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Cage PDF
Cage PDF
Diffferences an
nd the CAG
GE Distancce Framewoork1
Pankaj Ghhemawat
Thiss note introoduces the CAGE disttance frameework, whiich is used to
idenntify and prrioritize thee differencess between countries
c
thhat companiies
musst address when
w
develooping cross--border strattegies.2
Beggin by conssidering thee example summarized in exhibiit 2-1, whiich
plotts Walmartts operatinng margin by countrry in 20044 against tthe
distance betweeen each coountrys cappital and Walmarts
W
heeadquarters in
Benntonville, Arrkansas. Thhe impact off geographicc distance iss obvious, bbut
whaat other typees of differeence or distance can yo
ou identify that
t separatted
the markets thaat were proffitable for Walmart
W
from
m those thaat werent?
Exhibiit 2-1
Wallmart Internnationals Operating
O
M
Margin
by Co
ountry (2004 estimates)
Econom
mic distancee: Consumeer wealth an
nd income and
a the cost of
labor are
a
the most
m
obviouus (and reelated) determinants of
econom
mic distancee between countries. Others includde differencces
in availlability (or lack) of reesources, in
nputs, infraastructure aand
complements, andd organizattional capaabilities. It seems a bbit
harder for
f Walmarrt to do welll in poorer countries
although tthe
numberr of data points
p
is very
v
limited. Note, however,
h
thhat
econom
mic distancee has not been
b
entireely or evenn primarilyy a
liabilityy for Walm
mart. The company saves morre money bby
procurinng merchandise froom China
exploitinng econom
mic
distancee, particularrly in termss of labor co
oststhan it
i makes froom
its entiire internatiional store network. We
W will reeturn to suuch
strategies in sectionn 5, which discusses
d
arrbitrage.
Common laanguage
+42%
%
A
Administrativee
+47%
%
+188%
+114%
11%
%
G
Geographic
1.1%
%
0.2%
%
48%
%
+125%
E
Economic
Economic size:
s
GDP (1%
% increase)
Income leveel: GDP per caapita (1% incrrease)
+0.8%
%
+0.7%
%
Cultural
Distance
Couuntry pairs
(bilaateral)
Couuntries
(uniilateral)
Different
languages
Different
ethnicities;
lack of
connective
ethnic or
social
networks
Different
religions
Lack of truust
Different
values, norrms,
and
dispositionns
Insularity
Traditionallism
Adminnistrative Geographicc
Distannce
Distance
Ecoonomic
Disstance
Lack of
o colonial
ties
o shared
Lack of
regional trading
bloc
o common
Lack of
currency
Political hostility
Physical distaance
Lack of land border
b
Differences inn time
zones
Differences inn
climates / diseease
environmentss
Ricch/poor
diff
fferences
Othher
diff
fferences in
cosst or quality
of nnatural
resoources,
finaancial
resoources,
hum
man
resoources,
infr
frastructure,
andd
info
formation or
knoowledge
Nonmaarket/closed
econom
my (home
bias vss. foreign
bias)
o
Lack of
membeership in
internaational
organizzations
Weak institutions,
corruption
Landlockedneess
Lack of internnal
navigability
Geographic siize
Geographic
remoteness
Weak transpoortation
or communication
links
Ecoonomic size
Low
w per capita
income
Culttural
Disttance
Culturral differences
matterr the most
when::
Products have highh
lingguistic content
(TV
V programs)
Products matter to
culttural or nationall
idenntity (foods)
Product features
varyy in terms of
sizee (cars) or
stanndards
(eleectrical
equuipment)
Products carry
couuntry-specific
quaality
assoociations
(winnes)
Adminisstrative
Distancee
Governmentt
involvementt is high in
industries thhat are:
Producerss of staple
goods (eleectricity)
Producerss of other
entitlemeents (drugs)
Large empployers
(farming)
Large supppliers to
governmeent (mass
transportaation)
National champions
c
(aerospacee)
Vital to naational
security
(telecomm
munications)
Exploiterss of natural
resources (oil, mining)
Subject too high sunk
costs (infrrastructure)
Geographiic
Distance
Geography plaays a
more importan
nt role
when:
Products hav
ve a low
value-to-weiight or
bulk ratio (ceement)
Products aree fragile
or perishablee (glass,
fruit)
vision
Local superv
and operatio
onal
requirementss are
high (servicees)
Economic
Distance
Econnomic differencces
makke the biggest
impaact when:
Naature of demandd
vaaries with incom
me
(caars)
Ecconomics of
staandardization oor
scale are limited
(ceement)
Laabor and other
facctor cost
diffferences are
salient (garmentss)
Diistribution or
buusiness systems
aree different
(innsurance)
Coompanies need to
bee responsive andd
aggile (home
apppliances)
E Distance Framework
F
Appplications off the CAGE
Thee CAGE fraamework, onnce it is takken down to
o the industrry level, lennds
itsellf to a veryy broad arraay of appliccations. Letts focus heere on four of
the most imporrtant ones.
Com
mparing Maarkets and Discounting
D
by Distancce
Thee CAGE fraamework caan also be used to com
mpare markkets from tthe
persspective of a particularr company. One method to conducct quantitatiive
anallysis of thiss type is to discount (sppecifically, divide) raw
w measures of
marrket size orr potential with meassures of disstance, broadly defineed.
While such discounting
d
involves numerous
n
approximati
a
ions, making
som
me adjustmeents of markket potentiaal for distan
nce is a betteer idea, givven
how
w much distance
d
m
matters,
thaan refraining from making aany
adjuustments at all. Some companies
c
d formally
do
y use methods of this soort
in deciding
d
to enter or exiit markets (as
( describeed in the firsst case in thhis
secttion, on Groolsch).
on Reedefining Global
Strategy , (Harv
vard Business Review Preess, 2011):59
9-69
2
For an original disccussion of cultural distance and how itt affects foreiign
direcct investmennt, see Jorddan Siegel, Amir Lich
ht, and Shaalom Schwarrtz,
Egaalitarianism, Cultural Disttance, and FDI: A New Approach, working papper,
Harvvard Business School, Bostoon, October 2008.
2
5
Susan E. Feinberg
g, The Expansion and Location Paatterns of U
U.S.
Mulltinationals, unpublished working paper,
p
Rutgerrs University
y, 2005.
6
For a more
m
extendedd discussion of
o indexicality
y in a broadeer social sciennce
context, see Andrrew Abbott, Chaos of Dissciplines (Chiicago: Univerrsity of Chicaago
Press, 2001).
7
Subram
manian Rangaan and Aldem
mir Drummon
nd, Explaininng Outcomes in
Com
mpetition amoong Foreign Multinationaals in a Foccal Host Maarket, Strateggic
Mannagement Jourrnal 25, no. 3:: 285293.