Advantages of GCU
Advantages of GCU
In order to assure a truly global perspective and strategy the GCU would constitute the primary currency for preparation of master budgets and standards within MEs. The master budget would then be partitioned into operating budgets for each business unit and translated into the relevant currency(ies) of the business units so that the management of the business units would know what is expected of them and their unit in financial terms as expressed in the business unitīs functional currency. Reports of actual performance are translated from each functional currency into the GCU so that headquarters management can compare the actual performance of the different business units and their management to the budgeted (planned) GCU performance, that is, evaluation is carried out on a global basis.
If a ME opts for worldwide goals, a prerequisite may be to give the financial objectives of the ME a global denominator. The GCU may serve this function. Because a GCU is more neutral in nature than the parentīs currency the management of the foreign business units are more apt to accept evaluation of both their unit and themselves in the MEīs GCU than evaluation in the parentīs currency. The use of a GCU may, in other words, have a positive motivational effect on the foreign business unit management. Another problem in international evaluation is the volatility of currency values, that is, exchange rates. The use of a GCU would reduce the effect that extreme fluctuations in the individual operating currencies would have on the MEīs planning and performance evaluation system. The weakening of one currency within the GCU would be counterbalanced by the strengthening of another currency within the GCU, thus the overall effect of the individual currency fluctuations is smoothed when measured as a currency composite, that is, in the GCU. A situation where a foreign subsidiaryīs currency is weakening rapidly in relation to the parentīs currency would have a negative motivational effect on the subsidiary management if performance solely is measured in the parentīs currency and the subsidiary management is held responsible for the declining results due to currency devaluations. This may lead subsidiary management to undertake hedging activities which are from the overall corporate perspective dysfunctional. In other words, the use of a GCU may have a positive motivational effect because of its neutrality of currency denomination and stability in value. The use of a GCU would thus facilitate the planning and performance evaluation process within the ME and assure a global orientation.
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pontus.troberg@shh.fi