Page 170 - DMGT549_INTERNATIONAL_FINANCIAL_MANAGEMENT

Unit 10: Management of Operating/Economic Exposure

A firm exporting its products after a domestic devaluation may well find that the return Notes
per home currency expenditure on advertising or selling is increased because of the
product’s improved price positioning. A foreign currency devaluation, on the other hand,
is likely to reduce the return on marketing expenditure and may require a more
fundamental shift in the firm’s product policy.
Product Strategy: Companies can also respond to exchange rate changes by altering their
product strategy, which deals with such areas as new product introduction:

(i) Product line decisions
(ii) Product innovations
Following home currency devaluation, a firm will potentially be able to expand its product
line and cover a wider spectrum of consumers abroad and at home. Conversely, following
home currency appreciation, a firm may have to reorient its product line and target it to a
higher income, more quality conscious, less price sensitive consumers.
Equivalent strategy for firms selling to the industrial, rather than the consumer, market
and confronting a strong home currency is product innovation, financed by an expanded
R&D budget.
Production Initiatives

The adjustments discussed so far attempt to alter the home currency value of foreign currency
values. But, sometimes, the exchange rate moves so much that pricing or other marketing
strategies do not save the product.

Product sourcing and plant location are the principle variables that companies manipulate to
manage competitive risks that cannot be managed through marketing changes alone.
(a) Input Mix: Outright additions to facilities overseas accomplish a manufacturing shift.
A more flexible solution is to purchase more components overseas. This practice is called
as outsourcing. Outsourcing gives the company the flexibility to shift purchases of
intermediate inputs towards suppliers least affected by exchange rate changes.
(b) Shifting Production among Plants: Multinational firms with worldwide production
systems can allocate production among their several plants in line with the changing
home currency cost of production, increasing production in a nation whose currency has
devalued and decreasing production in a country where there has been a revaluation.
A strategy of production shifting presupposes that a company has already created a portfolio
of plants worldwide.

The cost of multiple sourcing is especially great where there are economies of scale that
would ordinarily dictate the establishment of only one or two plants to service the global
market. Despite the higher unit cost associated with the smaller plants, currency risk may
provide one more reason for the use of multiple production facilities.
(c) Plant Location: A firm without foreign facilities that is exporting to a competitive market
whose currency has devalued may find that sourcing components abroad is insufficient to
maintain unit profitability. Third country plant locations is a viable alternative in many
cases.

Did u know? Many Japanese firms, for example, have shifted production offshore—to
Taiwan, South Korea, Singapore and other developing nations as well as to United States—
in order to cope with the high Yen.

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