Caterpillar Currency Issues Case Study Example | Topics and Well Written Essays - 1500 words

Caterpillar Currency Issues - Case Study Example Shifting currency rates are always a risk to a firm and can lead to the firm incurring many losses. However, by understanding the problem, the business is able to look at the way in which the market can be looked at and come up with solutions (Wihlborg, 2008). In Caterpillar’s case, the firm was able to reverse the adverse effects of a strong dollar by removing these processes, especially production and manufacturing functions to other countries thus neutralizing the transaction risks. This helped the firm to be able to able to overcome the shocks caused by currency exchange rates. This was achieved in two ways as follows; Hedging labour and production costs This can be understood by looking at the actual reason why high dollar values in the 1980s had affected the revenues and profits of Caterpillar. To begin with, since Caterpillar’s manufacturing units were located in the United States only, strong dollar meant that its manufacturing costs would be higher than the man ufacturing costs of its competitors who were outside the United States. As a result, its products would have to be more expensive because when buyers in foreign countries would have to pay more once they converted their lowly valued currencies into American dollars. This meant that Caterpillar’s products could not be competitively priced as compared to those of the competitors. Hedging revenues Manufacturing costs were not the only issue affecting Caterpillar. By taking its manufacturing to other countries, the issues of high dollar value was solved. Not only did the manufacturing costs not get affected by the high US dollar values, but the firms would also be able to source raw materials locally and thus hedge the revenues. According to Delaney and Whittington (2010), this kind of hedging can be important where the firm needs to protect itself from unpredictable currency rates. By manufacturing in foreign countries and sourcing the raw materials in foreign countries, it mean t that the profits margins would be stable because the sales and the profits would be measured by the same foreign currencies. As a result, it can be said that Caterpillar overcomes this issue by localizing its operations in foreign markets rather than having the operations centralised in the US. This, according to Madhuvij (2006) is what is called thinking globally and acting locally. Caterpillar looked at the market from a global perspective because its products have markets in the global arena, but to be effective, the firm had to look at each local market individually. The strategy As identified, Caterpillar used the think global, act local strategy. This is a strategy which is being used by so many global firms which have to contend with so many challenges caused by the very same opportunities caused by a global market. Globalisation has brought opportunities for many forms but has also brought with it challenges which firms must be able to overcome if they are to benefit from the opportunities brought about by globalisation. This is the situation which Caterpillar has found itself in. For firms to be able to benefit from the opportunities brought about by globalization, they have to create strategies which will turn challenges into opportunities. This is what Caterpillar realised and started working towards creating a way to help it overcome its challenges. The validity of the strategy As it is with any business strategy, this strategy may be seen to have both advantages and disadvantages. It is the balance between the advantages and the disadvantages which make a strategy to be either worth it or not. As per the Caterpillar strategy, the main advantage is the fact that distributing its