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