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Shedding light on decisions concerning international opportunities and challenges for enterprises
Standardizing or Adapting? A Recurrent and
Unavoidable Dilemma for International Business
By Guillaume Cariou
The convergence of global consumption patterns
can lead to the belief that products and services
are becoming more and more standardized. For
example, carmakers seeking economies of scale
seem to be playing this card by selling identical
cars on several continents. Yet, they must also
conform to ever more stringent and varied
environmental norms across countries and even
regions. Regarding international product adapta-
tion, one must often look under the packaging or
the chassis.
Norm-Based Adaptations:
No Free Lunch
These adaptations aren’t always visible to the end
user yet they require substantial effort on the part
of the manufacturer. Adapting a product isn’t only
changing certain components so that it can func-
Where Is the Foreign Exchange
Risk in Your Enterprise? Have
you Looked at Your Operations?
By Normand Faubert
Pretty clever is the one who can predict currency
fluctuations on a continued basis. Movements in
exchange rates are relatively unpredictable and
entail substantial risks that can be felt in different
ways throughout the enterprise. Managing such
risks can be more complex than one thinks. To
illustrate this reality, let us compare them to the
risk of fire. The nature and consequences of this
Vo l . 3 – A u t o m n 2 0 1 0
tion at different voltages; it is also obtaining
certain designations (such as CE in Europe) or any
other label that will grant the product entry in
the chosen market. Although the processes for
obtaining these authorizations are often long and
costly, they are nonetheless obligatory.
Non-Constraining Adaptations:
At the Manufacturer’s Discretion
The exporter can also decide to adapt the products
or services specifically to the needs and tastes to
the target country’s clientele, necessitating
thorough knowledge of market data (and thus
additional cost). Although certain difficult choices
must be made, the degree of adaptation is freely
set by the manufacturer. For example, seeking to
sell abroad, a furniture maker will choose to
type of risk are evident in the eyes of entrepre-
neurs. If you purchase a building, the amount of
coverage is measured by the cost of replacement
of the building and the equipment that it houses.
Further, the coverage must enter into effect at
the moment you take possession and it must be
renewed at a fixed date every year.This is a stan-
dard process, very similar from one enterprise to
modify its colour palette in order to meet end user
expectations or to maintain the general aesthetics
of their products thereby simplifying the overall
presentation of their offerings (website, technical
documents etc.).
In conclusion, conforming to the norms and
regulations of the host country is only a first step.
Judiciously standardizing or adapting each
element of the marketing mix represents a
determinant yet discretionary second step as it
will permit the enterprise to distinguish itself from
the competition in the target market and to not
only lead a successful foray but a profitable
expansion.
Guillaume Cariou, Chief Analyst,
Mercadex International
gcariou@mercadex.ca
another. This is not the case for exchange risk
coverage.
How does exchange risk take form within your
enterprise? At what moment must you begin to
cover these risks? Every enterprise is unique.
Whatever your sector of activity, it is the nature
of your operations that must dictate your
exchange policy.
Let’s take the case of an exporter of mechanical
parts for machine tools who wants to understand
why operational profitability is not in line with
forecasts.This situation is even more unexpected
as sales growth both at home and abroad are
Continued on next page
surpassing objectives. We first surmised that
there may be a lack of control of production
costs, but after verification, there was nothing Cash Cycle
conclusive to explain the lack of performance.
Meanwhile, some members of the executive
board brought up a judicious question: "Is the Quota#on Sales Produc#on Shipping Invoicing Receipt
Price list USD, €, £…
volatility of exchange rates impacting our profi-
Quotation Production Invoicing
tability?" The enterprise’s management reacted Delay Delay Delay
by explaining that their exchange policy is very
Unconfirmed Risk Confirmed Risk
rigourous and that risks are systematically cove-
red by term exchange contracts. Further, she
added that the lack of exchange related losses ...but it is only at
Exchange risk
invoicing that it appears
within the financial statements demonstrates that appears here...
on the financial
currency fluctuation is not the cause.
Exchange risk is present throughout the cash cycle

Exchange Risk and

Financial Statements
Let’s be clear from the outset that the enterpri-
se’s management is committing one of the most
common errors by incorrectly concluding that
exchange related gains and losses reported on
the financial statements are indicative of the
real impact of currency fluctuations on opera-
tional profits. This is not the case. These figures
after all answer to accounting principles, essen-
tially serving to normalize certain treasury related
discrepancies within the financial statements.
The absence of financial loss does not imply
that profitability was not affected by currency
fluctuations.
The Appearance of Exchange Risk
Questioned on the management of their ex-
change risk, management explains that their USD
receivable accounts are systematically covered by
exchange contracts. We notice here that despite
the rigour of its practices, the enterprise is
committing another error by considering that
exchange risk only appears once it emits an in-
voice to its clients.The reality is that the invoicing
marks the moment where exchange risks appear
on financial statements, however it starts to take
form much earlier within the enterprise.
Exchange Risk and Sales Price cover than other risks. This can be explained by
the fact that we find very few indicators that are
It goes without saying that establishing an
capable of identifying and measuring these types
appropriate price is the first step toward profita-
of risk. This is why exchange coverage demands
bility. Also, once you transact in foreign curren-
knowhow and an action plan in line with opera-
cies, the exchange rate becomes a determining
tions. By aligning exchange coverage with one’s
factor of your receipts in the currency of record
accounts receivable, we can bet that our exporter
and of your profitability. Exchange risk thus
is carrying risk that isn’t being correctly measured
appears once you determine and propose your
but whose financial impact, although absent from
sales price in a foreign currency1.
the books, has a significant impact on operational
In other words, exchange risk is born at the very profits.
beginning of your cash cycle. Before having even
closed the slightest sale, currency fluctuation can Normand Faubert, President, Options Devises
turn your sales price inadequate and destabilize
faubertn@optionsdevises.com
the profitability of your business plan. The proper
management of exchange risk thus begins by
calculating a sales price that takes into account
the reality of currency rates, at which point
exchange coverage quickly becomes imperative
for the enterprise.The figure above illustrates the
situation.
MercadExpress is published by
Mercadex International
To Better Evaluate Exchange
Risk and Coverage Needs
Contact :
Exchange rate fluctuations present risks that are M. Guillaume Cariou
sometimes much more complex to measure and 1-877-489-9068
gcariou@mercadex.ca
www.mercadex.ca

1
The situation is similar for an importer in the sense that exchange risk appears once the price to be paid in a foreign currency for certain
inputs is determined.