BMW Do to Manage Global

¶ … BMW Do to Manage Global Financial Risk?

Any firm conducting business internationally faces global financial risk. Of particular concern is risk associated from foreign exchange transactions or currency related issues. Much of this risk results from the volatility ever present within the exchange rate and among interest rates. There are always other risks though associated with conducting business in a global marketplace. Fortunately there are very clear and decisive steps organizations can take to minimize the risks associated with international business. Many hedging instruments or techniques are available and work well to ensure a company manages risk reasonably.

Multiple factors affect a firm's exposure to financial risk including operational activities and the strength of the dollar compared with foreign currency (Kim & McElreath, 2001). BMW is an example of an international automaker that mitigates financial risks successfully. BMW takes multiple steps to manage the global financial risk associated with doing business in an international and competitive climate. Among the strategies the automaker adopts to minimize and manage financial risk include optimizing plant location, product sourcing, improvements in productivity, pricing and product strategy, joint ventures and market segmentation (Kim & McElreath, 2001). These ideas are discussed in greater detail below.

BMW Primary Risk Management Techniques

Location is a primary influencer of global financial risk. One of the biggest steps BMW took to minimize financial risk was deciding to build an assembly plant in the U.S. And in other global areas (BMW USA, 2005). By diversifying their manufacturing locations, BMW minimized currency fluctuation. BMW also set up shop in Mexico in 1994. Multiple other carmakers followed suit, in part due to the inexpensive labor and high quality offered in Mexico (Kim & McElreath, 2001). Being able to produce their product in multiple countries enables BMW to have better economic exposure; in addition by having a manufacturing plant in more than one country if the exchange rate declines in one place, like the U.S., BMW can easily shift part of its production to the other and thus increase the number of "exports to countries where the real exchange rate has risen" (Kim & McElreath, 21).

Joint ventures or partnerships and mergers are also a solid method for minimizing global financial risks (Choi & Prasad, 1995). Joint ventures have also benefited BMW. In early 1994 the company acquired a substantial portion of the automaker Rover, thus enabling greater production capability at a low cost, which in turn resulted in larger "economies of scale in purchases from suppliers" (Kim & McElreath, 21). This merger boosted BMW's production and doubled the company's size, giving it a lot more weight and negotiating power in the long run. Joint ventures also help BMW access other growing and/or promising markets and allow the company to share costs with partners as well as resources (Kim & McElreath, 2001). This helps minimize financial problems in times of slow sales or at times when resources may be pricey or unavailable. All of these actions help mitigate BMW's global financial risk and increase their long-term profitability and competitiveness.

BMW also uses product sourcing and input mix to rise above financial risk (BMW INT, 2005). BMW for example often procured parts and materials for its vehicles in the U.S. before it established a plant location in the U.S., in part because the exchange rates and production costs were much lower in the U.S. (Kim & McElreath, 2001). This allowed the German automaker to import necessary products inexpensively. BMW also diversifies its product offering three brands including the BMW, MINI and Rolls-Royce increasing the strength and efficiency with which it conducts business and minimizing the financial risks associated with owning or providing a single product (BMW, 2005).

Conclusions

Any company conducting business internationally faces particularly global financial risks, especially those associated with a volatile exchange market. Companies that successfully adopt hedging techniques or other strategies to mitigate risk are more likely to succeed and establish a strong global presence. Once such company that has succeeded in mitigating financial risks is BMW Corporation. The global German based automaker has succeeded despite multiple financial risk factors in an ever-competitive industry.

BMW Corporation has taken multiple steps to mitigate the risks associated with foreign exchange. The company has aligned their business and financial strategies and analyzed the types of risk they are subject to conducting business in an international market. They have also examined how these risks can be controlled and hedged.