Managing Operating Exposure and FX risk at Nissan

Posted: November 27th, 2013

Managing Operating Exposure and FX risk at Nissan

Name:

Institution:

Lecturer:

Course:

Date:

Managing Operating Exposure and FX risk at Nissan

Financial risks have been a major problem in many organizations that engage in global businesses specifically due to currency volatility. Many automobiles industries design, develop and market their motor vehicles within the global market. One of the automobile industries, which have been affected by foreign exchange risks, is Nissan, which is a multinational automaker company based in Japan (Nissan, 2011). It was a member of Nissan group but it became self-governing after its reformation under Carlos Ghosn, a chief executive officer of Nissan. The company is one of the biggest car manufacturing organization in the globe but it markets its vehicles under the Datsun brand name. Thus, Ghosn and Nisan used multicultural ways of cost cutting and adopted strategic plans in order to improve their operational efficiency.

In order to manage global financial risks, Carlos Ghosn and Nissan used the following ways to manage global financial risks. First, Ghosn used multicultural background issues in order to overcome the challenges that Nissan faced due to global financial risks. Ghosn and Ries (2005) argue that understanding multicultural issues is crucial because they enable organizational success. The principle rationale employed by Ghosn and Nissan in dealing with multicultural issues is that they wanted to overcome the problem of currency volatility. Further more, due to stiff competition especially from other automakers industries such as Toyota, Honda and Ford Motors, Ghosn wanted to adopt multicultural ways of creating more customers globally.

In addition, Ghosn and Nissan changed earlier business practicing methods to superior ones. This was through pulling away from the Japanese culture whereby stability surpassed sound fiscal management (Ghosn, and Ries, 2005) and moved towards cost cutting as well as increasing efficiency. The reason that made them to pull a way from Japanese culture and cut the cost of products is that the company wanted to create efficiency and increase its productivity (Kim, & McElreath, 2001). Note that, the institute’s principal aim was not only in increasing sales but also in managing the global financial risks. Ghosn thus decided to draw a plan in which their business was supposed to operate. The CEO and the Nissan engineering team designed and uncovered organizational problems towards setting new performance goals that were to be achieved through cost cutting, capacity reduction and close down of five plants, thereby making the company more successful in terms of commercial activities.

Nevertheless, the company introduced strategic plans of managing currency volatility and expanding its portfolio, which made it competitive in the automobile market. Nissan had been undergoing massive debts and operating at losses that consequently damaged the company’s brand name. Therefore, Ghosn and Nissan managed to overcome financial risks through adopting strategic plans of managing foreign currency, which benefited them in the industrial management operations. The risks management initiatives were fashioned in alignment to the portfolio theory used towards avoiding unsystematic risks (Connolly, 2007). Thus, they added low-risk and low return securities to the portfolio in order to secure their market.

Ghosn actually follows Napolo’s eight steps of as a prerequisite to the establishment of better foreign exchange policies and subsequently superior foreign exchange risks. Thus, Ghosn and Nissan adopted the following steps in an attempt to manage global foreign exchange risks. First, they defined the organizational corporate philosophy and objectives. This is the first step, which was used by Nissan Company whereby they outlined the principal lines and overall objectives of the company. Hicks (2000) points out that it is vital for an organization to set objectives and identify risks that need to be hedged away. Secondly, they identified and later quantified exposures. These crucial stages enabled the chief executive officer and the Nissan organization to overcome global financial crisis. Identifying and quantifying exposures enables organizations that carry out trading within the globe to adopt certain strategies such as hedging tools in managing foreign currency risks (Homaifar, 2004).

Another step that Ghosn and Nisan followed is defining of risk management policies and procedures (Napolo, 2005). Due to brand damage and operation of the company at losses, Ghosn and Nissan decided to identify management risks that were accountable for the problems. This enabled them to take actions and responsibilities towards creating organizational change. Wang (2005) argues that identifying exposures that pose significant risks to an organization is vital. This is because they enable the company to make decision of executing better methods of establishing policies vital for making the organization successful. In addition, monitoring exposures and hedges were adopted towards enabling the organizational team in monitoring hedging actions. Lastly, reviewing and measuring performance was used in order to improve organizational performance.

However, some of Napolo’s eight steps were difficult to implement and posed serious execution challenges. For instance, some strategies used for risk management were difficult because they required the corporation to modify potential from exchange movements due to competitive reasons. In addition, the executive strategy was not implemented. This is because the strategy required a level of approval based on size and transaction elements. This seemed difficult for the company to implement thus it could not be adopted.

In conclusion, in order to manage global financial risks, Ghosn and Nissan decided to adopt ways of creating change within the organization. They appraised multicultural issues thereby deciding to marginalize ineffectual Japanese cultures like the reduction of products costs in order to compete favorably within the international market (Nissan, 2011). In addition, the company changed its operational methods as well as it introduced strategic plans in operations handling. The company decided to follow Napolo’s steps that were convenient in nature towards creating trading success. Some of the steps used include risk identification, defining organizational philosophy and objectives as well as risk monitoring. Napolo’s strategies that were left out posed serious implementation challenges thereby acting as a constraint.

References

Connolly, M. B. (2007). International business finance. New York, NY: Routledge publishers.

Ghosn, C., & Ries, P. (January 17, 2005). ‘The Gaijin Who Saved Nissan’. Bloomberg

Businesweek. Retrieved on September 19, 2011 from http://www.businessweek.com/magazine/content/05_03/b3916021_mz005.htm

Hicks, A. (2000). Managing currency risk using foreign exchange options. Boca Raton, FL:

CRC Press.

Homaifar, G. (2004). Managing global financial and foreign exchange rate risk. Hoboken, N.J:

J. Wiley.

Kim, Y.-C., & McElreath, R. (January 01, 2001). ‘Managing Operating Exposure: A Case Study

Of The Automobile Industry’. Multinational Business Review, 9(1), 21-26.

Napolo, D. (March 2005) ‘Managing FX risk; an eight step plan to establish corporate foreign

exchange policy’. Treasury & Risk Management magazine. Retrieved on September 19, 2011 from https://www.wellsfargo.com/downloads/pdf/com/focus/risk/manage_fx_risk_reprint.pdf

Nissan. (2011). More Nissan Sites. Retrieved from http://www.nissanusa.com/more-nissan-sites/

Nissan. (2011). About Nissan. Retrieved from http://www.nissanusa.com/about/

Wang, P. (2005). The economics of foreign exchange and global finance. New York, NY:

Springer.