Question

The key to managing operating exposure at the strategic level is for management to recognize a disequilibrium in parity conditions when it occurs and to be pre-positioned to react most appropriately. How can this task best be accomplished?

Answer 1

The key to managing operating exposure at the strategic level is for management to recognize a disequilibrium in parity conditions when it occurs, and to be prepositioned to react most appropriately. If a firm’s operations are diversified internationally, management is pre-positioned both to recognize disequilibrium when it occurs, and to react competitively. Consider the case in which purchasing power parity is temporarily in disequilibrium. Although the disequilibrium may have been unpredictable, management can often recognize its symptoms as soon as they occur. For example, management might notice a change in comparative costs in the firm’s own plants located in different countries. It might also observe changed profit margins or sales volume in one area compared to another, depending on price and income elasticities of demand, and competitors’ reactions. Recognizing a temporary change in worldwide competitive conditions permits management to make changes in operating strategies. Management might make marginal shifts in sourcing raw materials, components, or finished products. If spare capacity exists, production runs can be lengthened in one country and reduced in another. The marketing effort can be strengthened in export markets where the firm’s products have become more price competitive because of the disequilibrium condition.