The Roraima Manufacturing Company, a producer of equipment and parts for the agricultural and mining sectors, has been in business since 1998. Roraima is headquartered in the US and over the years has mainly produced in the US and exported to other countries. The company has had a very timid approach to expansion into foreign markets. About 10 years ago it opened a small plant in Germany which produces mainly for the European market. Doing business in Germany was a safe and convenient haven for their operations.
Two crucial changes are taking place that affect the business. For some while now Roraima’s main competitor, Everest, has been aggressively seeking alternative markets for its production and products and, according to all accounts, it will soon surpass Roraima in sales volume and profitability ratios. In addition a Japanese competitor has recently opened a manufacturing plant in the US and is further eroding the position of Roraima.
Roraima’s Board of Directors is concerned that the company’s “play it safe” modus operandi has run its course and the company must respond to the imminent financial threats. They are very concerned about the bottom line and feel that the company has missed key opportunities to integrate into the global market and expand production and sales. The Board called a special meeting with management demanding a clear revamping of the company’s global strategy.
In the initial round of talks the Board makes it clear that management must be bold and aggressive, and examine a variety of options to arrive at a broad global strategy. These options include shifting production to other countries to decrease costs; and, opening new manufacturing facilities in regions like Asia, Latin America and Sub-Saharan Africa where they can possibly produce cheaper products and expand markets.
Roraima’s management concerned that they do not understand fully the global challenges, are very fearful about the prospects of taking the company into unknown areas. They set up a think tank and identify several areas that need examining and explaining.
As a member of Roraima’s think tank you have been charged with the responsibility of enlightening the Board on issues relating to foreign exchange risk, factors salient to foreign location choices, centralization and decentralization as possible strategies, logistics and distribution strategies; and, possible political risk while operating in foreign countries.
Board Questions:
1. Describe three levels of currency exposure that should be simultaneously managed by Roraima within its network of foreign exchange transactions. Explain the concept that best reflects the overall process of managing foreign exchange risk.
2. As Roraima’s global strategy take root, the company has to monitor continuously its foreign location choices – what countries to enter or not to enter, and what countries to either increase or reduce investment levels. Discuss the key factors to consider for most effectively making these choices?
3. Explain the concepts of centralization and decentralization as organizational structural options that Roraima could utilize to control and coordinate its global production activities as they expand.
4. Discuss the critical factors that Roraima should consider for production, outsourcing (make/buy), logistics, and distribution strategies as the company expands globally.
5. What are the political risks that Roraima will face with diverse foreign locations? How could the company manage those risks?