What Happens When the Host Country Environment Changes? A Tale of Currency Devaluation You Have Successfully Outsourced – Part One
By Denise A. Harrison
Note: This post is the first in a series of posts from Denise A. Harrison’s article What happens When the Host Country Environment Changes originally posted in Compass Points in November 2004. Part One will introduce the topic, discuss how Competition, Customers, Technology and the Economy will respond.
Yes, it sounds terrific, you successfully set up your operation in a country with significantly lower labor costs – and now the country’s currency is devalued. What could be better? Your source of cheap labor is even cheaper – but wait, is it that easy? Can you just sit back and rake in the profits?
As president of a financial services firm I faced this situation. Our labor-intensive operations were processed by a number of Mexican maquilladora plants. The exchange rate in 1993 was approximately 3 pesos to the dollar. In December the bottom dropped out of the Mexican financial market and the peso devalued to 6 peso/$. Labor costs were cut in half. Time to kick back and relax? No way, time to assess how our competition would respond to the reduced operating cost – all of us were processing in Mexico. Time to re-evaluate our assumptions and update our strategy!
Competition: how will they respond to the devaluation?
Competitors had three choices:
- Keep prices the same and reap the benefits
- Lower prices and call on prospective customers to gain market share.
- Sit and wait and respond after the first company starts cutting prices
Our assumptions concerning competitors’ future moves: we had recently become the number one player in the industry and our competitors were still smarting from the loss of market share. We assumed that they would respond aggressively by lowering prices to try and regain market share.
Customers – what would they do?
Customers had moved to us due to our superior service, processing speed and accuracy. While these benefits were important when prices were similar a significant drop in prices would be incentive for the customers to move their business. Switching costs were fairly low.
We had been investing in technology to automate the operation – so far the processing exceptions stymied out attempts to automate. With labor costs cut in half some of our investments in technology could be slowed, it was cheaper to process with labor than to automate the operation.
The peso devaluation caught global economists by surprise and the forecasts following the devaluation included the spectrum of options:
- Peso would stay where it was.
- Peso would return to previous level.
- Peso would continue to devalue.
Nothing like a little diversity of opinion to help with the decision making process. There was no clear cut answer so we decided flexibility would be an important consideration as we developed the strategy to meet this changing environment.
In the next part, we will discuss The assumptions we made, Strategic Options, Evaluation of Strategic Options and Strategic Choice.
Have you successfully outsourced and the host country’s environment changed? Attend the Simplified Strategic Planning Seminar for more instruction on how to handle this subject as well as all other aspects of Simplified Strategic Planning.
Denise Harrison is a senior consultant for the Center for Simplified Strategic Planning, Inc. She can be reached at firstname.lastname@example.org.
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