Application 
Kodak Plans for Currency Changes
Historically, Eastman Kodak focused its exchange risk management efforts on hedging near-term transactions. It now looks at exchange rate movements from a strategic perspective. Kodak’s moment of truth came in the early 1980s when the strong dollar enabled overseas rivals such as Fuji Photo Film of Japan to cut prices and make significant inroads into its market share. This episode convinced Kodak that it had been defining its currency risk too narrowly. It appointed a new foreign exchange planning director, David Fiedler, at the end of 1985. According to Fiedler, “We were finding a lot of things that didn’t fit our definition [of exposure] very well, and yet would have a real economic impact on the corporation.”8 To make sure such risks no longer go unrecognized, Fiedler now spends about 25% of his time briefing Kodak’s operating managers on foreign exchange planning, advising them on everything from sourcing alternatives to market pricing. Kodak’s new approach figured in a 1988 decision against putting a factory in Mexico. Kodak decided to locate the plant elsewhere because of its assessment of the peso’s relative strength. In the past, currency risk would have been ignored in such project assessments. According to Kodak’s chief financial officer, before their reassessment of the company’s foreign exchange risk management policy, its financial officers “would do essentially nothing to assess the possible exchange impact until it got to the point of signing contracts for equipment.”9
The ability to plan for volatile exchange rates has fundamental implications for exchange risk management because there is no longer such a thing as the “natural” or “equilibrium” rate. Rather, there is a sequence of equilibrium rates, each of which has its own implications for corporate strategy. Success in such an environment—in which change is the only constant—depends on a company’s ability to react to change within a shorter time horizon than ever before. To cope, companies must develop competitive options—such as outsourcing, flexible manufacturing systems, a global network of production facilities, and shorter product cycles.
In a volatile world, these investments in flexibility are likely to yield high returns. For example, flexible manufacturing systems permit faster production response times to shifting market demand. Similarly, foreign facilities, even if they are uneconomical at the moment, can pay off by enabling companies to shift production in response to changing exchange rates or other relative cost shocks.
The greatest boost to competitiveness comes from compressing the time it takes to bring new and improved products to market. The edge a company gets from shorter product cycles is dramatic: Not only can it charge a premium price for its exclusive products, but it can also incorporate more up-to-date technology in its goods and respond faster to emerging market niches and changes in taste.
With better planning and more competitive options, corporations can now change their strategies substantially before the impact of any currency change can make itself felt. As a result, the adjustment period following a large exchange rate change has been compressed dramatically. The 100% appreciation of the Japanese yen against the dollar from 1985 to 1988, for example, sparked some changes in Japanese corporate strategy that have proven to be long lasting: increased production in the United States and East Asia to cope with the high yen and to protect their foreign markets from any trade backlash; purchase of more parts overseas to take advantage of lower costs; upscaling to reduce the price sensitivity of their products and broaden their markets; massive cost-reduction programs in their Japanese plants, with a long-term impact on production technology; and an increase in joint ventures between competitors.