Cases in International Finance, 2000; Moffett; Addison Wesley; ISBN 0-201-70086-7
Northwestern Paper Company ( Source/ Cases in International Finance pp. 287-91)
The establishment of overseas operations provides a company with significant competitive advantages in conducting international business. Direct involvement in important markets provides access to new customers and their expectations. There may be important cost advantages which contribute to lower pricing and larger margins on sales. From a financial perspective the company can gain new sources of financing from local institutions. It can offset some of the complexities of foreign currency management.
At the same time the establishment of overseas operations involves new aspects of business strategy emerging from new sets of intracompany relationships and new patterns of business approaches from the parent and the offshore units. Financially there are important issues in the business activities between parent and subsidiaries and reflected in transfer pricing decisions. There are issues in the potential for alternative relationships with non-company sources which may be competitive with the ongoing intracompany business. Stresses from these areas are reflected in financial dilemmas in specific transactions. These dilemmas require careful consideration of investment and financial strategy to resolve for the overall benefit of the company.
The Northwestern Paper Company case presents the issues of parent/subsidiary relationships and the financial strategies inherent in these relationships. The case reviews the company’s expectations for ongoing business between the U.S. company which is the source of product, and subsidiaries in Korea and Indonesia which are active in key overseas markets. The situation describes the financial issues the dimensions of strategy, intracompany transactions and market prices. Complicated issues are raised which illustrate complexities in the financial management of international businesses.
The case focuses on three primary participants:
Subsidiary in South Korea
Subsidiary in Indonesia
Three aspects of the company’s situation are highlighted:
Transfer pricing on intracompany business
Competition between overseas subsidiaries
The team should address the following:
Situation Analysis – what were the critical factors for the company as a whole in managing its financial relationships with its international subsidiaries?
2. Strategic Interest – examine the priorities and expectations of the parent company in the establishment of the international ventures. How did these elements fit with important realities?
3. Subsidiary Interests – review the objectives, priorities and business needs of the two subsidiaries. Compare the interests of the subsidiaries to the interests of the parent. Compare the relationship between the subsidiaries and their motivations for cooperation or conflict.
4 .Parent as Production Center – what was the reasonableness of the company’s expectation to focus production on the established capacity in the United States? What were the financial considerations and stresses in doing so?
5. International Competition – review the financial realities in the overseas marketplace including pricing expectations, cost alternatives, financing and sales policies on transactions and foreign currency exposures.
Australian Transaction – analyze the opportunity for Northwestern in terms of the best interests of the company and the ability to the parent, Korea and Indonesia to provide the most competitive response.
Position Papers – provide three 1 to 2 page advocacy memos originating from the parent, Korea and Indonesia managments supporting their positions regarding the Australian transaction.
Transfer Pricing Analysis – examine the guidelines established by the parent in the transfer pricing program. Analyze their effect and efficiency on American, Korean and Indonesian profit centers. Suggest alternatives or modifications which may have been superior to the established system. Explain the basis for your suggestions.
Consequences for International Sales – did the company’s strategy and guidelines enhance its competitiveness and earning potential in its overseas business. What were the consequences for the overseas subsidiaries and was there balanced motivation for the subsidiaries to work effectively under the parent’s guidance?
6. Case Book Questions – consider the questions on p. 291 and be sure to integrate them into your answers or to provide further responses as necessary.
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