Case $10-2$

Assessing Foreign Subsidiary Performance in a World of Floating Exchange Rates

Chapter $10$ Managerial Planning and Control $387$

is on planning, results, and most recent

estimates. This evaluation process

provides corporate management with

an opportunity to determine whether

short$-$term actions are being taken at the

expense of long$-$range goals.

To minimize currency exposure,

GE finances fixed assets with equity and

holds the affiliate responsible for maintaining a balanced position on working

capital. The policy is modified as necessary for varying circumstances.

Unlike MNCs that have centralized the financing and exposure management functions at the head office, GE

makes exposure management a responsibility of its local managers, overseen

by sector and corporate personnel. To

avoid the transaction costs of having, for

example, a French affiliate hedge its

position by buying French francs

forward, GE has provisions for internal

hedging arrangements. Corporate treasury obtains currency exposure data

from all affiliates and provides needed

information on offsets. Therefore, units

can execute a hedging agreement

between themselves without going to

outside sources.

In setting the budget, the affiliate$$s

manager uses the exchange rate he

expects to prevail. General Electric

believes that, although predicting rates of

exchange is not an exact science, the managers of its foreign businesses have the

necessary authority and tools to take those

actions that will enable them to achieve

their budgeted income. These tools

include hedging and pricing decisions.

The manager can not only raise prices, cut

costs, lead payments, lag receivables,

borrow locally, and remit dividends

quickly but he can also take out forward

contracts if they are available.

The affiliate manager has the

responsibility and authority to protect the

unit against currency fluctuations and,

therefore, is accountable for dollar profits

regardless of exchange rate changes.

According to a company spokesperson:

If an unexpected devaluation

occurs, the affiliate$$s performance is still

measured in terms of dollar income vis $$

vis budget. GE considers changes in the

rate of exchange in the same way as

other risks that occur in a country. For

example, if an affiliate$$s sales are less

than those budgeted for because of a

recession in that economy, countermeasures are available to the affiliate. If one

contends that these things are not

controllable, how does one manage a

company? We$$re not saying it$$s controllable in the sense that it can be prevented

from happening, but it is susceptible to

countermeasures before and after the

event occurs.

Required

$1.$ Compare GE$$s approach to performance evaluation with that of

ICI $($mentioned in the chapter$).$

$2.$ Critically evaluate the strengths

and weaknesses of each company$$s

approach to the performance evaluation of its foreign managers as it

relates to the problem of fluctuating currency values.

$3.$ Which approach to performance

evaluation do you support and why?