The issue that is shown in the Flame fixtures case study is the foreign exchange currency risk. The transaction cost of Mexican peso changes and is likely to rise substantially in every three months. The peso will weaken the dollar because its currency is low and Flame Company will face a challenge since it does not have much liquidity (Bekaert & Hodrick, 2017). They will use many expenses than they expected before. Another issue that arises in this case study is the inflation rate. The inflation rates of Mexico are higher than that of United States. In addition, the Flames recognize that the cost of Coron will increase over time because of high inflation rate in Mexico. Moreover, because of the difference in inflation rates and the Flame products is high demand in the United States they have to increase their price to continue making the profit.
The actors of this case study are the economic actors. The economic actor may be a company, individual, government or society. According to this study, the economic actor is focused on the company and government. The economy of Mexico is shown well Flames want Coron to purchase some of their parts. The inflation rates of Mexico are higher than that of United States, which is a clear indication that the economic rate of Mexico is at risk. When the inflation rate is higher, it hurts the economy of the country.
The organizational forces of the Flames Company are the management. The management of the company is good management with good leadership because they are looking to expand their business in future. Even though their business is financially stable over time and they get adequate profit, they are looking for a way to increase their profit in future. The other force is the change in price of the lamps because of the effect of inflation rates in Mexico (Bekaert & Hodrick, 2017). The company is forced to increase the price of the lamps to get the profits because when Coron purchase some parts of their company.
The external forces that will be encountered by the Flames Company are the inflation rate. The inflation rate of Mexico where they are planning to buy part of their sales. This external force will affect them because they will be forced to sell their products at a higher rate to make profit. (Schulz et al, 2017). The company will also be affected by the policies of money transactions from one country to another one for instance, from Mexico to United States. They will also face stiff competition from other companies that they are selling the same commodity because if they hike up their price the customers will consider buying from their competitors because it will be cheaper. Another external force that affects the company is security. The Flames Company will be required to use its assets as collateral in case it does not fulfill the obligation.
The purchasing power parity (PPP) theory was used in this case study. The purchase power parity theory explains that the nominal exchange currencies rate between the two countries should be equal to the ration that is aggregate price level in the two countries. The idea behind this theory is that the amount of money that buys well in one particular country should be used to buy the same good in the foreign country they are exchanging the good (Viner, 2016). The Flames Company believes in the power of purchase power parity because the payment that Coron Company will pay will be equal.
The case study opens to us that the environment of international finance is not favorable because the rate of inflation of the two countries is not the same. Mexico has high inflation rate hence affecting the currency exchange between this country and the United States. The nature of international financial system and policy-making process is reflected by the case in that the foreign exchange is at risk. This is because peso has low currency rate than that of dollar of United States hence, it will affect the price of commodity on the other side. The policy is that the Flame Company will be required to use its assets to serve as collateral in case it does not fulfill its obligation. There are changes in inflation rate because after sometimes the prices of Mexico pesos rises substantially hence creating an effect on the currency exchange rate with United States dollars. The case study also shows the decision making process of the Flames Company is that the management decides to buy other parts from the Coron Company and they check both the advantage part and the consequences and because they did not have other alternatives they decided to buy those parts despite being given a lot of rules by Coron company. The leadership and management Of Flames Company are good because they are looking forward to the future. They need to purchase other parts to enable them to make higher profits in future. This is a good way of indicating good leadership and management of an organization. Ethics are the rules that define the moral conduct of an organization or individual. The administrative ethics in this case study is shown how Flames Company respect all the orders and decision of Coron Company despite knowing that their inflation rates are high.
The recommendation that I will recommend to Flames Company on the purchase of other parts from the Coron Company is to consider buying it when them when the inflation rate has not risen higher. On the other hand, the Coron Company should consider the currency differences between pesos and dollars (Bekaert & Hodrick, 2017). Another recommendation is that the Flames Company should have look for other alternatives for expanding their business other than to purchase some parts of another country. If the Flames Company considers doing this differently rather than purchasing some parts from Coron flame then they will continue making more profits. The international finance management is a good way of marketing but it is more disadvantage when the inflation rate is not the same and the concept of purchase power parity does not apply.
Sabre Computer Corporation is a Company that is situated in the United States and it plans to venture their business with two countries that are Mexico and Hungary. There are some of the organizational forces that affect the process; one of them is communication. The Sabre computer corporation has good communication strategy that has enabled them to get the contract in Mexico and Hungary (Schulz et al, 2017). Another factor is the leadership, the great leaders inspire, directs and motivates. The leadership of the company is good because they motivate themselves that they are the leading company in the production of technology and key to computer components. Through this, they are motivated to look for ventures in other countries. Even though they know that the price inflation in Mexico is higher, they wanted a contract that will adjust to cover the rising cost overtime. The company also has good management they were ready to send some of their managers temporarily to Mexico to go and teach them how to use their computers and how to manage them.
The external forces that is portrayed at this case study are, one is the government policy. The Sabre computer corporation is planning to venture into business with an organization in Mexico that is own by the government. This implies that the Sabre computer corporation will have to work with the Mexico government policy. Moreover, because the government is the one in charge of the market they can influence foreign marketing hence there is high chance to affect the Sabre computer company (Schulz et al, 2017). Another external force is competition. The computers that the Sabre computer corporation is planning to join venture with the production of personal computers in Hungary and the other companies produce the same computers. The Sabre computers corporation will have stiff competition in a foreign country because they are foreigners in that country and their competitors are the owner of that particular country. Sabre Computer Corporation believes that it will penetrate the market to its price. The other force is technology, each day there is improvement in technology and because their service deals with technology, it might affect them to some extent. Sabre Computer Corporation has good technology but some of its competitors can improve in technologies and destroy their market in of computers in foreign countries.
In the Sabre computer corporation case study the environment within which the international finance situation occurs differ from government policies and the economy of the country. The Sabre has a contract to sell its computers to Mexico institutions and agencies at price that tied the inflation. Most of the cost will be done in Mexico and therefore the payment will be done in pesos. Because the government is in charge, the payment the Sabre will receive 30 percent of the revenue generated from the computer’s sale and the rest percentage is taken by the government hence improving the economics of that Mexico. Since the Sabre computer corporation produces quality products, it has to manage their production coast as well as the opportunity cost as they are planning to sell their products in the foreign countries (Bekaert & Hodrick, 2017). The fluctuation in the price of pesos in Mexico can lead the company in getting profit or the loss. In Hungary, the Sabre computer corporation is expected to sell its products in all Eastern Europe. In that case, the company will face competition from the domestic companies that sell the same products in Hungary. The economy of the Eastern Europe countries is expected to be stagnant and the demand for personal computers is high therefore, the Sabre Company will get a profit when they join the personal computers with Hungarian computer manufacturers. The computers will be prices in Hungary’s currency and Sabre expects to get 30 percent of the revenue generated from the sale. The Sabre computer corporation should deal with international finance environment by checking the political risk and economic risk of the foreign country for them to continue making the profits.
The Sabre Computer Corporation might use some of these ways to finance their export. One of the way is for them to extend their credits to foreign buyers. When the Sabre agrees to give their products in credits to the buyers, they will get many customers in the foreign country and they will end up making profits (Liu et al, 2019). The other way is for them to give their products with discount to the foreign country. However, they will be in a position to win the market over their competitors because their prices will be good and favoring. The other way is for the Sabre Company to use government assistance programs especially with Mexico because they are dealing with government. With this, they will be able to make more sales in a foreign country because they are working hand in hand with the government of that particular country. The other way that the Saber will finance their exports is for them working one on one with the commercial banks of the foreign country. The company should measure the transactions need against economic exposure. This will enable the company to work on both the long and short cash flow of the company.
The method of payment that will be beneficial for the organization is using a clean payment method where the Saber computer corporation should have mutual trust with their ventures in Mexico and Hungary. This method is inexpensive and uncomplicated method for both parties because the role of bank in clearing the funds is required. This method will benefit the organization because it needs fewer procedures.
The management of accounts during international cash transfer involving network capital should ensure that the current cash flow is to be used to determine the nature of the risk and it should be analyzed by identifying the causes and the characteristics (Liu et al, 2019). In this case, the contract sign by the Saber and the two companies in Mexico and Hungary determine the transaction exposure.
Bekaert, G., & Hodrick, R. (2017). International financial management. Cambridge University Press
Liu, T., Lu, D., & Woo, W. T. (2019). Trade, finance and international currency. Journal of Economic Behavior & Organization, 164, 374-413.
Schulz, S. A., Martin, T., & Meyer, H. M. (2017). Factors influencing organization commitment: Internal marketing orientation, external marketing orientation, and subjective well-being. Journal of Management Development, 36(10), 1294-1303.
Viner, J. (2016). Studies in the theory of international trade. Routledge.