MIT Sloan Management Review

Financial Management, International Business

 

Managing Foreign Exchange for Competitive Advantage

By Abraham S. George and C. William Schroth

January 15, 1991

LET’S SAY you run a U.S. corporation that sells widgets to Germans. The deutsche mark drops against the U.S. dollar. What happens? You can sell the same number of widgets, but when the marks are converted into dollars, you get fewer of them in your pocket. And, if your widgets are produced in the United States, your production costs are higher than for your German competitor. Nothing you can do about it, right? George and Schroth argue that you can do something about it, but it takes systematic planning. In this article, they describe the increasing effects of foreign exchange rates on the global market and ways to plan for them. By making foreign exchange planning a part of overall long-term strategy, organizations can avoid its negative effects and even exploit its positive ones. Abraham M. George is President of Multinational Computer Models, Inc. and the Chief Consultant of First Boston/MCM Consulting Company C. William Schroth is a Managing Director of The First Boston Corporation and President and Chief Executive Officer of First Boston/MCM Consulting Company.

Buy article & permissions

GENERALS PLANNING military action and CEOs plotting corporate strategy often start from the same point: they identify the key strengths and weaknesses of their position vis-à-vis their rivals and develop a strategy to exploit the strengths and protect the weaknesses. In the corporate world many factors come into play, including quality of product, service, and availability, but two factors stand out because of their direct effect on the bottom line: pricing and cost of production. Senior managers across a wide spectrum of industries devote considerable thought to optimizing these two factors, but often ignore or underestimate a powerful force that influences them: the relative value of the currencies in which revenues and costs are denominated.

In the Bretton Woods world of stable exchange rates, currency values were less significant.1 At that time, pricing and volume determined revenues and relative labor and material costs determined production decisions. Today the world is different. Many U.S. corporations with large international businesses have seen their stock prices drop because investors have feared that a strong dollar would reduce the contribution of overseas operations to sales and earnings growth. Exporters in the United States are worried that a stronger dollar will cut into their profit margins.

Despite these developments, corporate management has been slow to grasp the full importance of foreign exchange movements. While most multinational firms are... To read the complete article, login or sign-up using the form below.

 
 

In This Issue

 

Best Sellers