General Electric Company's worldwide performance- evaluation system is based on a policy of decentralization. The policy reflects
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Assessments include how well the manager has dealt with government relations, progress made toward achieving certain targets, such as increasing market share, and success in maintaining good employee relationships. These measurements are based on the strategic plan and targets established between the manager and the parent-company supervisor at the start of the period.
GE conducts periodic operating reviews where each manager is reviewed by the level above.The focus is on planning, results, and the most recent estimates. This evaluation process provides corporate management with an opportunity to determine whether short-term actions are being taken at the expense of long-range goals. To minimize currency exposure, GE finances fixed assets with equity and holds the affiliate responsible for maintaining a balanced position on working capital. The policy is modified as necessary for varying circumstances.
Unlike MNCs that have centralized the financing and exposure management functions at the head office, GE makes exposure management a responsibility of its local managers, overseen by sector and corporate personnel. To avoid the transaction costs of having, for example, a French affiliate hedge its position by buying French francs forward, GE has provisions for internal hedging arrangements. Corporate treasury obtains currency exposure data from all affiliates and provides needed information on offsets. Therefore, units can execute a hedging agreement between themselves without going to outside sources. In setting their budgets, affiliate managers use the exchange rate they expect to prevail. General Electric believes that, although predicting rates of exchange is not an exact science, the managers of its foreign businesses have the necessary authority and tools to take actions that will enable them to achieve their budgeted income. These tools include hedging and pricing decisions. Managers can not only raise prices, cut costs, lead payments, lag receivables, borrow locally, and remit dividends quickly, but they can also take out forward contracts if available. The affiliate manager has the responsibility and authority to protect the unit against currency fluctuations and, therefore, is accountable for dollar profits regardless of exchange rate changes. According to a company spokesperson: "If an unexpected devaluation occurs, the affiliate's performance is still measured in terms of dollar income vis-à-vis budget. GE considers changes in the rate of exchange in the same way as other risks that occur in a country. For example, if an affiliate's sales are less than those budgeted for because of a recession in that economy, countermeasures are available to the affiliate. If one contends that these things are not controllable, how does one manage a company? We're not saying it's controllable in the sense that it can be prevented from happening, but it is susceptible to countermeasures before and after the event occurs."
REQUIRED
1. Compare GE's approach to performance evaluation with that of ICI (mentioned in the chapter).
2. Critically evaluate the strengths and weaknesses of each company's approach to the performance evaluation of its foreign managers as related to the problem of fluctuating currency values.
3. Which approach to performance evaluation do you support, and why?
Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...
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