Question

(Related to the Chapter Opener on page 1058 ) An article in the Wall Street Journal in June 2017 began with this observation: "The euro soared to its biggest one-day gain against the dollar in a year." Bayer AG sells Coppertone sunscreen in the United States. If Bayer produces Coppertone in the United States and sells it only in the United States, would an increase in the value of the euro against the dollar affect the company's profit from selling Coppertone? Briefly explain.

Short answer

No, an increase in the value of the euro against the dollar won't affect Bayer AG's profit from selling Coppertone in the United States, because both the production and the sales are localized within the United States, and not subject to exchange rate fluctuations.

Step-by-step solution

Identify Company Operations

Bayer AG produces and sells Coppertone sunscreen in the United States only. Therefore, the operations are localized and no direct import or export happens in terms of this product.

Consider the currency change

The euro has increased in its value against the dollar. This means that one euro can now buy more dollars than before. But this situation doesn't immediately affect Bayer's operations with Coppertone as those are based in the U.S.

Assess Profit Impact

As Bayer AG is operating Coppertone locally within United States, the increase in the euro value doesn't directly affect its profits from selling Coppertone. The cost of production and sales are all in dollars, no exchange rate comes into picture here. Their profits remain in dollars and are not immediately subject to exchange rate fluctuations.

Key concepts

Currency Fluctuations

Currency fluctuations refer to changes in the value of one currency relative to another. These fluctuations can significantly affect international business, especially for companies that operate globally. For instance, a rise in the euro against the dollar means the euro is stronger and can buy more dollars. This could affect profits when companies exchange money across borders.

In the context of localized operations, however, currency fluctuations may have less of an impact. For Bayer AG, which produces and sells Coppertone sunscreen exclusively in the United States, the change in euro value does not directly affect its operations. Since all costs and revenues are in U.S. dollars, the euro-to-dollar rate change does not alter their profitability.

Understanding currency fluctuations is crucial for companies with international dealings, as it affects their costs and revenues when converting currency. Yet, for strictly localized businesses like Bayer's U.S. operations, the impact is minimal.

Localized Operations

Localized operations occur when a company conducts business activities within a specific geographical area, without directly involving foreign markets. This could mean the production, marketing, and sales are all confined within one country, like Bayer AG's Coppertone operations in the U.S.

Due to this setup, external factors such as changes in exchange rates do not influence the business significantly. All transactions are carried out in the domestic currency, which reduces exposure to international currency risk. Therefore, localized operations provide a stable environment for businesses, minimizing concerns like currency fluctuations.

• They simplify financial management by eliminating the need for currency conversion.
• Help in maintaining consistent pricing structures unaffected by exchange rate changes.
• Allow businesses to focus on domestic market strategies without worrying about international financial variables.

This stability can be advantageous, especially for companies not seeking to expand internationally.

International Business Strategies

International business strategies are approaches that companies use to conduct businesses across borders, tapping into new markets and expanding their operations globally. Unlike localized operations, these strategies require attention to several global factors, including currency fluctuations, trade regulations, and cultural differences.

Businesses implementing international strategies need to be adept at managing exchange rate risks. For instance, if Bayer AG were to expand Coppertone sales outside the U.S., fluctuations in the euro against the dollar become relevant. This would require hedging against currency risks to protect profits.

• Diversification across markets to spread risk and leverage growth opportunities.
• Implementation of currency hedging to mitigate financial risks from exchange rate changes.
• Developing culturally sensitive marketing and operational practices to adapt to different regions.

Successful international strategies allow businesses to capitalize on global market trends while managing inherent financial complexities.