Who has lent tons of money from IMF and its currency has severely depreciated? Who is in the most debt?
Argentina peso; Venezuela
Currency is used as an economic_____________and ________________
stabillizer; weapon
What is an example of a country purposefully keeping their currency weaker so they are less expensive and therefore more attractive to other countries?
China keeping the Yuan dollar weaker so they continue to be a top exporter to US
Where does currency conversion take place?
FX market and exhange rate
Problems with currency conversion? and Why do we need it?
Foreign exchange risk and currency speculation; tourism business, etc
current market price for exchanging one currency for another right now
spot exchange rates
agreed-upon rates for exchanging currency in a future rate
This protects against potential fluctuations, forward exchange rates
agreement to exchange principal and interest in different currencies
currecny swap
the simultaneous buying and selling of securities currency or commodities in different markets or in derivative forms in order to take advantage of differing prices for the same asset
arbitrage
FX rates fluctuate because of
1. Inflation (Law of One price and PPP)2. Investment Interest Rates (Fisher effect and Internat'l fisher effect)3. Market Psychology (bandwagon effect)
What is the best short term and longterm predictors of FX rate fluctuation?
ST - bandwagon effectLT - Fisher Effect
What are the two main components of Inflation>
1. The Law of One Price 2. PPP
Ex: Leather jackets 1:2 This means they cost 40 pounds in London but $80 in the US. But what if jackets are 30 pounds in London then traders would buy in London and sell in NYC for a $20 profit (30 pounds x $2 = $60. But increased demand in London would increase prices while increased supply in NYC would lower prices eventually equalizing prices
The Law of One Price
Ex: Big Mac Index. Same ingredients but different cost and prices It costs 3.29 pounds in Britain but $5.66 in the US. Which implies the pound is undervalued to the dollar
PPP
What happened to bread in Germany?
example of hyperinflation: Bread grew to $100 billion and then the market finally collapsed. This is because Germany currency was incredibly invalued against the rest of the world
too much money chasing too many goods.
inflation
Inflation in Bolivia
The government kept increasing the amount of money supply, but foods and services did not increase, so inflation resulted
Deals with nominal interest rates which are real interest rates plus inflation where 5% is the real interest rate of a country and inflation is 10%. So 15% = 5% + 10% Thus an investor will demand 15% for investing in that country
Fisher effect (investment interest rates)
For any two countries the spot FX rate should change in an equal amount but in the opposite direction to the difference in nominal interest rates between them
international fisher effect
Occurs when expectations on the part of traders turn into self-fulfilling prophecies and traders join the bandwagon
bandwagon effect (market psychology)
Examples of FX hedging?
- buy foreign currency equal to purchase price - buy forward contracts - contractually bind seller/buyer to your currency
Forward contracting safetty
Must hedge both directions for the safest solution (buy forward contracts that assume the dollar weakens and contracts that assume the dollar strengthens)
Three types of currency convertibility:
1. Freely convertible: residents and non-residents 2. Externally convertible: only non-residents can exchange freely (ex: India Ruby) 3. Non-convertible currency: Neither residents nor non-residents can exchange (ex: North Korea and Eritrea)
Three types of business risk?
1. Transaction exposure - obligations to purchase or sell 2. Translation exposure - financial statement reporting 3. Economic exposure - Choices of country location for production or sales can have long-term consequences
Three typoes of echange rate regimes:
1. floating exchange rate 2. pegged exchange rate 3. Fixed exhange rate
1.set a constant rate between different currencies by agreement (abandoned in 1973) 2. Continually adjusting based on market demand 3. Pegged to another "stable" currency 4. pegged to a basket of currencies or a range of another "stable" currency
1. Fixed exhange rate 2. floating exhange rate 3. pegged exhange rate 4. dirty float
A country pegs its currency to gold AND guarantees its convertibility
The Gold Standard
the plans and actions that managers take to attain company goals
strategy
two components of business strategy:
1. market is always changing 2. Goal is to maximize shareholder wealth
direction and scope of an organization over the long term which achieves an advantage for the organization through its configuration of resources within a challenging environment to meet the needs of markets and to fulfill stakeholder expectations
business strategy
Porter's Generic Strategies: 4 categories:
1. cost leadership - broad target and lower costs 2. solution differentiation - broad target and different benefits 3. cost focus - narrow target, lower costs 4. segment differentiation - narrow target, different benefits
What are two ways a manager can add value/ grow profits to a firm?
profitabilty - reduce costs or add value (raise prices) profit growth - tap into new markets and sell more
The sweet spot between price and features is determined by the
Efficiency Frontier (study image in notes/slides)
Give the primary and support activities of a firm as a value chain:
1. Support - company infrastructure (info systems, logistics, HR) 2. Primary - R&D, production, marketing and sales, customer service
The operations of a firm have to align with the ____________________of the firm.
strategic direction
Supports flow into what three circles? These 3 circles flow into? (strategic fit diagram)
operations strategy, org architecture, strategy ---> market conditions
The strategy must BOTH fit the Market Conditions and be supported by the Operations and Organization Architecture
Strategic Fit
Value is the "consumer surplus" - the added benefit beyond the price paid
value creation
four basic strategies to add value by profitable growth globally?
1. Global standardization 2. transnational strategy 3. International strategy 4.Localization
high pressures for cost reduction and low pressures for local
responsiveness
high pressures for cost reduction and high pressures for local
responsiveness
low pressures for cost reduction and low pressures for local
responsiveness
low pressures for cost reduction and high pressures for local responsiveness
1. Global standardization 2. transnational strategy 3. International strategy 4.Localization
to change and adapt to what the market wants. Focuses on increasing profitability by customizing the firm's goods or services so that they provide a good match to tastes and preferences in national markets
localization
focuses on increasing profitability and profit growth by reaping cost reductions that come from economies of scale and location economies
The goal is to pursue a low-cost strategy on a global scale global standardization
tries to simultaneously achieve low costs through location economies
economies of scale, and learning effects, match local needs, and foster a multidirectional flow of skills., transnational
involves taking products first produced for the domestic market and then selling internationally with minimal local customization
international strategy
important factors to expand globally?
1. core competence2. location economies 3. experience effects 4. economies of scale
skills in a firm that cannot easily match or imitate
core competence
economies obtained by performing value-added activities in the optimal location
location economies
learning curve with the production of a product = increased labor production.
experience effects
over time
the experience effects and high volume of first adopter allow for reduced units, economies of scale
politically stable
developed and developing nations with free market systems, low inflation, and low private sector debt, qualities of a favorable market
politically unstable developing countries with mixed or command economies
or developing antions with excess borrowing, less desirable
The ______ an international business can create in a foreign market depends on the ____________ of its product and the nature of ______________ competition
value; suitability; indigenous
First Mover advantages
Preempt competition - brand Build market share (experieince curve) Integrate with other industries - switching costs Establish supply chain - reduce costs
First mover disadvantages
High pioneering costs - when business system in company is so different from home country business system Learning curve Product introduction Changing regulations
First mover (first to sell the product) has ___% failure
but the fast follower only has ___% failure, 47%; 8%
Two types of scales of entry?
1. large scale - Large investmet, Rapid, commitment, beat competition, first-mover advantages (high risk)
2. small scale - Small investment
Time to learn and adjust, more flexibility, less perceived commitment (low risk)
Modes of Entry (6)
1. exporting2. turnkey3. licensing4. franchising.5. joint ventures 6. wholly owned subsidiaries
List the modes of entry from least risky to most (correlates to higher risk
higher reward) 1. exporting 2. turnkey 3. licensing 4. franchising. 5. joint ventures 6. wholly owned subsidiaries
manufacturing
first-time expansion globally: name the mode of entry and give an example, exporting; Red Lobster exports biscuits
costs and location economies
Exporting advantages
Transportation Tariffs Local agents
exporting disadvantages
contractor agrees to handle every detail of the project for their foreign client Typically done in chemical pharmaceutical petroleum etc
Turnkey
Economic return from "Know how" Low investment
Turnkey advantages
No long-term interest Creation of competitor Selling of "know-how" loses competitive advantage
Turnkey disadvantages
intangible property like patents copyrights trademarks. (allowing other companies to use your company
Licensing. Example: Walt Disney granting McDonalds a license for McDonalds to co-brand McDonalds Happy Meals with a Disney trademarked character.
Low investment Overcomes local regulations
Licensing advantages
Lack of control over product Loss of economies of scale and Coordinate Strategic Moves Loss of technological "know-how"
licensing disadvantages
typically a trademark with a service industry (strict controls over production
marketing, location, sourcing), franchising. Examples: McDonalds (the brand) allows restaurants to sell their products and brand
Low investment. Overcome local regulations
franchising advantages
Loss of quality control Loss of coordinate strategic moves Competition later for "owned stores"
franchising disadvantages
When two or more companies pool resources and knowledge to reach a common goal joint venture. Example: Spotify and Hulu offering a combined subscription bundle
...
Local partner has local knowledge Share costs/risks Overcomelocal regulations
joint venture advantages
Loss of technological secrets Loss of coordinate strategic moves Conflicts with 50/50 goal strategy
joint venture disadvantages
Two ways wholly owned subsidiaries are created?
1. Greenfield 2. Acquisition
A company builds a new subsidiary from the ground up in a foreign country.
greenfield
a financially stronger entity takes over an already existing company (acquiring shares over 50%) ex: Amazon acquired Whole Foods
acquisition
Maintain technological know how Coordinate strategic moves Economies of scale and experience curve
Advantages of wholly owned subsidiary
The most costly method of entry Acquisitions fail at > 50% Greenfield lacks local knowledge and fail
Disadvantages of wholly owned subsidiary
identify gaps in the market so that the firm can develop new products to fill those gaps
marketing mix
4 components of marketing mix
1. Price 2. Product 3. Place 4. Promotion
Who suggested that the world markets were becoming increasingly similar making it unnecessary to localize the marketing mix
Levitt
Most experts believe that while there is a trend toward global markets
cultural and economic differences among nations limit any trend toward?, global consumer tastes and preferences
China is now trying to squeeze out US rivals like McDonalds adn Apple. Opening up restaurants that are very China-oriented - "A Chinese burger for a Chinese Stomach." How do you avoid this?
market segmentation
Segment the market into niches and create products and services for that niche (like purchasing preferences)
market segmentation
Market segmentation creates diversification that both meet the __________________ needs
but also produces extraordinary _____________, customer's; profits
Various ways to segment:
1. Geography (coastal, rural, mountain, beach) 2. socio-cultural(social class, values, religion,etc), 3. demography(sex, age, income, education level) 4. psychological (personaility)
Are there market segments that transcend national borders?
Global youth culture (clothes, smart phones, new and cool)
4 P's of the marketing mix
1. price - lists, discounts, allowances 2. Product - quailty design, features 3. Place - locations, transport 4. Promotion - sales force, marketing, etc
product attributes examples
Ex: Coca-Cola responded to Japan's traditional tastes with the beverage Georgia a cold coffee in a can. - certain colors and numbers can be offensive in countries. - may have to adjust to electric
Distribution Strategies (PLACE)
Retail concentration: 1. Concentrated retail system - few retailers supply most of the market 2. fragmented retail system - many retailers supply the market Channel length: 3. direct channel - direct end to customer 4. indirect channel - indirectly through customers (intermediaries) Channel Attributes: 5. channel exclusivity - Built on relationships and contacts; government or military 6. channel quality - Built on know-how, complex products, expertise Communication strategies 1. Cultural barriers 2. Source and Country of Origin effects 3. Noise levels 4. Push v pull strategies 5. Standardized Advertising
can make it difficult to communicate messages across cultures; must develop cross cultural literacy to combat this
cultural barriers
occur when the receiver of the message evaluates the message based on the sender's statues
source effects
the extent to which the place of manufacturing influences product evaluations
country of origin effects
Refer to the competing messages for the consumer's attention
noise level
personal selling (Mary Kay) v. mass media
push v. pull strategies
Reasons for standardized advertising
Significant economic advantages Creative talent is scarce - one large effort to develop a campaign will be more successful than smaller efforts
Reasons against standardized advertising
too expensive
Pricing strategies
1. elastic 2.inelastic (not a need) 3. predatory 4. multipoint 5. experience curve 6. anti-dumping regulations
need; poorer countries - small change in price leads to large change in demand)
elastic