Falcon Inc

Gunjan Kothari(27)
Global Appliance Industry: A
Glimpse
A consolidated industry with less than 10 companies
controlling 50% of the total market.

Slow growth pace hence making competition tougher

Three major segments: Low price, Mid price, Very high

price

Major players:Electrolux,G.E,Maytag,Whirlpool etc.

 Falcon Inc: A Brief Profile

A Publicly held U.S Co

A Global player in home appliance industry

Wide range of products including refrigerators, kitchen

appliances, washers, dryers etc

Presence in all three segments low price,mid price and

high price

Three foreign subsidiaries in Mexico,Denmark & Japan

 Falcon Inc: A Global presence
Falcon Inc Subsidiaries

Mexico Denmark Japan

High priced Low cost laundry
Product Refrigerators
machines
kitchen Appliances

Production Mexico U.S Japan

Sales Mexico Denmark U.S

Differentiator Growing No Low cost

demand competition
 Question 1
Under the current performance-evaluation
system (PES) at Falcon, how would you assess
the financial performance of the division
managers in Mexico, Denmark, and Japan?

Which manager should be awarded the

highest bonus, and which should be awarded
the lowest bonus?
 Current PES: Each Subsidiary is responsible for
budgeted US Dollar profit.

Year 2004 Mexico Denmark Japan

Budgeted 14,910,000 8,282,640 20,420,825
Profits( US $ )

Actual profits 14,937,721 9,691,788 17,839,177

( US $ )

Difference 27,721 14,09,148 (2,581,648)

Highest Bonus Lowest Bonus

 Question 2
Using the approach outlined in Appendix A, calculate the
nominal and real changes of exchange rates for Mexico,
Denmark and Japan during 2004?

In light of your calculations what revisions if any would you

make in the 2004 dollar budgets at the time of tracking them?

How would you assess the financial performance of the three

country managers of Falcon?

Which manager should be awarded the highest bonus? Why?

Evaluate appropriateness of the three country managers

responses to the changes in exchange rates?
 Nominal and Real exchange rate

Exchange rate Mexico Denmark Japan

(LC per US $ )
2003 10.72 6.88 119.8

2004 10.985 6.47 111.8

Real Exchange rate

Mexico: 10.72*1.05/1.023 11.00

Denmark : 6.88*1.043/1.023 7.014

Japan : 119.8*1.0225/1.023 119.74

 Presently Budgets have been evaluated by 2003 exchange rates
and performance of 2004 by the rates prevailing in 2004.

A common metric should be used for subsidiary evaluation, Hence

2004 budgets should be recalculated by using 2004 exchange
rates.

ROI method should be used to evaluate the performance of

managers.

 Mexico’s ROI:14937721/149100000*100=10%
 Denmark's ROI:9691788/20706600*100=47%
 Japan’s ROI:17839177/510520625*100=3%

Hence Denmark should be awarded highest bonus and Japan the

least
 Question 3: If ROI, rather than profit margin
were used as the performance measure
would the performance ranking of three
subsidiary be different?

 Describe the advantages and limitations of

using ROI as a performance indicator?

 Would you consider ROI as a superior

measure?
Advantages & Limitations of ROI
Comprehensive measure: Anything that affects financial
statements is reflected in this ratio

Simple, easy to calculate and understand

Can be used to compare performance of different units

Increase in ROI may reduce overall profits

Ignores cost of raising capital

 Question 4 : Evaluate the appropriateness of
Falcon’s use of the beginning of the year
exchange rate for budget setting, and
average-of-the-year rate for budget
tracking.

 Describe the approaches for preparing

country managers to better respond to
inflation and exchange rate changes
Falcon believes that the operating part of foreign exchange
risks should be born by subsidiary

However subsidiary managers should not be held responsible

for the same and common metric should be used for
comparison

Tools such as hedging of currency should be used so as to

safeguard forex risks
 Question 5 : Assume that for each of the past
five years, the Japanese subsidiary has
reported lower than budgeted profit margins
and ROI in dollar terms.If adjustments are
made for the real exchange rate changes
however its performance in each of those
five years turns out to be better than the
revised budget.

 Would you recommend closing Japanese

subsidiary? Why or why not?
 Real exchange rate has significant effect on competitive
positions.

A decline in nations real exchange rate makes its exports more

competitive and vice versa.
Eg:1$=10 yen earlier
1$=8 yen now
Hence Local currency profits would reduce

Now if real exchange rate is 1 $=9 yen the performance of company

would improve
Thank you