global competitors

Global coordination is necessary to monitor and respond to competitive threats and foreign and domestic markets

Pressures for Global Integration: Availability of media that reaches customers in multiple markets

Firms now take advantage of the Internet and cross-nationalize television to advertise their offerings in numerous countries simultaneously

Local responsiveness

Refers to meeting the specific needs of buyers in individual countries.

Pressures for Local Responsiveness: Unique resources and capabilities available to the firm

Each country has national endowments that the foreign firm should access.

Pressures for Local Responsiveness: Diversity of local customer needs

Businesses, such as clothing and food, require significant adaptation to local customer needs.

Pressures for Local Responsiveness: Differences in distribution channels

Small retailers in Japan understand local customs and needs, so locally responsive MNEs use them.

Pressures for Local Responsiveness: Local competition

When competing against numerous local rivals, centrally-controlled MNEs will have difficulty gaining market share with global products that are not adapted to local needs.

Pressures for Local Responsiveness: Cultural differences

For those products where cultural differences are important, such as clothing and furniture, local managers require considerable freedom from HQ to adapt the product and marketing.

Pressures for Local Responsiveness: Host government requirements and regulations

When governments impose trade barriers or complex business regulations, it can halt or reverse the competitive threat of foreign firms.

Benefits of global strategy

•cost reduction (increase economies of scale, exploit flexibility, enhance bargaining power)

•Improved quality of products and programs (focus and concentration on smaller number)

•Enhanced customer preference (global availability, global serviceability, global recognition)

•increased competitive leverage (more points to attack and counterattack competitions)

Potential disadvantages of global strategy

•reduced local competitiveness

•lessened responsiveness and flexibility

•reduced local management effectiveness

•centralized decision-making

•reduced motivation and morals

•increased cost in coordination effort and reporting requirements

Mission statements

Tells an organization where it is going.

Strategy

Tells the organization how to get there.

Stages of global strategic planning lrocess

•Assessment and adjustment of core strategy (analysis of markets and competition)

•Formulation of global strategy (choice of competitive strategy)

•Development of the Marketing Program (product offering, marketing program, value added activities, competitive position)

•Implementation (organizational structure)

Assessment stage of strategic planning process

Market/Competitive Analysis

•market size and growth potential

•number and types of competitors

•governments regulations

•economic and political stability

Internally assess the quality and strength of organizational factors and resources.

Competitive Strategies

•Cost leadership (lowest overall cost provider)

•Differentiation (unique product/service features)

•Focus (emphasis on single market segment)

Cost leadership

Lowest overall cost provider

Differentiation

Unique product/service features

Focus

Emphasis on single market segment

Market expansion strategy-country selection

Choose a country-market for entry

•concentration (scale) or diversification (risk)

Factors that affect it

•stand alone attractiveness

•global strategic importance

•synergy with other businesses

Centralized structure

Fits best wth the home replication or global strategy

Decentralized structure

Fits best with the multi-domestic strategy

•hard to coordinate

•good for localization

•inconsistent firm strategies

•hard to make strategic moves

•good to motivate local managers

Alternative organizational arrangements: Export department or international division

•there is a clear distinction between international and domestic business activities

•international business activities are usually carried out separately by a part of the organization

Matrix structure

Combination of centralized and decentralized aspects with the transnational strategy

Alternative organizational arrangements: Global organizations

•there is no distinction between international and domestic business activities

•domestic market is viewed as part of the global market

Global organization approaches

•geographic

•product

•function

•customer

•matrix

Factors for Organizational Structure

•company origin and political history of the area

•type and variety of products

•the businesses in which the firm is engaged

•the size and importance of the markets

•the degree of involvement in international operations

•the Human Resources capability of the firm

Ethnocentric

Home-market oriented

Polycentric

Oriented toward individual foreign markets

Geocentric

Oriented toward regions larger than individual countries or markets

Formal control

•an international budget and planning system

•a functional reporting system

•policy manuals to direct functional performance

Cultural controls

•company language

•dress codes

•employee recruiting, selection and indoctrination

•company creed and philosophy

•company-wide and regional meetings

•criteria for promotion

•bonus payment plans

Psychic Distance

Sometimes cultural variables, legal factors, and other societal norms make a foreign market that is geographically close seem closer in ________ __________

Psychic/Psychological Distance definition from Kim

Managers perceive distance between home markets and foreign markets

Two major issues of psychic distance

•some of the distance seen by firms is based on perception rather than reality

•closer psychological proximity makes it easier for firms to enter markets

Dynamism in profit and risk during early internationalization

In the short term firms may experience increased risk and decreasing profits when going international. (Personal note: over time they gain international experience and therefor have the ability to increase profits and decrease risks)

Key factors influencing a companies commitment to go international (market entry mode influences)

•Internal factors

•External factors

•Management commitment

Internal factors

•firm size capabilities

•international experience

•product characteristics

External factoes

•market potential (size and growth)

•market access (national controls)

•competition

•intermediaries available

•shippin considerations

Management Commitment

•degree of risk/uncertainty acceptable

•degree of control

•degree of flexibility

3 Broad Classifications of Entry Methods

1. Export modes

2. Contractual modes

3. Investment modes

Export entry mode

•Indirect

•Direct

100% externalizing

•Low risk (selling products to foreign buyers)

•Low control

•High flexibility (easy to change your mind and simply stop exporting products)

Contractual entry mode

•Licensing

•Franchising

Shared ownership and risk, split ownership

Investment entry mode

•Acquisition

•Create new subsidiary

100% internalizing

•High control (built everything yourself)

•High risk (change in government or market can destroy everything)

•Low flexibility(must sell factory, pull all processes back to home country, etc.)

Hybrid entry mode

(Contractual and Investment)

•Strategic Alliances

•Joint Ventures

60-80% ownership, control and risk

Low control strategies

(Limited resource commitment, maximum flexibility, low risk)

•Exporting and counter trade

•Global sourcing

Moderate control strategies

•Licensing, franchising, and other contractual strategies

•Project-based (nonequity) collaborative ventures

High control strategies

(Substantial resource commitment, minimum flexibility, high risk)

•Minority-owned equity joint venture

•Majority-owned equity joint venture

•Wholly owned subsidiary (FDI)

Indirect involvement

(Exporting/Importing)

The firm participated in international business through an intermediary and does not deal with foreign customers

Direct involvement

(Exporting/Importing)

The firm works with foreign customers or markets with the opportunity to develop a relationship

International intermediaries

Importers and exporters often use ___________ ____________ who provide assistance in documentation, financing, transportation, identification of foreign suppliers and trading companies, providing business contacts

Export Management Companies (EMCs)

Firms that specialize in performing international business services for other companies

Two primary roles of EMCs

•Agents (do not carry ownership of the product)

•Distributors (actually own the product they are selling)

Trading companies

Help firms by importing, exporting, investing, counter trading, and manufacturing.

International shipment documentation

•Bill of lading

•Commercial invoice

Bill of Lading

Acknowledges receipt of goods

Commercial Invoice

States basic info for the transaction including a description of the merchandise, total cost of goods and an invoice