Dell Mercosur case study: international business operations in Brazil

Dell Mercosur

Given how Dell translates its foreign-currency financial statements into dollars, how would a falling Brazilian real affect Dell Mercosur's financial statements? What about a rising real?

The falling real would help to improve Mercousur's financial statements. The reason why is because it made costs cheaper and increased profitability. A rising real would have a negative impact on the company, as it will cause their operating expenses to increase and profits to decline. ("Dell Mercousur," n.d.)

Dell imports about 97% of its manufacturing costs. What type of exposure does that create for it? What are its options to reduce that exposure?

It creates exposure that can cause the underlying cost of parts to increase, based upon moves in the currency. This is problematic, because it can have an impact upon profitability and forecasting. The options to reduce this exposure are: to aggressively hedge against adverse moves in the currency. This is when you are taking positions through various options or futures to limit the downside risk. ("Hedge," 2011) In the case of Dell, they can use hedging to offset against volatility, by aggressively using this strategy to protect their underlying cost basis against adverse moves in the currency. As far as the real is concerned, the company used a hedging strategy of purchasing calls, to protect against any kind of sudden increases. ("Dell Mercousur," n.d.)

Describe and evaluate Dell's exposure management strategy.

The exposure management strategy is when Dell will aggressively hedge against possible changes that are occurring on world markets. This involves taking aggressive positions in a number of different currencies such as: the U.S. dollar, Japanese yen, British pound and Brazilian real just to name a few. The idea is that by hedging the different risks, the company can be able to offset any kind of losses that may be experienced from: adverse changes in the currency. This strategy has proven to be effective at helping the company to maintain its low cost basis. While at the same time, it would allow their different operations around the world to have earnings stability (by controlling costs in a particular region). Once this occurred, it meant that the company could remain an effective competitor, by aggressively using this strategy to protect against these risks. As a result, Dell's exposure management strategy would have an impact upon quickly they were able to adapt to changes that were taking place in economy. ("Dell Mercousur," n.d.)

What are some programs or strategies that management in Dell Mercosur could implement to provide it with operational hedges?

Creating facilities in select locations, that are in the same areas as major markets, is how the company is using operational hedges. This means that they will identify key areas where there is strong demand for their products and services. At which point, they can create manufacturing plants and service centers in select locations. This would reduce the underlying costs and risk exposures that Dell could face in a particular region. At the same time, they could create manufacturing and customer service operations, in areas where there are free trade agreements with countries that are quickly expanding. This would help to improve the ability of the company to be able to maintain it low cost structure, while providing services to a number of different regions simultaneously. ("Dell Mercousur," n.d.)

What lessons can be learned from the Dell case for minimizing the risks of stock markets and currency fluctuations and financial uncertainty? Did regional agreements play a role in the company's response to such risks?

The lessons that can be learned, when it comes to the equity markets / currency fluctuations are that aggressive hedging strategies can reduce the underlying amounts of risk facing the company. As this has helped Dell to be able to maintain their cost structure and increase market share. This occurred during a period of time when: terrorism, volatility in the currency markets and political changes could have an impact upon the company's bottom line. As a result, this strategy helped Dell to increase their market position from: 12% of PC sales to 15% in 2001. ("Dell Mercousur," n.d.)

Regional free trade agreements played a major part in the company's strategy for dealing with these risks. This is because, the different free trade agreements would allow Dell to create a manufacturing facility in a particular area and import parts (without having to worry about any kind of duty or tariffs). Over the course of time, this strategy would help the company to keep the costs in a particular region as low as possible, by focusing on using the local currency as much as possible (through the manufacturing facility in an area) and then maintaining low costs (by importing parts from countries where free trade agreements are in place). ("Dell Mercousur," n.d.)