Lecture 7                                                                                                                   11-05-18

Trade off local adaptation and universality (=standardized global approach)

If you standardize things you can see there are efficiency advantages.

Applies especially to emerging markets because of institutional voids

• High growth potential
• High market to sell product
• But: high risk

Tension between two strategies in following topics:

Finance

Transaction exposurerisk that the currency exchange rates will change after the companies have already entered into financial obligations. After signing contract, the rate changes so inputs are cheaper/more expensive.

Risk àmoment of paying is not the same as moment of signing contract

Translation exposure the risk that a company’s equities, assets, liabilities or income will change in value as a result of exchange rate changes.

The value of asset in other company is going to change (on income statement) as the exchange rate fluctuates. Tax on owning property abroad will be higher dependent on rate.

àassets and liabilities in same country is ideal situation because than assets are equal to liabilities. For instance, mortgage in same currency as asset. Makes translation less complicated.

Economic exposure

Risk of net present value reduction of the firm’s future income streams

The extent to which the value of the firm would be affected by unanticipated changes in exchange rates.

Related to riskiness of doing business in some countries (=institutional voids) because risk of economic exposure is very high in some countries.

Very often related to political risk.

It adds uncertainty to value of a firm’s Location Advantage àIt may relut in negative effects on MNE income compared to rivals. Is it beneficial on the long term to do business here?

Being active in many zones decreases the risk of exchange rate disadvantages. This might cancel eachoter out = diversification strategy

Financial strategies:

1. MNEs should develop a flexible sourcing strategy

Non-finacial strategies:

1. Separate business unit model:

Each subsidiary configures its own operations to reduce its specific operating exposure. Treat every business unit as a stand alone unit that deals with its own risk. Is possible if you have assets and liabilities in same country. Only miss the advantage of diversifying and maybe have currency advantages

2. Company wide portfolio

Country diversification, exchange rate may go yp in one country and down in other, cancels each other out

3. Flexible operational planning model

Move production when rate goes up/dpwm. Is not that easy, comes with coordination and transaction costs.

Trade off between exchange rate costs and coordination costs

àmost strategic decisons are trade offs

I ternational marketing

Do i adapt or have global marketing campaign

Having a generalized is cheaper, but effective?

Standardization: pro is economies of scale, con is possible mismatch how you market you products and how they are perceived or wanted by locals.

Adaptation: pro is local adaptation, con is costly and difficult

How do you know that consumers will appreciate product for what it represents.

But not all companies follow same marketing strategy

FSA matters: routines and recombination capabilities still count.

Key remains to deal with changes in host country.

You have to deal with changing conditions in each country. 

Companies add value by adapting and packaging based on consumer preferences.