THE ENTRY DECISION

The decision on which entry method to use is, as we have said, one of major strategic importance. It is a decision that many established businesses have not taken before.

In the domestic market, few established businesses have to make conscious decisions about which distribution channel to use, in most situations these decisions will have been made previously. The main activity is based upon improving and enhancing the existing distribution

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In international business, the large number of country markets around the world gives rise to various opportunities to decide upon the best form of entry. It is unusual for companies to market their products in every country. It is quite common for companies to be restricted to less than 50 country markets.

The decision approach to entry can be made on subjective or on objective grounds. The significance of the decision strongly supports approaches that attempt to be systematic and to use formal evaluative criteria.

Subjective Approaches

Elements of subjectivity are inevitable because of a lack of complete and reliable information.

It is difficult to obtain factually correct data about prospective agents, distributors or joint venture partners. It is always difficult to forecast future sales. It is particularly difficult to forecast sales in a new situation. Once the company has been established in the market, it can use past sales data to help in the forecast of future sales. The company needs to make judgments about the various information gaps and it is therefore forced to make decisions which have various amounts of subjectivity contained within them.

The most common subjective approach would be to use a particular entry method because that is the way that the company has entered other company markets, for example, the company uses agents in its other markets and therefore automatically looks for agents when it wishes to enter a new country market.

The most likely entry routes to be the subject of the less rigorous subjective approach are the use of the company sales force (especially if the sales force remains based in the domestic market), the use of agents and distributors, and sales that are made domestically. All of these approaches restrict the risk to the company. If things go wrong, the company will not suffer major loss. It is worth remembering, of course, that the company could be missing substantial sales and profit opportunities by selecting inappropriate entry approaches.

Because the ‘lost’ sales can only be estimated, it is easy for the company to ignore the missed potential.

It is unlikely that a company will take a subjective approach with distribution methods that require a lengthy period to pay back the initial investment. Therefore, the wholly owned subsidiary particularly, but also the joint venture, strategic alliance, licensing and franchising would normally be evaluated in a formal way.

Objective Approaches

It is advisable for companies to examine the advantages and disadvantages of each entry method before making a decision. You will see already that it is improbable that any one approach will have no drawbacks. The final decision will not be easy. Furthermore, the decision will be based upon imperfect information. It is difficult to estimate what the future demand patterns will be for each of the entry approaches. Will agents generate more sales than distributors? How easy will it be to motivate agents? If we set up our own wholly owned subsidiary, what will the economic and political situation be in five to ten years’ time? These and other questions make it very difficult to develop a reliable evaluation of the entry options.

The two main approaches that companies can take are to:

 Evaluate entry options through applying scores to the different options.

 Carry out a computer simulation to estimate expected revenues and profit paybacks.

The decision between the two will be influenced by the importance of the decision to the company and its sophistication in using decision-making techniques.

The more the decision is based on reliable information, the more likely it is that the decision will be successful. Thus, subjective judgment should be minimised and the company needs to collect the information necessary to make a rational decision. However, the cost and the

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time taken for this is likely to influence the way in which it is approached. The main decision-making techniques are:

 The weighted factor score method

The weighted factor score method can be used in all situations, even if information is limited, and is preferable to complete subjectivity.

The method works by the company establishing the major factors that it should

consider in making the decision and assigning weights to reflect the relative importance of each factor. Each option can then be rated against these factors and compared to identify the best option.

If we take an example in which some of the options have already been eliminated because the company wishes to gain direct contact with the country market, this leaves eight options, using the company sales force, agents, distributors, licensing,

franchising, strategic alliance, joint venture and a wholly owned subsidiary. Assuming that the company wishes to develop its international sales rapidly and in the long term achieve a substantial global position, the factors that would be relevant and their weightings might be as shown in Figure 8.2.

Figure 8.2: Factor weightings

Factor Factor

Weight (A)

Factor Score

(B)

Rating (A*B)

The speed of sales growth 0.3

Investment payback period 0.1

Amount of learning about international markets 0.2

Degree of control 0.1

Long-term profit potential 0.3

Total Score

The total scores for each of the options can be calculated. In this way the company will make a careful evaluation of each option. Subjectivity is still part of the process. There are elements of subjectivity in deciding which factors to include and which to exclude.

The factor weights and the factor scores both contain elements of subjectivity, but, nonetheless, it does provide a useful way to make the important entry choice.

 Simulation method

A computer simulation could be developed to quantify the profit and sales revenue positions for each option. The options could then be decided by reviewing the payback period, the return on capital employed, the market share obtainable and other similar measures.

To be able to compute the solutions, various estimates would be needed to forecast sales revenue, profit contributions, business operations expenditures (for example, on advertising and sales promotion), the capital expenditures and the probability of results being achieved. The estimation of all this, and other, information would again involve making subjective judgments about the future. However, the advantage with this method is that it encourages a comprehensive review of costs, revenues and profits for each of the options.

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