Selecting an entry mode for a new organization or expansion is of vital importance to a decision maker, as many potential qualitative and quantitative criteria are to be considered. Entry mode decision is the most critical decision in international expansion; it can affect the performance of the company in the future. This paper solves an entry mode selection problem using PROMETHEE (Preference Ranking Organization Method for Enrichment Evaluation) and GAIA (Geometrical Analysis for Interactive Aid) method which is an effective multi-criteria decision-making (MCDM) tool and is used to deal with complex problems. In order to follow this technique, an investigation has been operated for comparing 5 entry modes such us exporting, franchising, licensing, joint venture and foreign direct investment (FDI) according to 15 criteria. The results, obtained by multi- criteria evaluation, clearly show that this method of entry mode selection for an Ivorian company named FILTISAC is successful and applicable. It is empirically determined that joint venture is the most suitable entry mode for company expansion amongst those selected.
Business is the biggest activity in the world today and has become more important for countries and companies. The number of companies operating internationally is increasing constantly. Companies expand their activities overseas around the world in order to take advantage of expanded markets and resources that exist across borders. However, the process by which a company moves from their home market to new markets successfully and starts up an economic activity remains a challenge to many of them.
According to Papadopoulos & Denis [
Once a foreign market has been chosen, the decision makers have to decide how best their company can enter in this specific market, Deresky [
There are many different modes of entering into foreign markets. Each mode has its advantages and disadvantages. Companies can expand into foreign markets through the following five entry modes: exporting, licensing, joint venture, franchising and direct investment. Several theories have developed different factors that influence entry modes decisions such as Chen and Mujtaba [
The objective of this study is to provide all the necessary information in order to analyze and recommend the best possible entry mode to the company’s business expansion in selected market. This can be realized by addressing a number of problems, sequentially by attempting to answer the questions, as follows: What factors need to be considered by companies before entering a foreign market? What entry mode should the company use to enter in the selected foreign market? Which method is the best to a quantitative method of entry mode analysis? In this paper, the preference ranking organization method for enrichment evaluation (PROMETHEE II) is employed to solve the problem of entry mode given that it is useful as method for more effectiveness and efficiency to enable company success in market expansion. A case study of a company that manufactures jute bags for packaging agricultural products will be used. The author mentions that the market has been selected in the previous study.
This study has great implication in giving direction to decision makers of companies, professional and academic economists, as well as research students and interested parties in the field of international business. Particularly, those learning international business as a practical example of company’s expansion showing how to select foreign entry mode for expansion. Results could provide new insights of inquiries.
The rest of this paper has been structured as follows: Section 2 discusses literature on factors that affect firm’s choice of foreign market entry mode and a short description of different entry modes. Section 3 sets out PROMETHEE-GAIA procedure and while Section 4 provides results and discussion. Eventually, Section 5 concludes.
In this section an overview of previous studies related to the research question is presented. The section is going to analyze foreign market entry mode, and then factors that influence company foreign market entry mode. Finally we presented a conceptual framework to understand the development of our paper.
According to Hollensen [
Exporting is sale of domestically-produced goods in another foreign market. The company doesn’t need to invest in the foreign market because all products are made at the company home country, Brassington and Pettitt [
Another mode of market expansion is licensing. At this point a company named licensor sells its intellectual property, technology, work methods, patents, copy rights, brand name to another company named the licensee; in return the licensee must pay the fee in order to obtain the agreement with the licensor, Hill [
Franchising is a popular entry mode used by most companies for market expansion. Franchising is a business arrangement that permits an organization, called the franchisee, to drive a business under another name, called the franchisor, in return for fee. The franchisor provides trademarks, an operating system and well-known product reputation to his franchisee, Armstrong and Kotler [
Buckley & Casson [
Foreign direct investment (FDI) is the direct ownership of services in the foreign country. It concerns capital, technology, and personnel. On the other hand, investment entry modes are about obtaining ownership in a company that is located in the foreign country, Root [
Each mode has its own advantages and disadvantages and the manager or the decision maker should select proper mode by considering different factors, Bradley [
Mode | Condition to use | Advantages | Disadvantages |
---|---|---|---|
Exporting | High target market, product cost, high political risk, low home-country currency | Relatively low financial exposure, permit gradual, market entry Acquire knowledge about local market | Vulnerability to tariffs logistical complexities potential conflicts with distributors |
Licensing | Licensing licks ability to become a competitor, low sales, potential in targeted market | Lower cost and risk licensee provides knowledge of local market | No tight control, risk for losing know-how |
Franchising | Contractual agreement | Low financial risk, low cost way to assess market potential, maintain more control than with licensing | Limits market opportunity, dependence on franchisee, potential conflicts with franchisee |
FDI | High sales potential low political risk. | Greater knowledge of local market, Can better apply specialized skills | Higher risk than other modes requires more resources and commitments may be difficult to manage the local resources |
Joint ventures | High sales potential local company can provide recourses and skills | Benefit from local partner Share cost and risk, Political considerations | Loss control of technology, no tight control of partner, Conflicts and battles |
Several studies have sought to identify a set of factors that influence entry mode decisions, Root [
In external factors, Root [
Secondly, Target Country Production Factors: Root [
Thirdly, Target Country Environment Factors: Root [
Lastly, Home Country Factors: Market, production and environment factors influence entry mode choice. If the market of the company home country is big, it permits a company to grow to a large size in the home market before its expansion. The competitive structure and policy of the home government are factors that need to be investigated carefully before taking the final decision. Geographical distance is another influential factor. The greater the geographical distance, the greater the probability that the company will choose investment as market entry mode, Root [
In internal factors, Root [
Company resource-commitments factors: Root [
The following theory has been developed by Koch [
The author also argues that some characteristics of the foreign market are easy to get but information about the company specific information or industry is difficult to find. Furthermore, he regards that certain elements such as image support requirements, global management, efficiency requirements, and popularity of individual MEMs in the overseas market, industry feasibility/viability of MEM and market barriers (tariff barriers, governmental regulations, distribution access, natural barriers, exit barriers and level of country development) can influence the selection of entry mode.
Concerning the internal factors, Koch [
Koch [
Chen and Mujtaba [
Country-specific Factors Include: country-specific economic, political, legal, institutional and cultural factors. These factors should be considered in the entry mode decision process.
Finally, Market-specific factors include: market potential, demand uncertainty and competitive intensity. Chen and Mujtaba [
To enhance understanding on the steps applied in gathering information for this study, a conceptual framework is employed to illustrate this. In the process of selecting entry modes, several influential factors must be taken into consideration before making the final decision. However, many authors have divided these factors in two or three groups. In this study, a set of factors, those have been frequently mentioned in the literature review, that also fit most of cases were chosen. For the conceptual framework, we have decided to use some influential factors mentioned above by Chen and Mujtaba [
After the decision maker evaluates the factors that influence the target foreign market, he will select the most suitable entry mode. Several researches identify export, contractual and investment as the main foreign market entry modes, Sitek [
Graph 1. Presentation of the conceptual framework.
The PROMETHEE (preference ranking organization method for enrichment evaluation) method was developed by Brans and Vincke [
The procedural steps as involved in PROMETHEE II method are enlisted as below:
Step 1: Normalize the decision matrix using the following equation:
where
For non-beneficial criteria, Equation (1.1) can be rewritten as follows:
The vector normalization denoted as
Step 2: Calculate the evaluative differences of
Step 3: Calculate the preference function,
There are mainly six types of generalized preference functions as proposed by Brans and Mareschal these preference functions require the definition of some preferential parameters, such as the preference and indifference thresholds. However, in real time applications, it may be difficult for the decision maker to specify which specific form of preference function is suitable for each criterion and also to determine the parameters involved. To avoid this problem, the following simplified preference function is adopted here:
Step 4: Calculate the aggregated preference function taking into account the criteria weights.
Aggregated preference function,
where
Wj is called the normalized weight of j criteria and it measures the importance of each criteria.
Step 5: Determine the leaving and entering outranking flows as follows:
Leaving (or positive) flow for
Entering (or negative) flow for
where n is the number of alternatives.
Here, each alternative faces (n-1) number of other alternatives. The leaving flow expresses how much an alternative dominates the other alternatives, while the entering flow denotes how much an alternative is dominated by the other alternatives. Based on these outranking flows, the PROMETHEE I method can provide a partial preorder of the alternatives, whereas, the PROMETHEE II method can give the complete preorder by using a net flow, though it loses much information of preference relations.
Step 6: Calculate the net outranking flow for each alternative
Step 7: Determine the ranking of all the considered alternatives depending on the values of
We apply the above method (PROMETHEE) to recommend the best entry mode used to expand internationally by a dynamically company that manufactures and distributes jute bags for packaging agricultural products. This company, FILTISAC S. A. (Filature, Tissage, and Sac―French name) is an enterprise establishes in Abidjan, Ivory Coast, West Africa in 1965 under the network of IPS WA (Industrial Promotion Services, West Africa), and an Institution of the Aga Khan Fund for Economic Development (AKFED). It occupies an area of land of approximately 102 acres, comprising of the factory, raw material and finished goods warehouses, the offices, the socio-medical structures, the sport facilities and residential accommodation. The company is present in four countries in West Africa (Cofisac and Fumoa) Senegal, (Embalmali) Mali, (Fasoplast) Burkina Faso and Niger. It has an annual turnover of about US $ 300 million and operates in six major fields of activities such as packaging for transportation, packaging, metals, agro-Industry, infrastructures, and Small and Medium Businesses. The company has been expanded internationally because the domestic market is become too small to be profitable. To meet the local demand of packaging for coffee and cocoa beans and other agricultural products, the industrial modernization strategy began in 1986. Over the years substantial innovative investments have been made and continue to take place. Today the Jute Mill has a capacity of thirty million bags per year. Parallel to these activities, research, maintenance and quality control methods are given top priority to produce high quality products at international efficiencies and productivity ratios. Strict quality control and budgeting is undertaken at all stages of production to ensure quality products at the most economic levels.
The PROMETHEE technique requires two types of information: alternatives and criteria. In order to follow this technique, an investigation has been operated to get quantitative data. A questionnaire is produced using 5 alternatives among the various alternatives namely entry modes: exporting, franchising, licensing, FDI and joint venture. Those entry modes are selected based on the literature review and the type of entry modes which appears convenient for this study.
Then we used 15 influential factors called criteria. The selections are made based on the political situation, cultural difference and economic competitiveness and there are presented in the table below (
FACTOR CRITERIA SCALE | MODES | ||||
---|---|---|---|---|---|
EXPORTING | FRANCHISING | LICENSING | FOREIGN DIRECT INVESTMENT | JOINT VENTURE | |
MARKET POTENTIAL (1 - 5) | 2 | 3 | 3 | 4 | 4 |
1 | 3 | 1 | 3 | 4 | |
2 | 4 | 2 | 3 | 5 | |
3 | 4 | 1 | 5 | 4 | |
1 | 5 | 1 | 3 | 4 | |
1 | 4 | 4 | 4 | 5 | |
PRODUCTION FACTORS (1 - 5) | 1 | 3 | 2 | 4 | 1 |
1 | 3 | 1 | 3 | 1 | |
1 | 3 | 1 | 3 | 2 | |
1 | 3 | 1 | 3 | 1 | |
1 | 3 | 1 | 4 | 1 | |
1 | 4 | 1 | 4 | 1 | |
GEOGRAPHICAL DISTANCE (1 - 5) | 2 | 4 | 1 | 2 | 1 |
2 | 4 | 3 | 1 | 4 | |
2 | 3 | 4 | 1 | 3 | |
1 | 4 | 2 | 1 | 2 | |
1 | 4 | 2 | 1 | 3 | |
1 | 3 | 2 | 1 | 2 | |
CULTURAL DISTANCE (1 - 5) | 3 | 4 | 3 | 1 | 2 |
1 | 4 | 5 | 1 | 1 | |
1 | 3 | 5 | 1 | 1 | |
1 | 4 | 4 | 1 | 1 | |
2 | 4 | 4 | 1 | 1 | |
2 | 3 | 5 | 1 | 2 | |
MARKET BARRIERS (1 - 5) | 4 | 1 | 3 | 2 | 4 |
5 | 1 | 3 | 2 | 5 | |
3 | 2 | 4 | 2 | 5 | |
4 | 2 | 3 | 3 | 4 | |
5 | 2 | 4 | 3 | 3 | |
6 | 2 | 2 | 1 | 4 | |
GOVERNMENT POLICIES AND REGULATIONS (1 - 5) | 3 | 2 | 5 | 1 | 3 |
4 | 2 | 4 | 1 | 3 | |
2 | 1 | 4 | 1 | 4 | |
2 | 1 | 3 | 1 | 3 | |
3 | 1 | 4 | 2 | 2 | |
3 | 2 | 3 | 1 | 4 |
DEMAND UNCERTAINTY (1 - 5) | 3 | 1 | 2 | 2 | 3 |
---|---|---|---|---|---|
3 | 1 | 1 | 2 | 4 | |
2 | 2 | 4 | 3 | 1 | |
1 | 2 | 2 | 2 | 2 | |
2 | 1 | 2 | 2 | 2 | |
3 | 2 | 3 | 2 | 3 | |
ENVIRONMENT FACTORS (1 - 5) | 1 | 3 | 3 | 3 | 4 |
1 | 4 | 4 | 2 | 4 | |
1 | 3 | 3 | 3 | 4 | |
1 | 3 | 3 | 3 | 4 | |
1 | 4 | 4 | 2 | 3 | |
1 | 2 | 4 | 4 | 3 | |
SIZE OF THE COMPANY (1 - 5) | 2 | 3 | 3 | 3 | 4 |
2 | 3 | 3 | 3 | 2 | |
1 | 2 | 2 | 2 | 4 | |
1 | 3 | 2 | 2 | 3 | |
1 | 2 | 2 | 2 | 3 | |
1 | 3 | 2 | 2 | 3 | |
INTERNATIONAL EXPERIENCE (1 - 5) | 1 | 4 | 2 | 2 | 1 |
1 | 3 | 1 | 1 | 1 | |
1 | 4 | 3 | 1 | 1 | |
1 | 4 | 2 | 1 | 2 | |
2 | 4 | 2 | 2 | 1 | |
1 | 4 | 2 | 2 | 1 | |
COMPETITIVE STRUCTURE (1 - 5) | 3 | 2 | 2 | 4 | 3 |
4 | 2 | 2 | 4 | 2 | |
4 | 3 | 2 | 5 | 2 | |
3 | 1 | 2 | 4 | 2 | |
3 | 2 | 1 | 5 | 1 | |
4 | 1 | 1 | 5 | 1 | |
POLITICAL RISK (1 - 5) | 5 | 4 | 5 | 5 | 5 |
4 | 4 | 5 | 5 | 4 | |
4 | 3 | 4 | 4 | 3 | |
3 | 4 | 4 | 5 | 3 | |
3 | 4 | 5 | 4 | 4 | |
3 | 4 | 4 | 5 | 3 | |
MANAGEMENT RISK ATTITUDE (1 - 5) | 3 | 2 | 3 | 4 | 2 |
3 | 2 | 1 | 3 | 3 | |
3 | 3 | 2 | 4 | 4 | |
4 | 2 | 2 | 4 | 4 | |
3 | 2 | 3 | 4 | 2 | |
3 | 2 | 3 | 4 | 3 | |
HOME COUNTRY FACTORS (1 - 5) | 3 | 1 | 1 | 1 | 2 |
2 | 1 | 1 | 2 | 2 | |
3 | 1 | 1 | 1 | 2 | |
2 | 1 | 1 | 2 | 3 | |
1 | 2 | 2 | 1 | 3 | |
2 | 1 | 1 | 1 | 2 | |
QUALITY, QUANTITY AND COST (1 - 5) | 4 | 3 | 2 | 3 | 3 |
3 | 3 | 3 | 4 | 3 | |
4 | 3 | 3 | 4 | 2 | |
3 | 4 | 3 | 4 | 2 | |
2 | 3 | 2 | 2 | 3 | |
4 | 3 | 3 | 3 | 2 |
After the questionnaire is made, six independents experts fill the form and we assume that there is no communication between the experts and they ignore the existence of each other. Unfortunately fewer experts in the specialized field were not available. So this paper did focus on the availability of the data about the six independent experts.
The scores are based on their personal experience, knowledge about international business and the expansion of a company abroad. The experts choose the score between 1 to 5 based on the relationship between each factor and the entry mode. When the score is close to 5, it means there is a strong effect that the influencing factor has on a specific entry mode. Each score for each entry modes is influenced by the factor criteria. So the difference is about the impact factor of entry modes on the factor criteria scale.
The results below are obtained using the PROMETHEE II method which gives the net outranking flow.
In
In PROMETHEE Network, Joint venture still dominates the others entry modes.
VISULA Analysis
A look on the PROMETHEE II complete ranking and PROMETHEE diamond (see
In this section, the vertical axis (
According to previous studies, entry mode decisions have always been one of the most critical decisions, in international expansion because the decision of how to penetrate a foreign market can have an important effect on the
rank | action | Phi | Phi+ | Phi− |
---|---|---|---|---|
1 | joint-venture | 0.1607 | 0.5536 | 0.3929 |
2 | licensing | 0.0714 | 0.5000 | 0.4286 |
3 | franchising | −0.0179 | 0.4821 | 0.5000 |
4 | exporting | −0.1071 | 0.4107 | 0.5179 |
5 | FDI | −0.1071 | 0.4286 | 0.5357 |
results. It is therefore important to select the most appropriate entry mode for a given company application which will minimize some mistakes and allow it to achieve growth internationally. The present study explores the use of PROMETHEE-GAIA method in solving an entry modes selection problem and the results obtained can be valuable to the decision maker in framing the entry mode selection strategies. This method allows for a model numeric processing of the problem and for presenting numerical and graphical results of ranking alternatives.
It is also observed that this MCDM approach is a viable tool in solving the entry mode selection decision problems. It allows the decision maker to rank the candidate alternatives more efficiently and easily. Actually, applying this approach can develop the evaluation process and improve decision-making since the assumptions on which it is based are in line with reality. Based on ranking, a definitive choice of the best solution at all the criteria is the choice of joint venture and which can be clearly seen above. Most of the studies recommend joint venture as entry mode in foreign market. The result from our study is relevant with others studies. The approach discussed can be applied or guide-lines to any company searching for a way to enter the target market and launch its business activities.
Assamoi Valerie Christian,Yabin Zhang,Coulibalykigbajah Salifou, (2016) Application of PROMETHEE-GAIA Method in the Entry Mode Selection Process in International Market Expansion. Open Journal of Business and Management,04,238-250. doi: 10.4236/ojbm.2016.42025