The 2001 article, “Factors influencing market and entry mode selection: developing the MEMS model ” by A. J. Koch gives an introduction to marketing model that denotes why, how and when market selection occurs. The method has been termed holistic and this is directly related to the fact that the model demonstrates reaction a melding of the internal and external market factors. In fact the three categories into which market selection models have been divided entails reaction to internal, external, and mixed market factors. Anna Puljeva and Peter Widén’s 2007 article, “The influence of internal and external factors on entry modes,” demonstrates similarity to this article discussed here. The authors acknowledge the increased globalization of today’s industries and cite the importance for businesses to stay current with this development. They note that the method in which any company elects to make the move from local or domestic commerce into business on a global scale will have a large impact on their success in the overall market.
In contrast, the 1997 article “Cost, value, and foreign market entry mode: the transaction and the firm” by A. Madhok takes a different approach by providing a comparison of different modes of entry into foreign markets and the decisions that drive them. Though the decisions also have been considered to be based on costs and the rewards that are viewed as likely to accrue to the business as a result, this article primarily deals with the “internalization perspective.” This perspective is shown to be in close relation to transaction cost (TC). Such perspectives have at their core the goal of minimizing transaction cost and causing the means through which market failure could occur to be eliminated. However, the literature also introduces a new perspective termed “organization capability” which is now a rival factor influencing market selection and entry. The significant difference between the TC and OC perspectives makes it so that the one to which a given firm subscribes therefore has an important bearing on its likelihood to enter a market. This is so because it changes the factors that affect this likelihood. On the one hand, the TC perspective weighs cost and benefit on a monetary scale. However, OC weighs costs and benefits on a managerial and relational scale, seeking also to create and sustain the relationships and management capabilities that will facilitate a financially profitable business.
The Koch (2001) article reviewed a wide cross-section of literature and found that the resources possessed by a company were shown to have a bearing on the ways in which it can service its market. In comparison, the Madhok (1997) article also conducted a very extensive review of literature. In fact, the entire article represented a meta-analytic exploration of the literature on TC and OC perspectives. The Puljeva and Widén (2007) article also represented a wide cross-section of literature. However, the ideas presented in this article concurred more with that of Koch (2001) than with that of Madhok (1997).
According to Koch (2001) and Puljeva & Widén (2007), smaller companies, for instance, possess a limited amount of resources and this makes it more likely that they become exposed to fewer modes of market servicing. Such companies are usually barred from forming subsidiaries that are owned completely by the company. This would take a higher level of investment than they could afford and would place them in a riskier position than their company could safely withstand. Also narrowing the scope for their market selection and servicing is the fact that the availability of management within such small companies is too limited to allow them to undertake overseas projects. Likewise, their employee base may not possess sufficient skills to successfully operate business in an overseas market. However, it is also important to note that the extent to which a company has freedom in selecting its entry mode in the market does depend significantly on the demands on resources that exist within specific industries. In contrast, though the Madhok (1997) article presented an in-depth review of a very wide cross-section of literature, these ideas rested mainly on the transaction cost and organization capabilities of companies. Though each was related either to an internal or external factors, the article was not dedicated to this broader heading but focused on these specific types of factors and how they differed from each other. While the other two articles focused on how many factors affected market selection, the focus in the Madhok article was mainly on comparing and contrasting TC and OC.
The goal of the Koch (2001) research was to determine a model for the several factors that contribute to the entrance of companies into different markets. It sought to correlate the different factors with the types of markets to which they would draw a company. In contrast, the objective of the Madhok (1997) research was to put into place a comparison of the transaction cost (internalization) perspective and that of organizational capabilities. It was hypothesized that the “critical difference between the TC and the OC perspectives is that the TC focuses primarily on the impact of a governance form on the costs of contracting and transacting while the OC addresses the impact of a governance form on the rent-generating potential of the know-how” (Madhok, 1997, p. 45). However, like the Koch (2001) research, the 2007 Puljeva and Widén research was interested in learning about the effects of internal and external factors on market selection. It employed two research questions:
“How do internal factors influence firm’s choice of international market entry mode?”
“How do external factors influence firm’s choice of international market entry mode?”
The Koch (2001) research used a method of sending out questionnaires to a number of companies across a wide range of markets in order to ascertain their reactions to market entry selection. The companies researched by Koch (2001) ranged from small to large, and the pool included sole proprietorships as well as multinational corporations. Some of these companies had single managers while other had multiple managers. The employee base of some was large while for others it was small. The questionnaires therefore were tailored to determine these factors within each company and also to examine the likelihood of the different companies to enter markets of different risk levels. Similar methods were used by Puljeva and Widén (2007), in that questionnaires were also given to a wide cross section of companies to determine their stance regarding the variables set forth for market selection.
However, Madhok’s methods differed from either of the two above.The methods chosen for the research by Madhok (1997) involved a meta-analytic look at other research in order to perform an extensive comparison/contrast of the two perspectives. The reaction of the different perspectives to certain circumstances was determined. The categories of circumstances were divided into several areas. These include transferring skills or “know-how” across borders; this same transfer of skill within borders; advantages that were deemed to be specific to individual firms; and different firms likelihood or “orientation” in favour of forming alliances within or between themselves.
Findings and conclusions
The Koch (2001) article discusses the data and comes to the conclusion that the “locus of control” enjoyed by management has a bearing on the extent to which a company becomes involved on the international market. It was found that the stronger the internal or external locus of control, the more influence that control has over the perceptions of the managers within those companies. Therefore, the internal working of companies may just have more of an influence on the company’s decision to enter a market than the conditions within the market itself. The amount of control given to managers in a company with a small number of managers may give rise to a wise decision being taken (depending also on the experience of the managers). However, managerial discord may cause a company for whom the market is favourable to refrain from taking a decision in the direction of entering the market. This, according to Koch, must also be attributed to the locus of control. Too much control given to too many managers may cripple certain organisations.
Market entry was also shown to respond to the attitudes that managers have about risk. In the previous example, consensus was a problem—but when this “discord” does not occur, then the manager(s)’ feelings about the risks they take becomes a primary driving force. Risks may be estimated using certain risk calculation formulas, but risk perception (without the use of formulas) is also a very important determinant of market entry. What as shown in the study is that the less a company demonstrates an aversion to risk, the more likely it was for that company to enter into a market that showed potential for long-term growth.
The meta-analytic discussion done by Madhok led to the following conclusions:
Transfer of know-how across boundaries
According to the TC perspective, this category predicts a failure in the market because an assumption exists that opportunism would arise to the detriment of the market. According to the OC perspective, a similar failure of the market would occur. However, this would come to be due to the fact that firms possess different innate abilities that could create a problem in the efforts at transferring knowledge. Furthermore, the different specificities within firms would make it likely that this knowledge transfer might be redundant or otherwise impossible to achieve. However, unlike TC, it doesn’t consider opportunism to be an important contributor to market failure.
Transfer of know-how within boundaries
According to the TC perspective, this could only be achieved based on an assumption that capabilities and knowledge are perfectly transferable between/among the employees in the possibly varied and likely non-homogeneous contexts. The OC perspective finds that failure would occur in the hierarchical dimension for reasons similar to the ones raised in the TC perspective: “context specificity and the imperfect mobility of know-how” (Madhok, 1997, p. 45).
The TC perspective emphasizes how advantages held by certain firms may be exploited to the detriment of others in the market. However, the OC perspective also focuses on the exploitation of any advantage. In addition, it also focuses on how advantage can be developed in order to place the firm in a critical position to increase its profits in the long run.
Orientation toward collaborations
The TC perspective focuses on how cost can be minimized. It seeks to protect itself in any market and therefore is more likely to forfeit the opportunity to enter a market if costs are too high. They focus only minimally on the skills and knowledge aspect of the entry. However, while the OC perspective also considers the benefits of low cost, it takes a stance that seeks to create positive value. It also has a “broader focus towards the routines underlying the know-how” (Madhok, 1997, p. 45).
Implications for Cases Reviewed
Company A seems to take an OC approach to its expansion into different markets. It takes care to expand into related markets, but also gives itself room for growth and the establishment of relationships within the industry. The policies of company A also points toward some of the ideas found in the Koch article, which demonstrates that larger and more secure companies are more likely to embark on investments in markets that are set to stabilize and/or be profitable only in the long term. Company A is such a company as it is a supplier for several large firms and already operates globally.
Company B is similarly quite large and therefore supports the ideas presented by Koch concerning the likelihood of larger firms (with more resources) to embark of entry into global markets. This firm possesses a large amount of resources, and this is matched with its existence in Australia and New Zealand, as well as in several European countries. Since its entry into globalization has also been deemed to be dependent on the extent to which former entrants have succeeded in the same market, it might also be said that external factors also have a bearing on market selection for this company. Company B also depends greatly on collaboration among possibly competing firms, and this demonstrates an adherence to the OC perspective, in which collaboration and information sharing leads to the transfer of knowledge and skills that facilitate stability and growth within an industry (Madhok, 1997).
Internal and external factors advocated by Koch (2001) and Puljeva and Widén (2007) seem also to be relevant to Company C. This company cites several internal factors for its entry into the global market. Its concern for maintaining the relationship between suppliers show it leaning heavily also in the direction of the theory proposed by Madhok (1997), which states that organizational concerns also drive market selection. Specifically, the OC perspective seeks to create positive value by forging relationships that facilitate the transfer of knowledge between and within corporations. Since suppliers are said to work closely together according to the philosophy of Company C, it can be said that information sharing has become a priority for the firm and a means of creating stability and enhancing the product.
Comparison of the three articles reviewed shows that the results gained by Puljeva and Widén (2007) were found to bear several similarities to those given by Koch. The size of the company, their resources (including skills and managerial), and attitude toward risk have an important effect on market selection. This demonstrated also a similarity to the Madhok research in that financial costs and risks were counted as important barriers to market entry. The Puljeva and Widén research differed from the Koch study, however, by naming certain external factors, such as “industry feasibility of MEM,” as having an important on the entry of a firm into a market. This does concur with some of the data found in the Madhok study (1997) which demonstrates that the OC perspective considers more long-term goals (such as market feasibility or failure) as having a bearing on market selection.
Koch, A. J. (2001). “Factors influencing market and entry mode selection: developing the MEMS model.” Marketing Intelligence and Planning. 19(5).
Madhok, A. (1997). “Cost, value, and foreign market entry mode: the transaction and the firm.” Strategic Management Journal. 18: 39-61
Puljeva, A, & P, Widén. (2007). “The influence of internal and external factors on entry modes.” Lulea University of Technology. D-Uppsats: Marknadsföring.