Of a Multinational Corporation - Case Study Example

Nokia – Current Scenarios and Strategies Impact of exchange rate risk management, expansion to new markets and international financing of operations strategies on market value Any company which has diversified its business into international market is impacted by the currency fluctuations. The two types of exposures that Nokia is exposed to on account of currency fluctuations are – translation exposure and transaction exposure. Translation exposure: Nokia uses Euro as its reporting currency. Whatever business it does in other countries is converted to Euros and thus any fluctuations of Euro with respect to US$, Yen or Pound can impact the balance sheet and the overall market value of the company. (Madura 2006). If the Euro tends to be stronger than the other currencies, then the overall profits reported from the respected countries can be adversely impacted while the reverse will be true in case of weakening Euro. The impact of this translation can be seen in its cash flows which directly impact its valuations. The subsidiary may not transfer the cash immediately if the currently the currency is weak. It can retain the cash and reinvest in its own country and transfer the remittance when the currency rate is favorable as compared to the Euro. However, the stock valuations can be impacted as many investors use earnings to value a firm. This is done either by deriving estimates from previous cash flows or using P/E ratio to derive a value per share. As per 2009 results Nokia had 46% of its sales in Europe and Africa, 35% in Americas and 18% in Asia Pacific (authorstream.com). This is the percentage by which the currencies of these countries will impact Nokia’s valuation as part of translation risk. Another factor that impacts the valuation in this category is the country of production. Its production units are spread across Americas, China, India, South East Asia and Europe. Currencies of these countries with respect to Euro also impact Nokia’s valuations. Transaction exposure: This is caused by actual transactions in the foreign exchange market. According to the Forex policy guidelines of the group, material transaction foreign exchange exposures are hedged. These exposures are hedged with financial instruments. Most of these have duration of less than a year. The group also does not hedge forecasted foreign currency cash flows beyond two years. Nokia uses the Value-at-Risk (“VaR”) methodology to assess the foreign exchange risk related to the Treasury management of the Group exposures. To correctly take into account the non-linear price function of certain derivative instruments, Nokia uses Monte Carlo simulation (sec.edgar-online.com). Volatilities and correlations are calculated from a one-year set of daily data. The VaR figures assume that the forecasted cash flows materialize as expected (sec.edgar-online.com). All these help in securing the company from risk of fluctuations and help maintain the market value of the company. Expansion to new markets also has a direct impact on the valuations of the company based on whether it is seen as having a positive impact on the company’s financials or a negative impact. A very significant example of this can be seen from the problems faced by Nokia when expanding into South Korea. As the company expected to use the cheap resources of the country to set it up as a production base, they did not concentrate much on the marketing strategy and used the same strategy which they used in Europe. Because of this they did not succeed in penetrating the market. This had a negative impact on the company’s valuations as the failure to penetrate was perceived as a loss of opportunity. However, expansion to developing economies, such as China and India where the product is still at the nascent stage of its life cycle, is seen to have positive impact for future sales and hence an increase in market valuations. International financing of operations also impacts the valuation of the company. This is again susceptible to exchange rate fluctuations which can impact the flow out. The return on investment for the amount of financing done impacts the valuation of the company. The longer the breakeven time of investment, lower will be the valuations. Changes in strategies of Nokia Nokia started as a paper and pulp mill in 1865 and has turned into one of the leading wireless wizard. This long journey of Nokia has been facilitated by shifts in its strategies over time. The company shifted into rubber and cable industry through a series of mergers and acquisitions in the 1960s. It started on its diversification much before 1930 when it started exporting its products to Russia, UK and France. It also diversified its portfolio to include electrical power. Between 1945 and 1980, Nokia embarked on a consolidation strategy whereby it consolidated state-controlled and privately owned units in Finnish businesses that had played a crucial role in electronics, radiophones and TV (Steinbock 2003). Though this was not a very well goal oriented strategy, it did help in investment into innovation and growth. There was no grand strategy behind these acquisitions, just a move to get into technology business and utilize the opportunity provided by failures of public sector’s high-tech ambitions. However, the company had an overall long-term internationalization strategy. The company was a pioneer in PCM technology but the electronics department was in losses for a long time. A lot of investment went into it before it became a cash-cow. However, this was still thought to be strategically the right move with a long term perspective. In the 1960s and 70s, the company embarked upon a strategy of applying innovative American insights to global industries. They were small enough to exploit new technologies and had higher flexibility than its mass producer rivals (Steinbock 2003). In 1982, Jorma Nieminen presented his vision of early radiophone business as global industry. With the emergence and growth of new markets, Nokia followed its global strategy and grew in double figures. With the death of Kairamo, the chief of Nokia who had embarked on the internationalization vision, Vuorilowhto took over the reins of the company and changed direction of the company from buying spree to selling one. Nokia’s strategy under his leadership focused on restructuring. There were only a few strategic acquisitions. The company came out of depression under his leadership. In 1992, Jorma Ollila, took over the leadership and embarked on the strategy of focusing on mobile communications. The company also exited from its noncore businesses. Nokia’s years of major growth were from 1994 to 2000. This growth was majorly facilitated by change in the political environment of Finland. The country had deregulated its telecom industry in the 1980s and this was followed in the rest of Europe in the rest of Europe in 90s. These policies helped Nokia expand beyond Finland, but its vendor strategy was the key to further growth. Ollila was initially the account manager for Nokia at the time of Kairamo’s leadership and was given the job of assessing its internationalization operations as well as M&A activities. (authorstream.com). He felt that the company’s strategies did not match the new competitive environment. He later joined the company and as its leader focused on GSM at an opportune time to make Nokia a world leader. His strategy for company was named by him as Nokia 2000, and was defined by 4 words – Focus, Global, Telecom-oriented and High Value-Added. References authorstream.com, Nokia Marketing Strategy Plan, viewed on April 20, 2010 http://www.authorstream.com/Presentation/rohit7jan-238784-nokia-marketing-strategy-plan-business-finance-ppt-powerpoint/ Madura, J 2006, International Financial Management, 8th ed. Cengage Learning. sec.edgar-online.com. ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK, viewed on April 20, 2010 http://sec.edgar-online.com/nokia-corp/20-f-annual-and-transition-report-foreign-private-issuer/2007/03/12/section20.aspx Steinbock, D 2003, Wireless horizon: strategy and competition in the worldwide mobile marketplace, AMACOM Division of American Management Association Read More