The Strategy Rule for Deciding on the Right Entry Mode

The strategy decision rule—use the right entry mode—is more difficult for managers to follow than the pragmatic rule, because it demands systematic comparisons of alternative modes. But it also guides managers to better entry decisions.

Our discussion of entry modes in the previous chapters should convince anyone that the entry decision process cannot be reduced to a formula, a set of rules, or even a complex computer model. Chapter 1 described the many external and internal factors than can influence the entry mode deci-sion: environmental, market, and production factors in the target foreign country; home country factors; and company product and resource/ commitment factors. As stated then, a company s choice of its entry mode for a given product/target country is the net result of several, often conflict­ing, forces.

As we can now recognize, another difficulty is the multiplicity of entry modes: the several variations of export, contractual, and investment modes and the several combinations of these modes to form mixed modes. It is by no means certain, therefore, that managers are always aware of the many entry modes available to them.

A comparison of alternative entry modes is also complicated by the need of managers to assess the advantages and disadvantages of each mode in terms of a company’s multiple objectives in the target market, objectives that are seldom fully consistent. An entry mode that scores highly on one objective (say, rate of growth in sales) may score low on another objective (say, profitability). Somehow, managers must decide on trade-offs among their several objectives. Managers may also find it hard to identify some of the advantages or disadvantages of a particular entry mode, to say nothing of measuring them. For example, our discussion of licensing indicated the possible cost of creating a competitor in third markets or the foreclosure of opportunity to enter a target market with a new entry mode at a later time.

This last remark points to another difficulty, one that is common to all strategic decisions. Entry mode comparisons need to be made between projected benefits and costs over a future period. Managers are comparing, therefore, expected benefits and costs of alternative entry modes, benefits and costs that are uncertain in some degree. Moreover, different entry modes (and the company assets associated with them) are subject to differ­ent market and political risks. Managers therefore need to adjust expected benefits and costs for risk.

Figure 15 brings these considerations together in an entry mode com­parison matrix. To fill out each row, managers should assess the specific entry mode in terms of the criteria listed at the top of the matrix. Next, they should use the columns to compare the alternative entry modes in terms of each criterion. To decide on the right entry mode, managers should then determine the relative importance or trade-offs among the criteria (which were identified earlier as important to the company), be­cause an entry mode could rank highly on one criterion and low on an­other. Of course, the entry decision would be greatly facilitated by a quantitative measure that captured all the criteria values for each entry mode—that is to say, a “summary” entry in a final column. Unfortunately, no such summary measure is likely to carry much credibility. But, as we shall see, it is possible to go part way in that direction.

Managers may view the strategy decision rule as too arduous or time-consuming to apply in the “real world.” But it is hard to deny the proposi­tion that managers should try to find the most appropriate entry mode for a target foreign market. Even a crude use of an entry strategy matrix holds the promise of better entry decisions. Given the complexity of the entry mode decision, what is demanded is not the abandonment of the strategy decision rule but rather an approach that facilitates systematic comparisons of alternative modes.

Source: Root Franklin R. (1998), Entry Strategies for International Markets, Jossey-Bass; 2nd edition.