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Foreign Exchange Market Impact over Nokia
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5. Foreign Exchange Market Impact over Nokia
"The foreign exchange risk usually affects businesses that export and/or import, but it can also affect investors making international investments. For example, if money must be converted to another currency to make a certain investment, then any changes in the currency exchange rate will cause that investment's value to either decrease or increase when the investment is sold and converted back into the original currency" (Investopedia, 2010). This way unfavorable market volatility will have a huge negative impact in Nokia’s profitability.
Large companies such as Volkswagen, Airbus and Philips, among others, have experienced a foreign exchange loss on profit arising from unhedged sales in dollar countries. Moreover, some companies, such as Heineken, Nokia and again Airbus, have already announced that the weakened dollar will keep affecting returns, due to mere short-term hedges in previous years.
The most common of these solutions are conversion of contracts into domestic currency or transferring the production abroad. The foreign exchange risk for a company will increase with the length of its foreign commitments. Relative small changes in the foreign exchange rates can have a huge impact on the profit and solvency of a company (Wijckmans, 2005).
According to the foreign exchange policy guidelines of the Group, material transaction foreign exchange exposures are hedged. Exposures are mainly hedged with derivative financial instruments such as forward foreign exchange contracts and foreign exchange options. The majority of financial instruments hedging foreign exchange risk have duration of less than a year. The Group does not hedge forecasted foreign currency cash flows beyond two years. One example from Nokia is KongZhong Corporation, a leading mobile Internet company in China, reaching a non-binding agreement with Nokia Growth Partners (NGP) to receive an investment of about US$6.8 million in 5-year convertible senior notes. NGP would also receive warrants to purchase an additional 2.0 million American Depositary Shares (ADS) at US$5.0 per ADS, exercisable within five years (PR Newswire Association LLC , 2009).
Nokia uses the Value-at-Risk ("VaR") methodology to assess the foreign exchange risk related to the Treasury management of the Group exposures. The VaR figure represents the potential fair value losses for a portfolio resulting from adverse changes in market factors using a specified time period and confidence level based on historical data. To correctly take into account the non-linear price function of certain derivative instruments, Nokia uses Monte Carlo simulation. Volatilities and correlations are calculated from a one-year set of daily data. The VaR figures assume that the forecasted cash flows materialize as expected.
6. Culture and Environment
Culture of a MNC is very vital when conducting business. Colleagues of different ethnic groups should be clear in communication as well as in interaction. While understanding the core cultural competencies within MNC it is equally important to apply them in the local contents (Smedley, 2008).
Some of the key highlights in the ‘Nokia Way’ can be listed as follows: • In 2007, it held 16 "Nokia Way Cafe" events, which saw 2,500 employees worldwide getting together to discuss what they perceived the driving cultural values of their company to be. • The four values, ‘Engaging you’, Achieving together’, ‘Passion for Innovation’ and ‘Very Human’ are drilled down to the new recruits • Job rotation is highly valued by the employees and transparency in selections • Work-life balance and flexibility in home worker facility
As a MNC the belief that a company should take into account the social, ethical, and environmental effects of its activities on its staff and the community around it is defined as the Corporate Social Responsibility (CSR). Let us also look at Nokia’s belief in company's accountability towards the community.Some of the key CSR initiatives of Nokia are as follows: • A global leader in recycling, with the industry’s largest voluntary recycling program. It is now operating in 85 countries, and working hard to increase awareness to encourage more customers to recycle their old phones. • Responsible ways of working have become business as usual at Nokia. • China headquarters in Beijing has received global recognition as one of the most environmentally sensitive buildings in the world. • Nokia also has been highly ranked for its environmental sustainability by several organizations worldwide. These include the Dow Jones Sustainability Index, the Carbon Disclosure Project and more recently, the Greenpeace Green Electronics Guide. • The GSM Association recently recognized Nokia's commitment and actions with its environmental achievement award for Nokia this year. • Nokia also is working with the industry to reduce the environmental impact of mobile phone chargers.
Summary
Mobile phones have already become part of our lives. People want to be truly connected, independent of time and place, in a way that is very personal to them. Nokia’s promise is to connect people in new and better ways. Nokia’s strategy is to build trusted consumer relationships by offering compelling and valued consumer solutions that combine beautiful devices with context enriched services.
But at the same time as a multinational corporation Nokia has to be mindful in how the future is planned and executed. This paper gave some insight information of Nokia’s market entry strategy, foreign direct investments, foreign exchange risk culture and environment. Lessons can be learnt from Nokia on the importance of interacting and integrating these segments as often as possible in order to ensure survival in economic turmoil. New markets has to be tapped, new products and services have to be invented and above all a positive culture should be encouraged to be adoptive to change as and when the market conditions change.
References
1. Seeking Alpha. (2009, April 17). Business. Retrieved October 8, 2010, from: http://seekingalpha.com/article/131449-nokia-corporation-q1-2009-earnings-call-transcript
2. Blau, J. (2008). Finland to implement new innovation strategy. Research-Technology Management , 51 (6), 2. Bradford, R. W., Duncan, P. J., & Tarcy, B. (2000). Simplified Strategic Planning. Man Hatten: Chandler House Press.
3. Cable News Network. (2009, July 20). FORTUNE. Retrieved October 14, 2010, from CNNMoney.com: http://money.cnn.com/magazines/fortune/global500/2009/snapshots/6652.html
4. Cullen, J. B., & Parboteeah, P. K. (2010). International Business-Strategy and the Multinational Company. New York: Routledge.
5. Fischer, T., Gebauer, H., & Fleisch, E. (2008). Redefining product strategies in China: overcoming barriers to enter the medium market segment. Strategic Direction , 24 (5), 3-5.
6. Hill, C. W., & Jain, A. K. (2007). International Business: Competing in the global market place (6th ed.). New York: The Macgraw-Hill Companies Inc.
7. International Security & Counter Terrorism Reference Center. (2009). Event Brief of Microsoft and Nokia Alliance Announcement Conference Call - Final. Thomson Financial.
8. Investopedia. (2010). Foreign-Exchange Risk. Retrieved October 15, 2010, from Investopedia: http://www.investopedia.com/terms/f/foreignexchangerisk.asp
9. Kallasvuo, O. P. (2007, August 23). India Becomes Nokia's Second-Largest Market, Surpassing U.S. (S. Bhatnagar, Interviewer)
10. Lesser, C. (2009). Market Openness, Trade Liberalisation and Innovation Capacity. Organisation for Economic Cooperation & Development , 8 (4), 65-107.
11. NOKIA. (2010, July 22). Press Releases. Retrieved October 14, 2010, from NOKIA Connecting People: http://www.nokia.com/results/Nokia_results2010Q2e.pdf
12. Nokia. (2008). Story of Nokia. Retrieved September 11, 2010, from Nokia Corporate: http://www.nokia.com/about-nokia/company/story-of-nokia Porter, M. (1980). Competitive Strategy. Moskow, 2005 (translation). http://vernikov.ru/media/K2/item_attachments/competitive_strategy.pdf
13. Smedley, T. (2008, April 17). What you achieve, you achieve together. People Management , 14 (8), pp. 34-37.
14. PR Newswire Association LLC . (2009, February 18). KongZhong Receives Investment from Nokia Growth Partners. Retrieved October 5, 2010, from Academic One File Infotrac: http://0-find.galegroup.com.library.ecu.edu.au/gtx/infomark.do?docType=IAC&finalAuth=true&contentSet=IAC-Documents&action=interpret&type=retrieve&tabID=T001&prodId=AONE&docId=A193907883&version=1.0&userGroupName=cowan&Z3950=1&searchType=BasicSearchForm
15. Tolkoff, S. (2009). STRATEGIC alliances (Business). Orange County Business Journal , 32 (9), 3-36.
16. Wijckmans, J.-W. (2005, January). Reducing long-term forex transaction risk under volume uncertainty. Risk , 18 (1), pp. 70-73.
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