Distance

Still Matters
The Hard Reality of Global Expansion

By Pankaj Ghemawat

Key words: Consumer, Distance, Global

Author Background and Contribution
•  Author Background
–  International background topics
•  Focus on the problems face by business during
expansion stage at international level
–  Developed DHL Global Connectedness Index(in
collaboration with Steven A. Altman)
•  Contribution
–  How different industries less or more sensitive to
particular type of distance.
 Context About Article
According to Federal Reserve
Globalization Report (2010), 35.6% of
clothes sold in the US
market, actually produced in
Enter into foreign market to sell product & services the China (Justin Kuepper,
2018)

Most Countries use Consumer Portfolio Analysis (CPA)

Most GDP, Income level of
before foreign expansion customer, and Demand

Business Tycoon Rupert

Resulted Murdoch (20th Century Fox
Over-(under)estimates the foreign demand
( cost and risk) of business Film)

DISTANCE

Traditional CPA
required better
Demographic Cultural Administration/ Economic
evaluation on foreign
Political market opportunities
Article’s Structure & Issues Addressed
Introduction Problem with analytic tools
that managers use to make
decision about overseas.

Cultural Distance Most

Distance Ignored
Body subdivided into Administrative Distance
CAGE framework
four categories Geographic Distance
Economic Distance

Conclusion Discussed in ppt. 11

12

•  Most of the costs and risks result from barriers created by DISTANCE
ü  DISTANCE does not mean only geographic

 Article’s Literature Review
•  Frankel and Rose(2000),finds that different factors affect the country’s
trade flows. They argue (Table below) that there is a positive (negative)
association between economic size and trade (distance and trade).
Distance Attributes Foreign Trade association Change in Trade (1%)
Income level Positive 0.7
Economic size: Positive 0.8
Physical distance Negative 1.1

(Source: Frankel and Rose, 2000)

Physical size Negative 0.2
Access to ocean Positive 50
Common border Positive 80
Common language Positive 200
Common regional trading bloc Positive 330
Relationship with colony Positive 900
Common colonizer Positive 190
Common polity Positive 300
Common currency Positive 340
 Article’s Methodology
•  Ghemawat used a tool (CAGE Distance), which
helps managers (at international level) to
account for risk in association with distance.
•  CAGE Distance (ppt.7)
•  Industry Sensitivity analysis (ppt.8)
 CAGE Framework: Market Selection
Distance Reason of distance Affected by distance
Cultural Different language Linguistic content (TV)
Different ethnicities Cultural identity (Food)
Different religions Product feature : size(car),
Different social norms standards (electrical
appliances),and Packaging
Country quality (Wines)
Administrative Absence of colonial ties Government involvement:
Absence of political association electricity, drugs, Farming,
Political hostility aerospace, telecommunication,

(Source: Ghemawat, 2001, p.140)

Government policies oil and mining, mass
Institutional weakness transportation
Geographic Physical remoteness Bulk ratio (cement, steel)
Lack of sea, river access, common Glass, fruit
border, transportation Communication and connectivity
Communication skills important (financial services)
Different in climates Local supervision requirements
Economic Difference in consumer incomes Demand -income level (cars)
Difference in cost and quality Standardization (mobile phones)
of :resources(natural, financial Labor cost (garments)
human), knowledge/information Business system (Insurance)
 Industry Sensitivity
Distance More sensitive Less sensitive
Cultural meat (preparation), edible Photographic and optical
products(preparation), tobacco, goods, watches, road
office machines (data processing vehicles, electricity current
equipment)
Administration gold (nonmonetary), electricity Gas and natural, travel

(Source: Ghemawat, 2001, p.142-143)

current, tea, coffee, spices, textile goods, handbags, plumbing,
fibers, sugar preparations and honey heating, lighting fixtures,
furniture (parts)
Geographic Electricity current, gas and natural, Pulp and waste paper,
paper, paperboard, live animals, photographic and optical
sugar and honey. goods, watches, tea, coffee,
spices, gold (nonmonetary)
Economic Nonferrous metals, manufactured photographic and optical
fertilizers, meat, iron and steel, goods, watches, tea, coffee,
waste papers spices, gold , animal oils and
fats, office machines
pliance business, for instance, Donald’s International to invest outside the home base, Mexico’s consumption decreases mopolitan managers, for instance, w
Maytag that concentrate on a United States. As a result, in 1998, TRI’s presi- less than any other country’s, as you might ex- affected by cultural differences tha
r of geographies produce far dent, Pete Bassi, decided to rationalize its glo- pect, given Mexico’s proximity to Dallas. nies whose managers are all from

Portfolio Analysis of International

for investors than companies
and Whirlpool, whose geo-
has come at the expense of sim-
bal operations by focusing its equity invest-
ments in a limited number of markets.
But which markets? The exhibit “Country
Based on just this readjustment, Mexico leaps
to sixth place in terms of market opportunity.
Further adjusting the numbers for a com-
country. In TRI’s case, consideration
pany-specific features made Mexico e
attractive. The company already ow

Market
mon land border and for membership in a than four-fifths of its Mexican outlet

o Analysis:
A Flawed Approach Country Portfolio Analysis:
CPA: A Flawed Approach CPA: Adjusted for Distance
KEY:
Adjusted for Distance (applies to both charts)
1 JAPAN 11 SAUDI ARABIA
2 KOREA 12 POLAND
Taking distance into account dra-
3 TAIWAN 13 BELGIUM
matically
4 PUERTOchanges
RICO estimates of
14 FRANCE 400
400 market opportunities.
5 MALAYSIA In the chart
15 GERMANY
6 AUSTRALIA 16 SPAIN
at right, each of 17the
7 THAILAND UK
fast-food

per capita fast-food consumption ($)

markets has been18 adjusted
8 NEW ZEALAND CANADA for a 4
per capita fast-food consumption ($)

4 9 S. AFRICA 19 MEXICO 300

300
number of distance attributes, 18
18 10 SINGAPORE 20 CHINA
based on the estimates by Frankel
and Rose. The relative sizes of the
6
6
bubbles are now very different. 200 8
200 8
For example, Mexico, which was
less than one-tenth the size of 15
15 the largest international markets, 17
17 1
Japan and Germany, 1 ends up as the 100
100 10 14
10 14 second largest opportunity. Clearly,
2 3
2 3 the CPA approach paints an incom- 9 16
7 7 12
9
12 16
13 plete picture, unless it is adjusted 0 20 5 11 19 Mexico 13
0 20 19 Mexico
5 11 for distance. -5,000 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000
-5,000 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000
per capita income ($)
per capita income ($)

harvard business review • september 2001

page 9

(Source: Ghemawat, 2001, p.146)

 Article’s Findings
•  Besides Sales, look at other factors.
•  Not fully globalized until DISTANCE exists
•  Multicultural Managers affect less than Home
managers from DISTANCE
 Article’s Contribution
Contribution

Academic Policies Makers & Practitioners Managerial Aspect

•  Entry point for writing on Cover the issues related to major How does
IB , as article short and sociopolitical and economic events companies grow at
written in easy language such as Brexit and GFC international level in
•  Helps non-expert in IB short span?
 Article’s Limitations
•  Conclusion is questionable as present
research did not illustrate that how ‘distance’
should be addressed into CPA
 Contribution of this Article in my
research
Contributes
CAGE Framework My Research Topic

Give negative impact

Administrative Distance Big Four: NAS

Creates
Political Associations Cross border Policies NAS
competition barrier

Involved OTHERS
Countries CHINA

Sensitive
More
Sensitive
Less
•  The challenges face by big4 in China
(Paul Gillis ,2010)
•  Tougher govt. policies and domestic US, Canada,
AUS, UK
competition (Browne and Dean, 2010) EU