Strategic Planning And External Environments In Healthcare Organisation

Description




Scenario:

A small independent hospital in rural Georgia is seeking to attain Magnet Status. This designation demonstrates to stakeholders that the organization is committed to delivering high-quality patient care. With this designation, the organization can easily attract and retain a highly-engaged clinical staff. Moreover, it provides the organization an opportunity to market itself to potential patients as the place to receive top-quality care. This means that the organization could realize a greater market share of insured and private pay patients traveling as far as 100 miles just to receive the quality services. It also positions the organization to enter into joint ventures with physician groups eager to provide new services, which would lead to increased revenue streams.

Although the designation sounds like a great opportunity for the organization, the board of directors is split on their support of this designation. The board members in support of the designation understand the great value that this program will bring to the facility; however, those in opposition learned from a research study that non-magnet hospitals had better infection control and less post-operative sepsis. They also learned from another study that working conditions in a magnet facility are not better than those in non-magnet facilities. Therefore, the dissenting directors have concluded that the organization should not invest its time and resources to seek this credential. The CEO must get support from an overwhelming majority of the board to move forward with pursuing this designation.

Review the provided scenario and consider external environmental factors that may impact the organization’s strategic planning (e.g., policy and economics, laws and ethics, health care quality, and population health).


IDENTIFY THE FOLLOWING IN THE EXECUTIVE SUMMARY:


1.) Impact of external environmental factors on strategic planning


2.) Recommendations of strategies to address external factors and limit their influence on organizational


operations

International Journal of Business and Society, Vol. 15 No. 3, 2014, 437 – 446
THE STRATEGIC PLANNING OF SMES IN MALAYSIA:
A VIEW OF EXTERNAL ENVIRONMENTAL SCANNING
Wei-Hin Cheng♣
Universiti Utara Malaysia
Kadzrina Abdul Kadir
Universiti Utara Malaysia
Abdul Manaf Bohari
Universiti Utara Malaysia
ABSTRACT
The business world today is getting more competitive and many companies are looking for
ways to survive in the market competition especially Small Medium Enterprises (SMEs).
This research was aimed at investigating whether formal strategic planning is relevant to
SMEs and whether the strategic planning model suggested by Wheelen and Hunger (2008)
is applicable to SMEs in the Asian context and in particular the Malaysian context. The
main focus was to determine how important external environment scanning was to SMEs
in the Northern states of Malaysia and do SMEs perform the external environment scanning
which resemble the Wheelen and Hunger (2008) strategic planning model. The sample of the
research comprised of SMEs in the Northern states of Malaysia which covered Perlis, Kedah
and Penang. The population of the samples was derived from the directory of SMEs from the
website. A purposive sampling was used and a cross sectional study was conducted where data
was collected over a period of weeks through mail questionnaire and individual administrated
questionnaires. The result of the research suggested that most SMEs do have some form of
formal strategic planning. Further to this, it also indicated that environment scanning is getting
more attention from the SME in today’s competitive market. The findings suggested that most
of the SMEs do have strategic planning which resembles the Wheelen and Hunger Strategic
Planning Model. There is a strong indication that the model of Wheelen and Hunger Strategic
Planning is applicable to the practice of SMEs in the Northern region in Malaysia.
Keywords: Small Medium Enterprise; Strategic Planning; Environment Scanning.
1. INTRODUCTION
Small and Medium Enterprise (SMEs) are vital to determine the growth of economy in all
countries. In the heat of today’s competition, most of the SMEs are struggling to survive in the
market. In order to be successful, SMEs need to possess various types of resources including
financial, technological, human and knowledge resources (Brush et al., 2001). According to
♣ Corresponding author: Wei-Hin Cheng. School of Business Management. College of Business, COB Main Building. Universiti
Utara Malaysia 06100 UUM Sintok, Kedah, Phone+ 604- 928 7438. E-mail: cheng.wh@uum.edu.my
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The Strategic Planning Of Smes In Malaysia: A View Of External Environmental Scanning
Hashim (2011), SMEs in Malaysia represent majority of the business enterprises and they
make up more than 90% of the total number of businesses as they can be found in various
industries. As reported in the SME Annual report 2009/2010, SMEs accounted for about 99%
of total business establishments, 56% of total employment and 19% of the total exports of the
country.
Despite their importance in the national economy, studies have revealed that SMEs in Malaysia
encounter various problems in their operations that affect not only their sustainability but also
their business activities. This study intended to help managers to understand how strategic
planning can be done with the model suggested by Wheelen and Hunger (2008).
The main objective of the journal was to examine whether SME did strategic planning and
whether the strategic planning model suggested by Wheelen and Hunger (2008) applies to
the SME in the Asian context, in particular the Malaysian context. The research attempted to
examine whether external environment scanning was done in SMEs in Malaysia as proposed
by the model and how the environmental factors fared in terms of their importance to these
SMEs. This study contributed to knowledge on how relevant the model is to SME in Northern
States in Malaysia and how the Wheelen and Hunger (2008) model can help SMEs to do their
strategic planning and especially the environmental scanning.
2. LITERATURE REVIEW
According to Normah (2006), the Chief Statistician from Department of Statistics Malaysia,
SMEs has been the backbone of the Malaysian economic growth in driving industrial
development. This is due to their sheer numbers, size and nature of operations, in promoting
endogenous sources of growth and strengthening the infrastructure for accelerated economic
expansion and development in Malaysia. For such reasons, the success of SMEs is very
important to ensure the consistent growth of the country’s economy. The main focus of this
study was to examine whether SME do their strategic planning and whether their strategic
planning resembles the Strategic Planning Model suggested by Wheelen and Hunger (2008)
specifically in the first stage of the planning where the external environment scanning was
proposed by the model.
Previous researches had consistently showed that most SMEs do not engage in strategic
planning (e.g., Robinson & Pearce 1984; Sexton & Auken 1985; Berman, Gordon & Sussman
1997; Orser, Hogarth-Scott & Riding 2000; Robinson& Pearce 2001 and Beaver 2003).
According to Gable and Topol, 1987), environmental scanning is a necessary process which
prelude to strategy formulation to enable the firm to understand its external environment
in terms of factors that can influence its resources. This should be done so that SMEs can
develop responses to secure or improve its future position to the changes of the environment.
Scanning the environment is the first stage in the process of understanding and therefore in
the process of linking strategy and the firm’s external environment (Hambrick, 1982; Daft
et. al., 1988). Based on the findings from previous study done by Haase and Franco (2011),
SMEs suffer from resource constraints, they have lack of infrastructure to obtain and analyze
external information, unlike larger companies which are able to obtain external information
from specialized sources. Previous research also indicated that SMEs faced with challenges in
obtaining specialized external information and in environment of uncertainty. SMEs should,
Wei-Hin Cheng, Kadzrina Abdul Kadir and Abdul Manaf Bohari
439
therefore develop effective strategic planning where they must obtain relevant information of
the external environment.
Since SMEs faced the problem in obtaining external information, are they able to benefit
from the strategic planning model suggested by Wheelen and Hunger (2008)? Boyd and Fulk
(1996) showed that systematic scanning should be used by smaller organizations to help them
understand and cope with complex environmental uncertainties.
Wheelen and Hunger (2008) argued that Strategic Management is a rapidly developing field
of study that has emerged in response to increasing environmental turbulence. According to
the authors, this area of study looks at managing the organization as a whole and attempts to
explain why some organizations performed well while others did not.
The Strategic Planning Model developed by Wheelen and Hunger (2008) involved four major
steps which are: environmental scanning, strategy formulation, strategy implementation and
strategy control and evaluation. The scope of the strategic planning process (Figure 1) covers
organization –wide issues in the context of a whole range of environmental influences. The
Strategic Management process involves organization, management and environment as a
whole. Thus in understanding the Strategic Management process and how it works, a general
knowledge of the organization, its internal and external environments and management is
required (Wheelen & Hunger, 2008).
Environment scanning is aimed at gathering and analyzing data from outside the organization
(Daft and Weick, 1984). Aguilar (1967) defined environmental scanning as the acquisition
and the use of information about events, trends and relationships in an organization’s external
environment. This knowledge is vital for the organization and would assist the management
in planning the future course of action. Environment scanning helps managers to better
understand the development of the market and assists the strategic planning efforts (Hambrick,
1982; Lester & Parnell, 2008).
Figure 1: The Wheelen and Hunger Model of Strategic Planning
Notes: Legend: 1a to 4a are element for each level of strategy planning 1a: external environment
(PEST); 1b: industry environment; 1c: Internal environment 2a: vision and mission; 2b: objectives;
2c: strategy; 2d : policies 3a: program, 3b: budget; 3c: procedures 4a: evaluation and control.
Source: Wheelen and Hunger (2008).
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The Strategic Planning Of Smes In Malaysia: A View Of External Environmental Scanning
Stoffels (1994) suggested that studying the external environment should be the first thing to
do in strategic thinking. May (2000) argued that environmental scanning used the external
information for strategic decision making and these information will be used by organization
to react quickly, adapting its strategy at the right moment and to guard against threats and
future constraints (Strandholm & Kumar, 2003).
Haase and Franco (2011) analyzed the increased importance for environmental scanning
and reported that scholars have published a number of studies of environmental scanning
in different industries namely the manufacturing (Jennings & Jones, 1999), services and
retail (Folsom, 1991), tourism and hospitality and health care (Davis et. al. 2008), traffic
management (Jennings and Jones, 1999) and biotechnology (Antunes and Canongia, 2006,
Berard & Delerue, 2010)
Haase and Franco (2011) also found that the discussion of the external environment information
sources used in the environmental scanning is somewhat scanty and centered on large
organizations and for small and medium sized enterprises, timely and relevant information
sources from the socio economic surroundings is equally important. They found in their
research that size of an organization do in fact have an impact on environmental scanning.
Smaller firms do not scan as broadly as frequently as larger companies. Smaller firm under
utilised certain external information for their competitiveness (Haase & Franco, 2011).
3. METHODOLOGY
The primary goals of this study were to examine whether SMEs in the northern states of
Malaysia do strategic planning and how the strategic planning process is done. The sample
of the research comprised of SMEs in the Northern Region of Malaysia which covered the
states of Perlis, Kedah and Penang. The researcher obtained the population of SMEs from the
directory of Small Medium Enterprise which is accessible through the website. A purposive
sampling was chosen as the sampling design for the reason that companies which were chosen
have to qualify certain requirements before they can be used as respondents or before they
are considered as SMEs. As this was a cross sectional study, the data was collected over a
period of weeks and data was gathered from September 2011 to December 2011. The data
came from two sources: mail questionnaire and individual administrated questionnaire. For
mail questionnaire, two hundred and fifty questionnaires were mailed to the respective SMEs
with the help of a research assistant. The respondents were asked on whether they do strategic
planning and whether they utilized each steps suggested by Wheelen and Hunger (2008)
model in their strategic plans (The strategic plan of Wheelen and Hunger (2008) consists
of environment scanning, strategy formulation, strategy implementation, strategy evaluation
and control). The strategic planning questionnaire was operationalzed using the Wheelen and
Hunger Model (2008).
As for individual administrated questionnaire, one hundred questionnaires were distributed
through self-administered method with the help of research assistants. Statistical Package for
the Social Sciences (SPSS) version 19.0 was used to analyze the data collected. In terms of
data processing, five statistical techniques were used for different purposes. These included
descriptive statistics, mean, median, standard deviation. For inferential statistics, crosstab
results were obtained and chi square results were conducted. The respondents’ demographic
441
Wei-Hin Cheng, Kadzrina Abdul Kadir and Abdul Manaf Bohari
variables were analyzed using descriptive statistics such as frequencies and percentages. While
other items were measured based on the five point Likert scale and ordinal scale. Due to this
reason, only non parametric tests such as chi squares were performed to analyze the results.
4. FINDINGS
A total of 300 questionnaires were mailed to SMEs in the Northern states (Perlis, Kedah and
Penang). Out of the 118 returned questionnaires, 10 questionnaires were discarded due to
incomplete data. Hence, 108 questionnaires were used in the statistical analysis representing
a response rate of 36%. From, the 108 companies which responded, 52(55%) companies
were from Kedah, 33 (35%) companies were from Perlis and only 9 (9.5%) from Penang.
In terms of industry, 73 (77%) companies were from other industries, 5(4.8%) in furniture,
7 (6.7%) in cosmetics, 3 (4%) motor vehicle, 7 (7,7%) in .hotel and 1 (1%) in education
industry. Most of the companies which responded have one owner (42%), two owners (36.1%),
three owners (14.8%), while 6 (7.4%) companies have four and more owners. The highest
percentages were recorded for companies with 10-50 staff (58%), 51-100 staff (31%), 101150 staff (5.6%) and above 151 staff (4.1%) respectively. In terms of start-up capital 34
companies (32%) have a start-up capital of less than RM50,000, 28 companies (26%) have a
start-up capital of RM50,001-RM100,000, while 26 companies (27%) have a start-up capital
of RM101,000 – RM500,000 There were only 17 companies(16%) with start-up capital of
more than RM500,000. Most companies which responded were established companies with
4-6 years of establishment (24%), 10-12 years (17.5%), 1-3 years (16. %), 16-18 years (10%)
and more than 21 years (9.3%) respectively. Most respondents who were interviewed were 1)
Managing Director (26%), 2) CEO (16.3%), 3) Sole Proprietor (16.3%), 4) Manager (16.3%)
and 5) Senior Manager (8.7%).
4.1. How do SMEs do their Strategic Planning?
Respondents were asked if they do formal strategic planning which resembles the elements
and the four stages of Wheelen and Hunger (2008) model.
4.2. Does your company do strategic planning (conduct external environment scanning)
and how important it is?
The table below shows the results whether the respondents conducted strategic planning
(external environment scanning) and how important it was to them. Out of 81 respondents
who answered this question, 65 of them said that they conducted strategic planning formally
and do environmental scanning. Only 16 of them said that they did not scan the environment.
Of those who said that they scanned the environment, 47 of them felt that it was important and
very important to do so.
Table 1: Result of Environmental Scanning
Conduct Environmental
Scanning
Count
Very not
Important
Not
Important
Neutral
Important
Very
Important
Yes
No
Total
65
16
81
5
5
6
6
7
7
25
25
22
22
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The Strategic Planning Of Smes In Malaysia: A View Of External Environmental Scanning
4.3. If your company do environmental scanning, which environmental factors would be
most important?
Table 2 depicts that if the respondents have done environmental scanning what are the factors
(political, economical, legal, social, and technological) they would consider important and
how these factors fared in terms of very important, not important, neutral, important and very
important.
Table 2: Importance of External Factors in Environmental Scanning For Those Who Do Environmental
Scanning
External Environment
Scanning Factors
Very not
Important
(Factors of External Environmental Scanning)
Not
Very
Important Neutral Important Important
Total
Political and legal factors.
6
9
24
27
15
81
Environmental Scanning Factors
Economic factors
1
2
8
27
43
81
Socio-cultural factors.
2
3
28
31
16
80
Technological factors.
0
4
15
34
27
80
Bargaining power of suppliers.
1
2
13
36
29
81
Bargaining power of buyers.
1
1
7
44
26
79
Threat of substitute products.
2
11
26
37
4
80
Intensity of rivalries.
1
2
18
29
30
80
Importance of trade block.
8
13
26
29
13
79
Importance of labor union
8
15
31
15
9
78
NGOs (non government
organization)
14
15
34
12
4
79
Government agencies
5
4
20
36
16
81
Community
0
6
16
36
23
59
Financial institution
2
4
12
36
27
80
Threat of new entrants
1
7
20
48
5
81
From the results above, the importance of external environment factors can be illustrated in
Figure 2 below.
Figure 2: Importance of Environmental Factors
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Wei-Hin Cheng, Kadzrina Abdul Kadir and Abdul Manaf Bohari
The histogram shows that in terms of environment factors most SME responded that in the
external environment scanning the most important factor is the economic factor (B7b). This
is followed by B7f (bargaining power of buyers), B7e (bargaining power of suppliers), B7n
(financial institution), B7d (technological factors) and B7h (intensity of rivalries), B7m
(community) and B70 (threats of new entrants). External environmental factors that are less
important (in descending order -higher to lower order) are: B7b government agencies, B7c
socio-cultural factors, B7a political and legal, B7g threats of substitute products, B7i trade
block, B7j labor union and B7k non government organization.
4.4. Does the Wheelen & Hunger Model diagram resemble your company’s strategic
management planning?
There were 100 respondents who answered this question. Out of this hundred, 59 respondents
or (54.6%) answered yes, while 49 respondents or (45.4%) answered no. In other words more
than half respondents agreed that their strategic planning process do somewhat resembles
Wheel and Hunger Strategic Planning Model.
Of those who agreed that the model resembled their strategic planning process, 52% said that
the model exactly resembled their strategic planning,
A Chi Square test was further conducted to see if those who think that if their strategic planning
process resembled the Wheelen & Hunger model, will there be a tendency that it will exactly
follow the Strategic Planning Model suggested bu Wheelen & Hunger (2008). The Chi Square
Test result provided below is significant at 0.000 (“p” less than 0.001): which suggested that if
the SME do strategic planning, it will follow the Wheelen & Hunger (2008) model.
Table 2: Chi Square Test. (If strategic planning process resembles Wheelen and Hunger Model,
there will be tendency it will be exactly the same as their strategic planning process)
Pearson Chi-Square
Likelihood Ratio
Linear-by-Linear Association
N of Valid Cases
Value
df
Asymp. Sig. (2-sided)
101.084
137.309
77.347
108
8
8
1
.000
.000
.000
5. DISCUSSION OF FINDINGS
Major findings of the study indicated that SMEs do have some form of formal strategic
planning and further to this, most of their strategic planning resembles that western Strategic
Planning Model suggested by Wheelen and Hunger (2008). In terms of environment scanning,
most respondents indicated that environmental scanning is important to them. Among the
environmental factors, the most important factor that the respondent felt was the economic
factor, this was followed bargaining power of buyers, bargaining power of suppliers, financial
institution, technological factors, intensity of rivalries, community and threats of new entrants.
Economic factors which cover economic growth of the country, purchasing power, employment,
inflation, taxation etc were the most vital factors to the SMEs to determine their survival in
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The Strategic Planning Of Smes In Malaysia: A View Of External Environmental Scanning
business and hence, formulation of strategies. This was followed by technological factors like
new product development, product innovation or automation. Political factors were considered
next, like stability of the government, change of the government, laws or regulations, The
research provided support to earlier findings of Beck (2007) where external environmental
scanning factors were examined in relation to SMEs performance, These environmental
factors were found to be significantly important to the organization in terms of performance.
The findings were also in consistent with the study which was done by Ngamkroeckjoti
and Speece (2008) where SMEs were found to benefit from environmental scanning when
a comprehensive scanning was done to their new product development. Their study clearly
suggested that SMEs which conducted environmental scanning were able to develop better
strategies and the environmental scanning practices have an influence in the success of the
company. Further to this the authors viewed environmental scanning as a strategy tool and
companies should scan the environment for a long term objectives (five to ten years). The
findings were also in consistent with research done locally by Hashim (2011) who found that
economic factors were the most important factors considered in environmental scanning.
Although many earlier research found that smaller companies are incapable of formal
strategic planning and environmental scanning, this research has proven otherwise. One of the
reason of why SMEs in the Northern states do have some form of formal strategic planning
and environmental scanning could be due to the reason of the active role of the Malaysian
government. The Malaysian government emphasized and focused a lot on the growth of SMEs
as it is the backbone of the Malaysian economy. They have provided a lot of assistance,
training, education and support to these SMEs through various government agencies or bodies.
In fact, each year during the Annual National Budget, the Malaysian government will announce
a substantial amount of money and funds to be put aside to train and educate the SMEs.
The limitation of this study was the sample selected may not be able to generalize all SMEs in
Malaysia as it covered only the States of Kedah, Perlis and Penang. Furthermore, only 9% of
the respondent in this study came from the state of Penang. The limited number of companies
which participated in this study may be a concern on the representativeness of the sample.
Future research in this study should include wider zones across all states in Malaysia. Larger
sample size will increase the validity of these findings which can be used as a general reference
in evaluating SMEs strategic planning.
6. CONCLUSION
The overall previous studies indicated that Strategic Planning is important for the growth of
SMEs especially the first stage which is environment scanning. However, earlier findings of
many research indicated that SMEs do not really have a formal strategic planning and they
tend to face with difficulties in obtaining external information from specialized sources when
their conduct environment scanning. However, most studies agreed that External Environment
Scanning is the most important stage that SMEs should look into in order to survive in the
intensity of market competition. Future studies should explore wider sample range from all
states of Malaysia.
Wei-Hin Cheng, Kadzrina Abdul Kadir and Abdul Manaf Bohari
445
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M U LT I P L E
CRITERIA
DECISION
Vol. 9
MAKING
2014
Dorota Górecka*
Małgorzata Szałucka**
APPLICATION OF MCDA METHODS AND STOCHASTIC
DOMINANCE RULES IN THE ENTRY MODE SELECTION
PROCESS IN INTERNATIONAL EXPANSION
Abstract
When a company decides to enter overseas markets, it must take a number of
strategic decisions, such as, for instance, a decision on the appropriate entry mode. The company has a wide array of choices: various forms of exporting, contractual modes such as licensing, franchising and management contracts, turnkey
projects and subcontracting or equity-based modes including wholly-owned subsidiary or joint venture. The various entry modes differ greatly in resource commitment, degree of risk, level of control or profit potential. The appropriate choice of entry mode is a key element of the success of foreign operations and the
future of the company. Hence, it is essential for the company to conduct a deliberate and conscious analysis of advantages and disadvantages of each entry mode
from the point of view of internal and external factors that influence the choice of
entry mode, taking into account the opinion of different participants of the decision-making process.
The aim of this paper is to carry out the simulation of the entry mode selection, using MCDA methods and stochastic dominance (SD) rules, from the perspective of a dynamically developing company that manufactures and distributes
hygiene, cosmetic and medical products for women, children and adults.
Keywords: entry mode selection, non-equity modes, equity modes, MCDA methods,
EXPROM II with veto thresholds and SD rules.
*
**
The Faculty of Economic Sciences and Management, Nicolaus Copernicus University in Torun,
ul. Gagarina 11, 87-100 Toruń, Poland, e-mail: dgorecka@umk.pl.
The Faculty of Economic Sciences and Management, Nicolaus Copernicus University in Torun,
ul. Gagarina 11, 87-100 Toruń, Poland, e-mail: m.szalucka@umk.pl.
6
D. Górecka, M. Szałucka
1. Introduction
A firm seeking to run its business operation outside its domestic market must
make decisions about many related but distinct issues. They are complex and
complicated and affect both the likelihood of success and the probability of survival not only of the undertaking abroad, but they may have an additional impact
on the success and performance of the internationalizing firm.
The internationalization of the firm has many dimensions. The managers
must give careful consideration to many aspects of the process. That is why
companies going international should define their entry strategy for international
markets in order to perform business functions abroad successfully. International
market entry strategy is a comprehensive plan where the company makes decisions about objectives, resources and polices to guide its business operations
abroad for a longer period of time to achieve and sustain competitive advantage
in the global economy (Root, 1994).
When starting to plan its international market entry strategy, the company
must define the reasons why it wants to go abroad. Setting objectives and goals
of internationalization has a tremendous impact on the overall strategy determining directions and frames of international expansion. When objectives and goals
are set the company must decide on the products or services it wants to deliver to
a foreign market. The choice is made in relation to international environment
and the company’s potential. The next step is to select the target market or markets where the company will sell its products or provide services. It has been
recognized widely in the literature as international market selection (Root, 1994;
Koch, 2001; Kumar et al., 1994; Cavusgil, 1985; Russow and Okoroafo, 1996;
Papadopoulos et al.; 2002; Sakarya et al., 2007; Górecka, Szałucka, 2013).
When the target market is identified, the company must find a way to enter it
and launch its products or services. Consequently, it must decide on the entry
mode it wants to use to explore the market. Companies have a wide array of entry modes to choose from. The decision about the appropriate arrangements for
organizing business activities located outside the home country is a critical part
of an entry strategy for international markets (Wind and Perlmutter, 1977; Hill et
al., 1990, Kough and Singh, 1988; Agarwal and Ramaswami, 1992). It might
have critical implications for the international project’s performance (Root,
1994; Woodcock et al., 1994) and its survival (Li, 1995). Finally, when a company knows with what, when and how it intends to expand internationally, it
must decide on the timing of the entry.
Since the decision about the internationalization is very complex, the opinion
of different persons from different levels of the company’s structure (board of directors, managers, experts) is usually taken into account. As regards entry
modes, they differ greatly in resource commitment, degree of risk, level of con-
Application of MCDA Methods and Stochastic Dominance Rules…
7
trol or profit potential. Hence, it is essential to conduct an analysis of their advantages and disadvantages from the point of view of a wide variety of internal
and external factors and taking into account the opinion of various participants
of the decision-making process.
The aim of this paper is to apply multi-criteria decision aiding (MCDA)
methods and SD rules to the problem of entry mode selection. Their usefulness
will be illustrated by a real-life example of a company that is a leading producer
and deliverer of hygiene, cosmetic and medical products seeking new markets.
The paper is organized as follows. Section two focuses on an integrated
framework for entry mode selection, presenting possible entry modes to explore
international markets and factors that influence the company’s choice of entry
mode. Section three demonstrates the methodology used in the research including the description of the case study. In section four the research results obtained
due to the application of the MCDA methods are presented.
2. A framework for entry mode selection
Among the most critical issues in international market entry strategy is the selection of an appropriate entry mode in order to penetrate the foreign target country.
Entry mode has been defined as an institutional agreement that allows the company to enter a market with its products, technology, human skills, management,
or other resources (Root, 1994).
A firm entering a foreign market has a variety of mode choices to organize its
business activities abroad. Entry modes can be divided into three categories: export entry modes, contractual entry modes and investment entry modes (Root,
1994; Sitek, 2000; Rymarczyk, 2004; Gorynia, 2007; Johnson et al. 2008;
Duliniec, 2009). The first category includes indirect and direct export activities.
It refers to the manufacture of a product outside the target market and the subsequent shipping of the product to it. Direct exporting can be done via an agent or
distributor in the target country or via a direct branch/subsidiary that requires
equity investment. Exporting has been considered as the most common way to
enter new international markets. Contractual entry modes are understood as nonequity cooperation agreements between a company that wants to enter the market and an entity located in a foreign target market. In contrast to export modes,
contractual entry modes involve a transfer of technology or other skills and
knowledge between partners. In the case of export modes, the transfer is limited
to physical products. The cooperating companies are characterized by their legal
autonomy and simultaneous economic interdependence. Firms have a wide array
of contractual entry modes to choose from, including licensing, franchising,
technical agreements, service contracts, management contracts, turnkey con-
8
D. Górecka, M. Szałucka
tracts, manufacture contracts and co-production agreements (Root, 1994). The
last category – investment entry modes – represents operation modes that are inevitably linked to ownership and equity investment. A firm decides to engage in
international expansion by setting up a completely new firm or acquiring an existing local one. An investor may do this alone; maintaining full ownership and
control over an affiliate (a branch or a subsidiary) or it may do this with the support of a partner or partners sharing ownership and control. In the literature, the
former form of equity-based modes is described as a sole venture and the latter
as a joint venture.
Entry modes differ considerably along several dimensions. The most common ones found in the literature are: degree of control (Anderson and Gatignon,
1986; Root, 1994; Kotler, 1994), level of risk (Root 1994; Kotler, 1994) and resource commitment (Hill et al., 1990; Meissner, 1990; Kotler, 1994). Moreover,
entry modes have been also characterized by level of management involvement
(Meissner, 1990), dissemination risk (Hill et al., 1990), skills requirement
(Gronhaug and Kvitastein, 1993) or profit potential (Kotler, 1994). Degree of
control, level of risk and resource commitment are highly correlated. Higher
control requires higher resource commitment; increased resource commitment
leads to higher risk.
The establishment of a wholly owned subsidiary results in the highest level of
resource commitment, risk and a level of control, but it also provides the highest
level of profit potential and the lowest level of dissemination risk. Joint ventures,
where ownership of and responsibility for the management of the operation are
shared, is considered as the entry mode with a lower level of resource commitment, control, profit potential and general risk compared to a wholly owned subsidiary, but with a higher level of dissemination risk. In licensing or franchising,
the licensee assumes the investment risk – bears the development cost and risk
associated with opening up a foreign market, thus the resource commitment and
general level of risk is lower than in equity-based modes. At the same time,
however, the level of control or economic gains are lower and there is a higher
risk that firm-specific advantages in know-how will be expropriated by a licensee. Exporting is characterized by a low level of resource commitment, risk and
a level of control.
From the theoretical point of view, entry mode choice is dependent on the
analysis of objective information gathered systematically from the environment
and the company. In practice, the companies often make their decisions how to
enter the foreign market on the basis of non-systematic and ad hoc procedures
(Whitelock and Jobber, 2003). This happens due to the highly complex entry
mode decision that makes it difficult for the company to make a conscious and
deliberate cost/benefit analysis of options.
Application of MCDA Methods and Stochastic Dominance Rules…
9
Entry modes differ significantly in terms of their mix of advantages and
drawbacks. The entry mode choice comes down to a trade-off between control
and the cost of resource commitment under conditions of certain level of risk
(Sarkar and Cavusgil, 1996) which leads to a choice that maximizes riskadjusted return on investment (Anderson and Gatignon, 1986). However the
tradeoffs are not easy to evaluate and not well understood. There is still not
a comprehensive and easy to apply tool which will allow managers to assimilate
a huge amount of information referring to internal and external factors in order
to make the right decision about the choice of entry mode. Research in this field
is still very fragmented and limited in scope. This paper attempts to provide
a comprehensive method to fill in the blanks in this field. Assuming that managers make decisions based on a rational model using the proposed method, they
may take into account a wide range of factors influencing entry mode choice and
make tradeoffs between each mode in relation to the other relatively easily.
However, managers should be conscious of the limitations of the rational decision-making model and of the difficulties with making “optimal decisions”.
They operate under bounded rationality and make decisions based on incomplete
information, under time pressure and under conditions where particularistic
goals are contradictory. In reality, their aim is to find the more or less optimal mode
at a given point in time. Benito and Welch (1993) emphasize the need for a dynamic approach to foreign entry mode choice. As mentioned above, the entry mode
is selected at a given point of time, when specific internal and external conditions
prevail. The environment, the company and its strategies evolve over time and the
concept of “optimal decision” seems to be unclear from the perspective of the rational models describing the entry mode decision-making process.
A huge range of factors needs to be considered by the company when selecting the most appropriate entry mode for a target foreign market. Managers can
be overwhelmed by the diversity and complexity of the required information. In
the literature, researchers consider a number of variables to be significant in the
decision about the choice of entry mode. Canabal and White (2008) identified
around 200 different independent variables used in various entry mode studies.
According to their review of empirical studies in international entry mode research, the most commonly used variables were MNE/international experience,
cultural distance, risk, firm size, host restriction/host policies (host country variables), R&D intensity, host country experience, industry competition/
concentration, size of operation/scale and advertising intensity.
In the context of such a large number of variables affecting the choice of entry mode, researchers suggest to synthesize and group them into sets of variables. There are several proposals for groups of variables that support the assessment process (Root, 1994; Hill et al., 1990; Gannon, 1993; Luo, 1999; Sitek,
10
D. Górecka, M. Szałucka
2000; Rymarczyk, 2004; Johnson et al. 2008). In this paper we decided to adopt
the framework proposed by Root (1994) and we identify four main sets of variables: target country environmental factors, target country industry factors, company factors and company product factors. We strongly believe that home country factors in the case of some countries may be also critical; however, in our
case they do not play a significant role. For each group we decided to include the
factors commonly referred to in the literature. Their importance in the entry
mode decision process is determined mainly by the objectives and goals of company’s international expansion and verified by a firm’s capacity. When analysing
factors, it must be remembered that each of them should be considered in terms
of whether it encourages or discourages a particular entry mode.
Target country environmental factors
When making a decision about the right entry mode, managers should pay attention to several host country environmental factors. International entry mode
studies confirm their considerable impact on the choice of entry mode. The factors within this group that are considered in the decision process include: market
potential, production factors, cultural distance, geographical distance, government policies and regulations of the host country, property rights systems, external economic relations and political risk. All commonly examined factors relate
to the macro environment, country attractiveness and market potential.
Market potential (size and growth) has a great impact on the entry mode. It
has a direct impact on a firm’s size of operation, defining the potential sales volumes. Where market potential is relatively low, we can assume (ceteris paribus)
that the company will favour entry modes with low resource commitment and
low breakeven sales volumes such as indirect exporting, direct exporting via an
agent/distributor or contractual arrangements. Otherwise the company may follow an entry strategy with a high resource commitment, such as equity-based
modes, finding its justification in high sales potential and in better satisfaction of
customers’ needs.
One of the reasons for companies going abroad is the presence of resources
(production factors) that are not available at home or are of a higher quality
and/or lower cost. These factors are considered very widely in the literature and
practice. Companies are seeking resources such as natural resources, raw materials, labour, technological, innovatory and created assets (e.g. patents) or physical
infrastructure (ports, roads, power, telecommunication). In the majority of cases,
when the company wants to exploit these resources, it must be physically present
in the host country using investment equity modes. For certain resources, equitybased modes are the only entry modes that can ensure access to them. However,
Application of MCDA Methods and Stochastic Dominance Rules…
11
some of resources may be also exploited indirectly through contractual entry
modes. Hence we can assume that the greater benefits from factor endowments
in the host country, the more companies will favour solutions that include equity
investment.
Cultural distance has been also recognized as a factor affecting market entry
mode (Kim and Hwang, 1992; Agarwal, 1994; Brouthers and Brouthers, 2001;
Anderson and Gatignon, 1986; Anderson and Coughlan, 1987; Gomes-Casseres,
1990; Erramilli and Rao, 1993). In general, it refers to the distance between the
home country and the target country in terms of cultural values, language, social
structure or ways of life (Root, 1994). Differences between the countries increase uncertainty and the level of risk as well as the cost of coordinating business operations. We can assume that the greater the cultural distance between the
home country and the target country, the more the company will favour nonequity entry modes in order to limit the resource commitment and accompanying
risk. Another way for a company to overcome cultural barriers and reduce risk is
to involve a local partner or partners who are familiar with the culture of the target country in the economic activity abroad.
Geographical distance has a slightly contradictory impact on entry mode
strategies. Greater geographical distances and high transportation costs may significantly deteriorate the company’s position compared to its competitors in the
target market. The geographical distance also reduces flexibility and the ability
to respond quickly to changes in the local market. The greater the geographical
distance, the greater the likelihood that firms will decide to make an investment
entry. If the geographical distance is low, then export entry may be favoured
over other modes (Root, 1994).
The government policies and regulations may also directly or indirectly affect the
choice of entry mode. The countries are analysed in terms of how favourable their
policies and regulations are to foreign companies willing to enter. High tariffs and
tight quotas will hinder exporting activities and encourage companies to locate production in the target country, while a restrictive host country policy on foreign investment will reduce the number of equity investments in favour of other modes
such as exporting or non-equity contractual arrangements. In some countries there
are legal limits on foreign equity participation in domestic enterprises and companies are forced to operate in the host market using only joint ventures. The host
country may offer foreign companies a wide array of incentives in terms of taxation,
access to infrastructure, local financing as well as resource or material supply, depending on entry modes favoured by the host country (Luo, 1999).
In this context, external economic relations should also be taken into consideration while selecting the most appropriate entry mode. Exchange rate policy
and exchange rate behaviour, the balance of payments, the level of foreign debt
12
D. Górecka, M. Szałucka
and its service, restrictions on the transfer of capital, profits and salaries etc.
should be carefully assessed by managers. Under restrictive exchange controls,
companies are better off utilizing low control entry modes such as indirect or
agent/distributor exporting or contractual agreements which allow them to reduce negative effects of transfer restrictions. When the exchange rate has depreciated, firms are motivated to produce locally using equity-based entry modes.
On the other hand, when the exchange rate has appreciated, export modes are
chosen above the other options.
Another aspect of the target country environment concerns property rights
systems. This is an essential issue, especially for companies with high technological competences and tacit knowledge. If host countries are unable to ensure
effective property rights protection, the company risks leakage or unwanted dissemination of proprietary technological and marketing assets to competitors,
suppliers or customers. Faced with potential infringement and piracy by local
firms, companies are often willing to select higher ownership modes to reduce
the risk of unwanted dissemination. Keeping the transfer and use of intellectual
property rights within the company provides the highest level of protection.
When property rights protection is sufficient in the host country, companies may
select modes offering lower levels of control as the risk of the expropriation of
assets is lower. In these circumstances the company does not need to construct
a costly governance structures to protect assets.
Finally, political risk is a factor that needs to be examined in order to make
the right entry mode decision. In markets where political risk is high, companies
try to minimize their resource commitment to ensure strategic flexibility (Anderson and Gatignon, 1986). Flexibility increases the company’s ability to exit
quickly from the target market without a significant loss when the environment
deteriorates. Consequently in markets with high political risk, companies will
favour low control and ownership modes. They will tend to use export modes or
modes that enable them to share the risk with partners. The most valuable partners will be local, with knowledge about the host country as well as relations
that can help to reduce external uncertainty and the impact of a volatile environment. In markets with lower levels of political risk, the companies are more
inclined to pursue investment modes such as a wholly owned subsidiary.
Target country industry factors
Various target country industry factors also need to be considered by a firm
when entering a new market. The factors within this group considered as part of
the decision process include local supply and distribution infrastructure, relations with suppliers and buyers, competitive conditions, demand uncertainty and
entry and exit barriers.
Application of MCDA Methods and Stochastic Dominance Rules…
13
When companies enter international markets, knowledge about the availability and quality of local supply and distribution infrastructure in the industry may
play a significant role in the process of selecting the appropriate entry mode.
Good marketing infrastructure in the target market allows the company to reduce
its resource involvement and use an existing network of local agents and distributors to launch products. There is no need to engage deeply in the market
with more advanced modes. Indirect and agent/distributor exporting is recommended. Where marketing infrastructure is poor, a branch/subsidiary may be indispensable to reach the local market (Root, 1994). Moreover, when industrial
linkages with suppliers and distributors are essential in the industry, it is recommended that the company utilizes high resource commitment modes such as
a wholly owned subsidiary or joint venture. Entry modes with partners will be
useful when the company does not have industrial linkages and has to build and
develop relations with various actors in the industry.
Competitive conditions may lead companies to use high control or low commitment entry modes. One aspect of competitive conditions in an industry is its
competitive structure (Root, 1994). When there are many non-dominant competitors in the target market (atomistic structure), the company may prefer to use
export entry modes because there is no need for high commitment. In target
countries where the competition is oligopolistic or monopolistic, the companies
may favour equity investment in production, an option that should improve their
ability to compete on the market. However, when competition is too strong for
both exporting activities and equity-based modes, Root (1994) recommends licensing or other contractual agreements that allow the company to be present
with its products without direct involvement in the market. The other dimension
of competitive conditions in an industry is the volatility of competition (Hill et
al., 1990). According to Hill et al. (1990), when competition is more volatile
companies tend to use low control and ownership modes due to their increased
flexibility. Intense competition and rapidly changing environmental factors require from the company the ability to adapt quickly, an ability which is linked
with low rather than high resource commitment.
Demand uncertainty is one the most essential factors affecting the entry mode
choice. It directly refers to the host country demand for the company’s products.
If demand is unknown or predicted to be low, there is no point in making a substantial resource commitment (higher resource commitment leads to less strategic flexibility and substantial sunk costs if a withdrawal from the market becomes necessary). Demand conditions vary depending on the stage of the
industry life cycle. It has been widely recognized that uncertainty and unpredictability are greatest in the early/embryonic or late/declining stages of the industry
life cycle (Vernon, 1966). Thus, when a target market is in its embryonic or de-
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D. Górecka, M. Szałucka
clining stage, managers are more inclined to favour low resource commitment
and low control entry modes. More stable and predictable demand conditions
encourage managers to increase their resource commitment; however, this does
not necessarily imply a need for investment modes (Hill et al., 1990).
Entry and exit barriers in the target industry in the host country may also influence a company’s choice of entry mode. High barriers reduce a company’s
freedom to choose from a wide array of available entry modes. It may happen
that the company will be forced to accept host government-instituted modes of
entry into certain industries (Luo, 1999).
Company factors
When selecting the right entry mode, managers also need to take into consideration some features of the firm they operate. There is a general agreement in the
literature that factors such as size of the company, international experience, corporate strategy, generic marketing strategies and nature of the strategic assets are
crucial in the entry mode decision-making process.
Firm size has been recognized as an important factor in the entry mode decision process. Sarkar and Cavusgil (1996) highlighted it as one of the key subthemes alongside international experience within firms/foreign venture specific
factors. A relationship between firm size and entry mode strategy is a direct reference to resource commitments. As noted above, entry modes differ in terms of
resource commitment. Hill et al. (1990) define resource commitment as “(…)
dedicated assets that cannot be redeployed to alternative uses without cost (lost
value)”. We have to remember that with greater resource commitment comes increased risk. Hence small-sized firms will have limited opportunities for international expansion as they must make use of those entry modes requiring resources
that are adjusted to their capacity. It must be stressed that resources are understood widely, not only in terms of capital, which may be the first that springs to
mind when discussing entry modes, but also in terms of technology, management, marketing and production skills. Small-sized companies often face financial and managerial constraints, forcing them to restrict themselves to the simpler entry modes with low international involvement and resource commitment.
Conversely, large firms have lower resource constraints and can bear the higher
risk of their international operations. Therefore they can often use more advanced entry modes that offer higher profit potential but also higher risk. An
abundance of resources permits the company to limit the consequences of potential failure that could lead a small-sized company to bankruptcy.
International experience is the second key sub-theme within this group of
factors. According to Canabal and White (2008), it is the most commonly used
variable to explain entry mode choice in empirical studies. Knowledge about
Application of MCDA Methods and Stochastic Dominance Rules…
15
foreign markets and international experience is crucial for increasing involvement in international operations (Johanson and Vahle, 1977). The greater international experience allows the company to reduce risk and uncertainty, which
constrain the company’s involvement in business functions outside the domestic
market. Companies with more experience due to their accumulated market
knowledge which have developed capabilities for managing foreign operations
are more likely to make higher resource commitments and prefer high-control
modes such as a wholly owned subsidiary or joint venture (Gomes-Casseres,
1990). Conversely, the companies with little knowledge and experience in foreign markets face higher levels of exposure to risk. Lack of knowledge or experience may cause errors and inefficiencies. In order to limit exposure to risk,
such companies prefer modes offering low-control and low resource commitment, starting with exporting through subcontracting, licensing or franchising.
When a company suffers strongly from a lack of local knowledge and experience
in the host country, it may tend to prefer modes engaging local partners in business operations in order to gain knowledge and experience in the local market.
Hennart (1991), Li (1995), and Delios and Beamish (1999) support a positive relationship between the level of international experience and the level of ownership and control.
Corporate strategy has been also recognized as a factor effecting entry mode
choice (Hill et al., 1990; Gannon, 1993; Luo, 1999). The company may pursue
one of two basic corporate strategies: a multi-domestic strategy or a global strategy. The assumption on which the multi-domestic strategy is based is that national markets differ widely along many dimensions such as customer tastes and
preferences, the competitive and operating conditions, and political, legal, and
social structures. In order to meet the different challenges of national markets,
companies must confer a high degree of autonomy and responsibility for local
activities on national subsidiaries, where the majority of business functions have
to be located. A high degree of autonomy for national subsidiaries is a consequence of the need to adapt operations to differing local competitive conditions
and products to the specific tastes and preferences of local customers. In general,
we can assume that companies pursuing multi-domestic strategy will tend to use
modes with a relatively low degree of control and resource commitment to maintain global flexibility and profitability by using entry modes with low breakeven
sales volumes. They may also prefer modes involving local partners such as licensing or joint venture in order to limit the resource commitment and gain
knowledge and experience in the local market. Conversely, the companies pursuing a global strategy will favour modes with a high degree of control to ensure
the effective configuration and coordination of all the activities a company performs all over the world. The basic assumption underpinning a global strategy is
16
D. Górecka, M. Szałucka
a convergence of tastes and preferences among consumers from different national markets. The company sees its sources of advantage over other competitors in the substantial scale economies it can achieve by centralizing production
activities and marketing a standardized product to a global market. The national
subsidiaries are usually highly specialized units that follow central decisions
from headquarters. Under these circumstances, all modes involving partners are
not recommended, due to the high level of subordination and low autonomy of
national subsidiaries.
Besides corporate strategy, generic marketing strategies are also expected to
affect the entry mode decision process (Gannon, 1993; Bradley and Gannon,
2000). One of the strategic decisions the company has to make when entering
foreign markets is whether it will pursue a concentration or diversification strategy (Ayal and Zif, 1979). A market concentration strategy assumes a high level
of marketing efforts and significant levels of resource commitment to each foreign market in which it operates. It is a consequence of the company’s objective
to achieve a strong market position in each of its foreign markets. Only when the
company achieves a significant share in the foreign market it can enter other new
markets. The strategy is based on concentrating resources in a limited number of
markets and a slow, gradual increase in the number of markets, country by country. Following a concentration strategy may result in preferring high control entry modes such as wholly owned subsidiaries and joint ventures which are supposed to enable the company to have greater control over strategy and tactics. In
contrast, a market diversification strategy assumes a high level of return from
low resource commitment in many markets. The company following this strategy is trying to enter many foreign markets within a short period of time. Although this approach permits the immediate penetration of a larger number of
foreign markets, it also involves resource dispersion. Hence, following a diversification strategy by the company may result in a preference for low control entry
modes and non-equity modes such as indirect exporting, agent/distributor exporting or licensing.
The internationalization theory suggests that the nature of strategic assets also
shapes the entry mode decision. High transaction costs associated with a marketbased exchange of strategic assets, particularly in the case of firm-specific
know-how, result in a positive relationship between the level of control and the
specificity of assets (Anderson and Gatignon, 1986, Hill et al., 1990; Delios and
Beamish, 1999). In an attempt to avoid the cost of drafting, negotiating, monitoring, and enforcing contracts with economic market actors (with bounded rationality and opportunistic tendencies), companies internalise the transactions within
the company’s structure. By establishing a wholly owned subsidiary they reduce
dissemination risk (risk of losing control) and avoid the market failures related
Application of MCDA Methods and Stochastic Dominance Rules…
17
to information (problems related to the evaluation of those assets by the market).
In addition, the internal transfer of assets is considered to be more appropriate
and efficient than the market mechanism, when assets, particularly know-how,
are tacit and deeply embodied in the company, and it might be problematic to
separate it out for a transfer to the partner. Hence we can assume that the more
specific and tacit company’s assets, the more likely it will choose high-control
entry modes.
Company product factors
The last group of factors to which managers should pay attention are factors directly
related to the company’s product, such as product adaptation, life-cycle stage of the
product, levels of customer service, and transaction specificity of the product.
When the company needs to adapt the product to local needs and preferences,
it must have considerable knowledge about the local market. Root (1994) indicates that the selected entry mode should assure the company of the close proximity to the foreign market in order to be able to tailor the product to the local
customer. An active approach and a deep involvement with the market are essential to fulfil customers’ expectations. If so, we can expect that the more customized their products, the more companies are likely to enter a foreign market
through high-control entry modes, which seem to be more efficient in this case
(Anderson and Gatignon, 1986).
A similar approach to entry mode selection is used in relation to customer
service levels. If a product requires pre- and post-purchase service, proximity to
the foreign market and customers seems to be crucial. It is hard, sometimes even
impossible for the company to fulfil the service requirements at a distance. Thus,
we can assume that companies with high service requirements tend to prefer
more high-control entry modes in order to achieve the necessary proximity to
customers (Lee, 1986).
Life cycle stage of the product (PLC) is related directly to the proprietary
content. Anderson and Gatignon (1986) indicate that immature products in the
early stages of the PLC are characterized by high proprietary content which generates problems with its transmission and valuation. Moreover, there is a potential risk of loss of technology or property, leading to a need for control. Therefore, the more mature the company’s product, the greater the propensity to
choose a low-control entry mode.
Transaction specificity of the product (Gannon, 1993; Bradley and Gannon,
2000; Anderson and Gatignon, 1986) is related directly to the nature of the assets
that the company possesses. Products of a company might be classified into
“high tech” and “high touch” (Levitt, 1983). High tech products are defined as
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D. Górecka, M. Szałucka
products with highly intangible components for which objective valuation may
be problematic: it is difficult for the buyer to estimate the value of the intangible
asset component because it is poorly understood, unless it is disclosed. Those intangible components are related to technological know-how, marketing knowhow or brand loyalty (Gannon, 1993) and stand behind the company’s technical
leadership, product image and reputation or its capacity for fast and flexible response. High touch products are based on tangible assets and are well understood. That’s why the objective valuation of them is relatively easy. Thus, when
the company possesses highly proprietary products (or processes) it may tend to
use entry modes offering greater control due to the hazard of valuation.
3. Methodology
The present study shows the possibility of applying multi-criteria methods from
the PROMETHEE family and SD rules to aid decision-makers in the entry mode
selection process. It is based on the example of a dynamically developing company that manufactures and distributes hygienic, cosmetic and medical products
for women, children and adults. This company is an enterprise with entirely Polish capital, which is organized in 17 countries. The capital group is composed of
54 companies including 17 manufacturing companies (in Poland, Russia,
Ukraine and India), 27 trading companies (in 14 European countries, India and
the USA) and 10 service (medical and information technology) companies (in
Poland and Russia). It employs over 7.3 thousand people and markets its products in more than 65 countries worldwide (they are available on all inhabited
continents). Thanks to the firm’s own Research and Development Centre that
cooperates closely with experienced scientific institutions, its products are based
on the cutting edge technologies. This helps the company to compete successfully with international companies in the highly competitive markets in which it
operates1.
The concise history of the firm, emphasizing especially its foreign operations
and R&D related activities, is presented in Table 1.
1
Information about the company comes from its brochure and its website: http://www.tzmoglobal.com/en_GLO (7 March 2014).
Application of MCDA Methods and Stochastic Dominance Rules…
19
Table 1
Company’s history in brief
Years
Event
1950s
The company is established as a state-owned enterprise
Dressing material is produced for the Ministry of National Defence and the Central Mining
Office Supply. Production is set to shut down after completing the order but due to the high
quality of work further orders appear
The company begins conquering foreign markets: products are sold in European, African and
Asian countries
1990s
The company is privatised – a joint-stock company is created by individuals (Polish citizens):
the employees of the company and representatives of the academic and medical environment
In 1997 the company receives – as the first firm in Poland – a certificate confirming that it
produces medical products in accordance with the requirements of GMP (Good Manufacturing
Practice) – the principles set by the WHO (World Health Organization)
In addition, the company obtains certificates of conformity of quality management system
ISO 9001 and ISO 13485
Since the end of the 1990s the company is entitled to mark its products with the European
CE safety mark
2000s
In the early 2000s the company opens a hospital in Poland which – since 2007 – has been serving
as a modern polyclinic. Since the beginning of 2000s it has been also providing a sterilization
service for hospitals
In 2003 R&D company joins the capital group. Thanks to that the offer of the company is
extended of biomaterials and other technologically advanced products
Production of hygiene products in the newly built plants in the East market starts – in 2003
in Russia and in the first quarter of 2004 in Ukraine
In 2002 the company establishes a joint venture with its Indian partner. A new factory in India
begins manufacturing hygiene and medical products in 2005. At the end of 2000s it obtains the
CE mark for medical production
In 2004 the company builds a modern logistic centre in Poland (which serves as a central distribution warehouse). The following year a training, marketing and logistics centre is opened
in Germany. Another logistics centre is founded in 2007 in Romania
In 2008 new business units are established in Poland (e.g. a films and laminates production plant
and a clean room for medical production)
At the end of 2000s the company starts business activity in North America − it establishes its
headquarters in the United States
2010s
In 2011 the company finishes work on a modern machine for the production of absorbent pants.
This is one of the few high-tech machines in the world for the production of absorptive products
The company consistently develops its business overseas. In 2012 it takes part in the largest trade
show in the United States for those who are interested in home medical equipment market –
Medtrade
The company receives many prestigious awards, for instance: Business Eagles in Germany 2011,
President’s Economic Award – ‘Polish Economic Nobel Prize’ for ‘the presence on the global
market’ 2012, ‘Orzeł Rzeczpospolitej’ for ‘the best production company’ 2013
Source: http://www.tzmo-global.com/en_GLO/companyHistory (7 March 2014).
20
D. Górecka, M. Szałucka
The present simulation of an entry mode selection refers to a project already
carried out by the company, namely the investment made in India (see Table 1).
Hence, it is assumed that the target market had been already selected by the firm.
After considering the various alternatives we have selected six entry modes,
which seemed reasonable to apply in the case considered, namely: indirect export, agent/distributor export, licensing, branch/subsidiary export, joint venture
and wholly owned subsidiary.
Factors affecting the company’s choice of the entry mode have been identified through the literature review. We have selected 15 criteria that should be
considered from the point of view of encouraging or discouraging a particular
entry mode. They are presented in Table 2.
Table 2
Factors influencing the company’s choice of the entry mode
Factors (criteria)
Measures (units)
Evaluation scale
Target country environmental factors
Total population
(number of inhabitants)
Market
potential
Urban population
(number of inhabitants)
GDP growth rate (annual %)
GDP per capita
(GDP per capita constant 2000; USD)
Production factors
Cotton production
(thousand bales)
Labour cost
(USD per hour)
Geographical
distance
Distance between capital cities
(kilometres)
Cultural distance
Cultural distance: power distance, individualism,
masculinity, uncertainty avoidance,
pragmatism, indulgence
(index)
Political risk
Political risk: corruption, government
non-payments/non-repatriation, government
stability, information access/transparency,
institutional risk, regulatory and policy
environment
(index)
ƒ
ƒ
ƒ
ƒ
ƒ
Very low
Low
Medium
High
Very high
ƒ Low (unattractive)
ƒ Medium
ƒ High (attractive)
ƒ Low (up to 1500 km)
ƒ Medium (from 1500 to 3000 km)
ƒ High (over 3000 km)
ƒ Low
ƒ Medium
ƒ High
ƒ
ƒ
ƒ
ƒ
ƒ
Very low
Low
Medium
High
Very high
Application of MCDA Methods and Stochastic Dominance Rules…
Government policies
and regulations
Demand uncertainty
Marketing
infrastructure
Size of the company
International
experience
Economic freedom: property rights, freedom
from corruption, fiscal freedom, government
spending, business freedom, labour freedom,
monetary freedom, trade freedom, investment
freedom, financial freedom
(index)
Target country industry factors
Product-market development: growth rate,
number of competitors, competitive structure,
technologies, sector access
Outlet density
(number per 1,000 inhabitants)
Modern Trade density
(number of retail stores per million population)
Company factors
Employment
(number of employees)
Sales turnover
(thousand PLN)
Sales on foreign markets
(revenue in thousand PLN)
Number of markets served
Number of projects abroad
Corporate strategy
Corporate strategy analysis
(based on cost pressure, local responsiveness
and global integration)
Generic marketing
strategies
Generic marketing strategy analysis
(based on number of markets and time horizon)
Nature of the strategic assets
R&D intensity
Product technical complexity
ƒ
ƒ
ƒ
ƒ
ƒ
Repressed
Mostly unfree
Moderately free
Mostly free
Free
ƒ
ƒ
ƒ
ƒ
Birth stage
Growth stage
Maturity stage
Decline stage
ƒ Poor
ƒ Moderate
ƒ Good
ƒ Small
ƒ Medium
ƒ Large
ƒ
ƒ
ƒ
ƒ
ƒ
ƒ
ƒ
ƒ
ƒ
ƒ
ƒ
ƒ
ƒ
Very low
Low
Medium
High
Very high
Global
Mostly global
Mostly multi-domestic
Multi-domestic
Concentration
Mostly concentration
Mostly diversification
Diversification
ƒ Low
ƒ Medium
ƒ High
Company product factors
Product adaptation
Degree of product customization
Product lifecycle
PLC analysis
(based on proprietary content)
ƒ
ƒ
ƒ
ƒ
ƒ
ƒ
ƒ
ƒ
ƒ
Very low
Low
Medium
High
Very high
Introduction stage
Growth stage
Maturity stage
Decline stage
21
22
D. Górecka, M. Szałucka
Finally, five experts − specialists in the field of foreign investments (two scientists, two practitioners from FMCG sector and one scientist with practical experience) − scored the selected entry modes individually and independently according to their knowledge and experience on scales established by a main
expert and taking into account their own evaluation of 15 factors affecting the
company’s choice of the entry mode.
Table 3 provides the performance matrix for the six entry modes considered
and the 15 criteria used to evaluate them.
Table 3
Input data
Factors
(criteria),
scale2
Market potential
(1-5)
Production
factors
(0/1)
Geographical
distance
(1-3)
Cultural
distance
(1-4)
Political risk
(1-4)
Government
policies
and regulations
(1-4)
Demand
uncertainty
(1-3)
2
Indirect
Export
1
3
1
1
1
0
0
0
0
0
1
3
1
2
1
3
1
2
1
3
4
1
2
4
3
4
3
2
3
2
1
2
2
2
2
Agent/
Distributor
Export
2
5
2
2
1
0
0
0
0
0
1
3
2
3
1
4
2
3
3
4
4
1
4
3
3
4
3
2
3
3
1
2
3
3
3
Entry modes
Branch/
Licensing
Subsidiary
Export
2
4
1
1
2
3
1
5
3
2
0
0
0
0
0
0
0
0
1
0
2
1
1
3
3
2
2
2
3
2
4
2
2
3
3
3
4
1
3
2
4
3
3
3
4
3
4
2
4
2
3
2
4
4
2
1
4
2
3
3
1
3
1
3
3
2
2
1
3
2
Joint
Venture
5
2
5
2
5
1
0
1
0
1
3
1
3
2
3
3
4
4
3
3
2
4
4
4
2
1
4
4
4
2
2
3
3
3
2
Higher values indicate that the entry mode is better tailored to the specific situation.
Wholly
Owned
Subsidiary
5
1
4
5
5
1
1
1
1
1
3
1
3
1
3
1
4
3
1
2
1
4
3
2
2
1
4
2
2
2
3
3
3
1
2
Application of MCDA Methods and Stochastic Dominance Rules…
Marketing
infrastructure
(0/1)
Size of the
company
(1-4)
International
experience
(1-4)
Corporate
strategy
(1-3)
Generic
marketing
strategies
(1-3)
Nature of the
strategic assets
(1-3)
Product
adaptation
(1-3)
Product lifecycle
(1-3)
0
0
0
0
0
1
1
1
2
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
2
1
1
1
1
1
1
1
1
1
1
1
1
0
0
1
0
1
2
1
1
2
1
2
1
1
1
1
2
1
1
1
1
1
1
2
1
2
1
1
2
1
1
1
1
1
2
1
1
1
2
2
1
0
0
1
0
1
2
1
1
1
2
2
1
1
2
2
1
1
1
2
2
1
1
1
1
2
1
1
2
2
2
1
1
1
2
1
1
1
2
1
2
1
1
0
0
0
3
3
3
3
3
4
2
3
3
2
3
2
3
1
3
3
2
2
2
3
3
2
2
2
2
4
2
2
1
3
3
2
3
2
2
1
1
1
1
1
3
3
4
3
4
3
2
4
3
3
2
3
2
2
2
2
2
2
1
2
2
2
2
1
2
2
3
3
3
1
2
2
3
1
1
23
1
1
0
0
0
4
4
3
4
4
4
4
2
4
4
3
3
3
3
3
3
3
3
3
3
2
3
2
3
3
3
3
3
1
2
3
3
3
3
3
To rank entry modes from the best to the worst from the point of view of the
expansion of the considered company to the Indian market, the PROMETHEE II
method (see Brans and Vincke, 1985; Brans, Vincke and Mareschal, 1986) with
SD rules and veto thresholds (see Nowak, 2005; Górecka 2009) and the EXPROM II method (see Diakoulaki and Koumoutsos, 1991) with SD rules and
veto thresholds (see Górecka, 2010; Górecka 2011) have been applied.
Although expected utility models and outranking relation models used to be
often treated as competitors, it is possible to benefit from both approaches in the
situation when the performances of various alternatives are evaluated in a probabilistic way (as it is in this case because the number of experts participating in
24
D. Górecka, M. Szałucka
evaluation is greater than one). Namely, stochastic dominance rules can be employed to establish preferences with respect to each criterion and the criteria aggregation method based on the outranking relation procedure can be used to obtain
global preference (Martel, Zaraś, 1995). Moreover, the concept of pseudo-criteria
can be employed to distinguish situations of strict preference, weak preference and
indifference (Nowak, 2004). As a matter of fact, applying this combined approach
seems to be an appropriate solution in the case of entry mode selection.
The following characteristics of the decision-making problem analysed and
the following expectations of the decision-makers should be taken into consideration in the process of selecting the most appropriate multi-criteria decision
aiding method for the problem of choosing the most proper entry mode:
• the decision-making problem should be formulated as a problem of ordering
a finite number of alternatives;
• the problem is a group decision-making problem – experts engaged in the entry modes’ appraisal evaluate them individually and independently and it is
required to incorporate diverse individual views into a blended final decision;
• decision-makers are able to present the information about their preferences but
they do not have much time for interaction and cooperation with the analyst;
• participants of the decision-making process have very diverse educational
background and their knowledge about multi-criteria decision aiding methods
is usually limited;
• the decision aiding technique should not be too complicated to enable decision-makers to understand how it works;
• it should be taken into account that experts appraising entry modes may not
be consistent in their evaluations, especially in view of uncertainty and inaccuracy characteristic for the decision-making problem discussed;
• the possibility of the occurrence of complete compensation should be removed as in the case of some criteria it may be hazardous;
• it is desired that the final solution takes the form in which the points occur,
otherwise it may be unconvincing for the decision-makers.
Taking into account all the above-mentioned information the most suitable
methods to aid the decision-making process seem to be PROMETHEE II and
EXPROM II with SD rules and veto thresholds. They are considered to be userfriendly, i.e. simple and easily understood – all steps can be quite effortlessly explained to the decision-makers as they are neither very complex nor mathematically challenging. Additionally, thanks to the introduction of the veto threshold
the techniques are partially compensatory (a really bad score on one criterion
cannot be compensated with a good score on another). Moreover, these techniques allow us to obtain a complete pre-order of the alternatives to which the
points are assigned in the final solution. When comparing both methods, the
Application of MCDA Methods and Stochastic Dominance Rules…
25
PROMETHEE IIv method with SD rules results in an ordinal scale of measurement, while the EXPROM IIv method with SD rules, which is based on the notion of ideal and anti-ideal solutions, enables the decision-maker to rank alternatives on a cardinal scale.
To check the influence of changes in the weights of evaluation criteria on the
final rankings of entry modes examined the analyst in cooperation with the main
expert have established four different vectors of weighting coefficients. The first
vector was determined arbitrarily, the second one was created with the help of
the AHP method (Saaty, 2006; Saaty and Vargas, 1991), and the third one used
Hinkle’s method, which is also called the ‘resistance to change’ grid (Hinkle,
1965; Rogers and Bruen, 1998). In the last approach all factors were presupposed to be equally important. The analyst and the main expert established also
the values of indifference (q), preference (p) and veto (v) thresholds. The model
of preferences for the decision-making problem is presented in Table 4.
Table 4
Model of preferences
Vectors of weighting coefficients
Factors
(criteria)
Max
/min
I
II
III
IV
Market
potential
max
0.11
0.1379
0.140
Production factors
max
0.11
0.1379
Geographical
distance
max
0.04
Cultural distance
max
Political risk
max
Government policies
and regulations
q
p
v
0.067
0
1
3
0.140
0.067
0
0
1
0.0305
0.013
0.067
0
1
5
0.06
0.0520
0.070
0.067
0
1
5
0.09
0.0861
0.100
0.067
0
1
3
max
0.04
0.0305
0.013
0.067
0
1
5
Demand uncertainty
max
0.09
0.0861
0.100
0.067
0
1
2
Marketing
infrastructure
max
0.06
0.0520
0.070
0.067
0
0

1
Size of the company
max
0.09
0.0861
0.100
0.067
0
1
3
International
experience
max
0.11
0.1379
0.140
0.067
0
1
3
Corporate strategy
max
0.06
0.0520
0.070
0.067
0
1
5
Generic marketing
strategies
max
0.02
0.0195
0.005
0.067
0
1
6
Nature of the
strategic assets
max
0.04
0.0305
0.013
0.067
0
1
5
Product adaptation
max
0.04
0.0305
0.013
0.067
0
1
5
Product lifecycle
max
0.04
0.0305
0.013
0.067
0
1
5
D. Górecka, M. Szałucka
26
4. Results
Tables 5 and 6 provide, respectively, a summary of the results obtained by applying the PROMETHEE IIv and EXPROM IIv techniques with SD rules using
four different vectors of weighting coefficients.
Table 5
Rankings of the entry modes obtained using PROMETHEE II with veto thresholds
and SD rules for four different vectors of weights
No.
PROMETHEE II with veto thresholds
Vector no. 1
Vector no. 2
Vector no. 3
Vector no. 4
No.
1
Joint Venture
Joint Venture
Joint Venture
Joint Venture
1
2
Wholly Owned
Subsidiary
Wholly Owned
Subsidiary
Wholly Owned
Subsidiary
Wholly Owned
Subsidiary
2
3
Branch/
Subsidiary Export
Branch/
Subsidiary Export
Branch/
Subsidiary Export
Branch/
Subsidiary Export
3
4
Licensing
Licensing
Licensing
Licensing
4
5
Agent/ Distributor
Export
Agent/ Distributor
Export
Agent/ Distributor
Export
Agent/ Distributor
Export
5
6
Indirect Export
Indirect Export
Indirect Export
Indirect Export
6
Table 6
Rankings of the entry modes obtained using EXPROM II with veto thresholds
and SD rules for 4 different vectors of weights
No.
EXPROM II with veto thresholds
No.
Vector no. 1
Vector no. 2
Vector no. 3
Vector no. 4
1
Wholly Owned
Subsidiary
Wholly Owned
Subsidiary
Joint Venture
Wholly Owned
Subsidiary
1
2
Joint Venture
Joint Venture
Wholly Owned
Subsidiary
Joint Venture
2
3
Branch/
Subsidiary Export
Branch/
Subsidiary Export
Branch/
Subsidiary Export
Branch/
Subsidiary Export
3
4
Licensing
Licensing
Licensing
Licensing
4
5
Agent/Distributor
Export
Agent/Distributor
Export
Agent/Distributor
Export
Agent/Distributor
Export
5
6
Indirect Export
Indirect Export
Indirect Export
Indirect Export
6
The rankings presented in Tables 5 and 6 show the robustness of the solutions
to the changes in the vectors of weights as the modifications of the parameters’
values do not lead (with only one exception) to alterations in the rankings of entry modes.
Application of MCDA Methods and Stochastic Dominance Rules…
27
The rankings of the entry modes we have obtained are not in complete agreement. The best entry mode, taking into account its appropriateness as the institutional agreement allowing the considered company to enter the Indian market, is
joint venture or wholly owned subsidiary. Branch/subsidiary export also turned out
to be quite a good solution – the values of net flows determined for it are in all
cases positive. In turn, licensing and agent/distributor export do not seem appropriate arrangements for organizing business activities in India by the company examined as the values of net flows determined for them are in all cases negative.
Finally, the worst mode to enter the Indian market is indirect export.
To sum up, taking into account all the results obtained, joint venture is recommended for the analysed company (top-ranked five times). Above and beyond, the firm may consider wholly owned subsidiary (top-ranked three times)
or branch/subsidiary export as the entry modes to explore the Indian market.
5. Conclusions
In the paper we have proposed a universal tool, based on the outranking MCDA
methods combined with stochastic dominances, namely PROMETHEE II with
SD rules and veto thresholds, and EXPROM II with SD rules and veto thresholds, which can be used to solve the entry mode selection problem for international expansion. In fact, applying this approach can enhance the evaluation
process and improve decision-making since the assumptions on which it is based
are in line with reality. The usefulness of the presented tool is confirmed by the
fact that in reality, the firm that formed the basis of our analysis of its international expansion chose joint venture as the entry mode to explore the Indian
market and it has succeeded on it.
The approach discussed can be applied to any company searching for a way
to enter the target market and launch its products or services. Nonetheless, the
criteria and measures should certainly be tailored to each firm’s specific circumstances and challenges. The example presented in the paper may serve as guidelines to other companies.
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J Manag Gov (2014) 18:51–76
DOI 10.1007/s10997-012-9233-6
Partnerships as strategic choices in public management
Les Metcalfe • Antonio Lapenta
Published online: 18 October 2012
Springer Science+Business Media New York 2012
Abstract Partnerships are not new phenomena in public administration. However,
there is now a more explicit recognition that managing public policy networks
involves partnerships within and across policy fields and linking interdependent
levels of government nationally and internationally. The aim of this paper is to
widen the scope of strategic choice in designing partnerships in public management
by developing an alternative approach: the Power-Role Analysis. As the term
suggests, Power-Role Analysis uses distinctions between types of power and the
roles and relationships corresponding with them to clarify and define different forms
of partnership. Power-role analysis provides a basis for considering systematically
the problems that arise in managing partnerships of different kinds. It also gives
guidance for establishing congruence between forms of partnerships and the results
to be expected from selecting one form rather than another. The Power-Role
analysis is afterwards performed, its focus being two empirical cases.
Keywords Partnerships Strategic management Power-role analysis
Strategic choice Public management
1 Introduction: fashion and fundamentals in the partnerships debate
Strategic management involves setting new policy directions in response to
changing policy needs and political circumstances. External changes may trigger
new policy responses or redefined political objectives may prompt revaluation of
L. Metcalfe
Durham Business School, Durham University, Mill Hill Lane, Durham DH1 3LB, UK
e-mail: les.metcalfe1@btinternet.com
A. Lapenta (&)
Independent Public Management Consultant, Potenza, Italy
e-mail: antonio.lapenta@yahoo.com
123
52
L. Metcalfe, A. Lapenta
existing policies. Whatever the motivation, political leaders routinely employ the
rhetoric of strategic management when launching new initiatives. But the success of
new political strategies often requires the parallel development of administrative
capacities because existing organisations are not fit for new purposes. Strategic
management includes creation of appropriate organisational structures and
management systems that will ensure that policies will work.
In recent years ‘‘partnerships’’ have become the fashionable solution in public
management reform. The favoured response to the question ‘‘How will this work in
practice?’’ has been to invoke the idea of ‘‘partnerships’’, especially public–private
partnerships. It is a step forward that this has moved debate away from the polar
opposites of state versus market. It is increasingly apparent that neither the state
alone nor the market alone provides adequate solutions to many problems of
managing public service provision and social development. Implementing strategic
change frequently requires a combined effort with public and private actors working
together in partnership.
Howeve…
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