{"id":100,"date":"2015-07-29T21:14:24","date_gmt":"2015-07-29T21:14:24","guid":{"rendered":"https:\/\/courses.candelalearning.com\/intlbusx1xmaster\/?post_type=chapter&p=100"},"modified":"2017-01-09T19:18:23","modified_gmt":"2017-01-09T19:18:23","slug":"cage-analysis","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/cerritos-internationalbusiness\/chapter\/cage-analysis\/","title":{"raw":"Reading: CAGE Analysis","rendered":"Reading: CAGE Analysis"},"content":{"raw":"
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Learning Objectives<\/h3>\r\n
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  1. Understand the inputs into CAGE analysis.<\/li>\r\n\t
  2. Know the reasons why CAGE analysis emphasizes distance.<\/li>\r\n\t
  3. See how CAGE analysis can help you identify institutional voids.<\/li>\r\n<\/ol>\r\n<\/div>\r\n
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    The Inputs into CAGE Analysis<\/h2>\r\nPankaj \u201cMegawatt\u201d Ghemawat is an international strategy guru who developed the CAGE framework<\/span><\/span> to offer businesses a way to evaluate countries in terms of the \u201cdistance\u201d between them.<\/span>[footnote]Pankaj Ghemawat, \u201cDistance Still Matters,\u201d Harvard Business Review<\/em> 79, no. 8 (September 2001): 1\u201311.<\/span> [\/footnote]In this case, distance is defined broadly to include not only the physical geographic distance between countries but also the cultural, administrative (currencies, trade agreements), and economic differences between them. As summarized in Table 8.2 \"The CAGE Framework,\" the CAGE (cultural, administrative, geographic, and economic) framework offers a broader view of distance and provides another way of thinking about location and the opportunities and concomitant risks associated with global arbitrage.[footnote]Pankaj Ghemawat, \u201cThe Forgotten Strategy,\u201d Harvard Business Review<\/em> 81, no. 11 (September 2003).[\/footnote]<\/span>\r\n
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    Table 8.2 The CAGE Framework[footnote]Source: Recreated from Pankaj Ghemawat, \u201cDistance Still Matters,\u201d Harvard Business Review<\/em> 79, no. 8 (September 2001), accessed February 15, 2011, http:\/\/sabanet.unisabana.edu.co\/postgrados\/finanzas_negocios\/Homologacion\/negociosint\/Distance%20still%20matters.pdf<\/a>.[\/footnote]<\/th>\r\n<\/tr>\r\n
    Cultural Distance<\/strong><\/th>\r\nAdministrative Distance<\/strong><\/th>\r\nGeographic Distance<\/strong><\/th>\r\nEconomic Distance<\/strong><\/th>\r\n<\/tr>\r\n<\/thead>\r\n
    Attributes Creating Distance<\/strong><\/td>\r\n<\/tr>\r\n
    Different languages<\/td>\r\nAbsence of colonial ties<\/td>\r\nPhysical remoteness<\/td>\r\nDifferences in consumer incomes<\/td>\r\n<\/tr>\r\n
    Different ethnicities; lack of connective ethnic or social networks<\/td>\r\nAbsence of shared monetary or political association<\/td>\r\nLack of a common border<\/td>\r\n\n\nDifferences in costs and quality of the following:\r\n\r\n\u2022 Natural resources\r\n\r\n\u2022 Financial resources\r\n\r\n\u2022 Human resources\r\n\r\n\u2022 Infrastructure\r\n\r\n\u2022 Intermediate inputs\r\n\r\n\u2022 Information or knowledge<\/td>\r\n<\/tr>\r\n
    Different religions<\/td>\r\nPolitical hostility<\/td>\r\nLack of sea or river access<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    Different social norms<\/td>\r\nGovernment policies<\/td>\r\nSize of country<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    <\/td>\r\nInstitutional weakness<\/td>\r\nWeak transportation or communication links<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    <\/td>\r\n<\/td>\r\nDifferences in climates<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    Industries or Products Affected by Distance<\/strong><\/td>\r\n<\/tr>\r\n
    Products have high-linguistic content (TV).<\/td>\r\n\n\nGovernment involvement is high in industries that are\r\n\r\n\u2022 producers of staple goods (electricity),\r\n\r\n\u2022 producers of other \u201centitlements\u201d (drugs),\r\n\r\n\u2022 large employers (farming),\r\n\r\n\u2022 large suppliers to government (mass transportation),\r\n\r\n\u2022 national champions (aerospace),\r\n\r\n\u2022 vital to national security (telecommunications),\r\n\r\n\u2022 exploiters of natural resources (oil, mining), and\r\n\r\n\u2022 subject to high-sunk costs (infrastructure).<\/td>\r\nProducts have a low value-of-weight or bulk ratio (cement).<\/td>\r\nNature of demand varies with income level (cars).<\/td>\r\n<\/tr>\r\n
    Products affect cultural or national identity of consumers (foods).<\/td>\r\n<\/td>\r\nProducts are fragile or perishable (glass or fruit).<\/td>\r\nEconomies of standardization or scale are important (mobile phones).<\/td>\r\n<\/tr>\r\n
    Product features vary in terms of size (cars), standards (electrical appliances), or packaging.<\/td>\r\n<\/td>\r\nCommunications and connectivity are important (financial services).<\/td>\r\nLabor and other factor cost differences are salient (garments).<\/td>\r\n<\/tr>\r\n
    Products carry country-specific quality associations (wines).<\/td>\r\n<\/td>\r\nLocal supervision and operational requirements are high (many services).<\/td>\r\nDistribution or business systems are different (insurance).<\/td>\r\n<\/tr>\r\n
    <\/td>\r\n<\/td>\r\n<\/td>\r\nCompanies need to be responsive and agile (home appliances).<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\nTo apply the CAGE framework, identify locations that offer low raw material costs, access to markets or consumers, or other key decision criteria. You might, for instance, determine that you\u2019re interested in markets with strong consumer buying power, so you would use per capita income as your first sorting criterion. As a result, you would likely end up with some type of ranking. Ghemawat provides an example for the fast-food industry, where he shows that on the basis of per capita income, countries like Germany and Japan would be the most attractive markets for the expansion of a North American fast-food company. However, when he adjusts this analysis for distance using the CAGE framework, he shows that Mexico ranks as the second most attractive market for international expansion, far ahead of Germany and Japan.[footnote]Pankaj Ghemawat, \u201cDistance Still Matters,\u201d Harvard Business Review<\/em> 79, no. 8 (September 2001): 1\u201311.[\/footnote]<\/span> Recall though, that any international expansion strategy still needs to be supported by the specific resources and capabilities possessed by the firm, regardless of the picture presented by the CAGE analysis. To understand the usefulness of the CAGE framework, consider Dell and its efforts to compete effectively in China. The vehicles it used to enter China were just as important in its strategy as its choice of geographic arena. For Dell\u2019s corporate clients in China, the CAGE framework would likely have revealed relatively little distance on all four dimensions\u2014even geographic\u2014given the fact that many personal-computer components have been sourced from China. However, for the consumer segment, the distance was rather great, particularly on the dimensions of culture, administration, and economics. For example, Chinese consumers didn\u2019t buy over the Internet, which is the primary way Dell sells its products in the United States. One possible outcome could have been for Dell to avoid the Chinese consumer market altogether. However, Dell opted to choose a strategic alliance with distributors whose knowledge base and capabilities allowed Dell to better bridge the CAGE-framework distances. Thus the CAGE framework can be used to address the question of where (which arena) and how (by which entry vehicle) to expand internationally.\r\n\r\n<\/div>\r\n
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    CAGE Analysis and Institutional Voids<\/h2>\r\nWhile you can apply CAGE to consider some first-order distances (e.g., physical distance between a company\u2019s home market and the new foreign market) or cultural differences (e.g., the differences between home-market and foreign-market customer preferences), you can also apply it to identify institutional differences. Institutional differences include differences in political systems and in financial markets. The greater the distance, the harder it will be to operate in that country. Emerging markets in particular can have greater differences because these countries lack many of the specialized intermediaries that make institutions like financial markets work. Table 8.3 \"Specialized Intermediaries within a Country or Other Geographic Arena\" lists examples of specialized intermediaries for different institutions. If an institution lacks these specialized intermediaries, there is an institutional void<\/span><\/span>. An institutional void refers to the absence of key specialized intermediaries found in the markets of finance, managerial talent, and products, which otherwise reduce transaction costs.\r\n
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    Table 8.3 Specialized Intermediaries within a Country or Other Geographic Arena<\/th>\r\n<\/tr>\r\n
    Institution<\/strong><\/th>\r\nSpecialized Intermediary<\/strong><\/th>\r\n<\/tr>\r\n<\/thead>\r\n
    Financial markets<\/td>\r\n\n\n\u2022 Venture-capital firms\r\n\r\n\u2022 Private equity providers\r\n\r\n\u2022 Mutual funds\r\n\r\n\u2022 Banks\r\n\r\n\u2022 Auditors\r\n\r\n\u2022 Transparent corporate governance<\/td>\r\n<\/tr>\r\n
    Markets for managerial talent<\/td>\r\n\n\n\u2022 Management institute or business schools\r\n\r\n\u2022 Certification agencies\r\n\r\n\u2022 Headhunting firms\r\n\r\n\u2022 Relocation agencies<\/td>\r\n<\/tr>\r\n
    Markets for products<\/td>\r\n\n\n\u2022 Certification agencies\r\n\r\n\u2022 Consumer reports\r\n\r\n\u2022 Regulatory authorities (e.g., the Food and Drug Administration)\r\n\r\n\u2022 Extrajudicial dispute resolution services<\/td>\r\n<\/tr>\r\n
    All markets<\/td>\r\n\u2022 Legal and judiciary (for property rights protection and enforcement)<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n
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    Three Strategies for Handling Institutional Voids<\/h2>\r\nWhen a firm detects an institutional void, it has three choices for how to proceed in regard to the potential target market: (1) adapt its business model, (2) change the institutional context, or (3) stay away.\r\n\r\nFor example, when McDonald\u2019s tried to enter the Russian market, it found an institutional void: a lack of local suppliers to provide the food products it needs. Rather than abandoning market entry, McDonald\u2019s decided to adapt its business model. Instead of outsourcing supply-chain operations like it does in the United States, McDonald\u2019s worked with a joint-venture partner to fill the voids. It imported cattle from Holland and russet potatoes from the United States, brought in agricultural specialists from Canada and Europe to improve Russian farmers\u2019 management practices, and lent money to farmers so that they could invest in better seeds and equipment. As a result of establishing its own supply-chain and management systems, McDonald\u2019s controlled 80 percent of the Russian fast-food market by 2010. The process, however, took fifteen years and $250 million in investments.[footnote]\u201cMcDonald\u2019s in Russia: Accept or Attempt to Change Market Context?,\u201d Economic Times of India<\/em>, April 30, 2010, accessed February 17, 2011, http:\/\/economictimes.indiatimes.com\/features\/corporate-dossier\/McDonalds-in-Russia-Accept-or-attempt-to-change-market-context\/articleshow\/5874306.cms<\/a>; Tarun Khanna and Krishna G. Palepu, Winning in Emerging Markets: A Road Map for Strategy<\/em> (Cambridge, MA: Harvard Business School Press, 2010).[\/footnote]<\/span>\r\n\r\nAn example of the second approach to dealing with an institutional void\u2014changing the institutional context\u2014is that used by the \u201cBig Four\u201d audit firms (i.e., Ernst & Young, KPMG, Deloitte Touche Tohmatsu, and PricewaterhouseCoopers) when they entered Brazil. At the time, Brazil had a fledgling audit services market. When the four firms set up branches in Brazil, they raised financial reporting and auditing standards across the country, thus bringing a dramatic improvement to the local market.[footnote]Tarun Khanna, Krishna G. Palepu, and Jayant Sinha, \u201cStrategies That Fit Emerging Markets,\u201d Harvard Business Review<\/em> 83, no. 6 (June 2005): 2\u201316.[\/footnote]<\/span>\r\n\r\nFinally, the firm can choose the strategy of staying away from a market with institutional voids. For example, The Home Depot\u2019s value proposition (i.e., low prices, great service, and good quality) requires institutions like reliable transportation networks (to minimize inventory costs) and the practice of employee stock ownership (which motivates workers to provide great service). The Home Depot has decided to avoid countries with weak logistics systems and poorly developed capital markets because the company would not be able to attain the low cost\u2013great service combination that is its hallmark.[footnote]Tarun Khanna, Krishna G. Palepu, and Jayant Sinha, \u201cStrategies That Fit Emerging Markets,\u201d Harvard Business Review<\/em> 83, no. 6 (June 2005): 2\u201316.[\/footnote]<\/span>\r\n
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    Ethics in Action<\/h3>\r\nNestl\u00e9\u2019s Nespresso division is one of the company\u2019s fastest-growing divisions. The division makes a single-cup espresso machine along with single-serving capsules of coffees from around the world. Nestl\u00e9 is headquartered in Switzerland, but the coffee it needs to buy is primarily grown in rural Africa and Latin America. Nespresso set up local facilities in these regions that measure the quality of the coffee. Nespresso also helps local farmers improve the quality of their coffee, and then it pays more for coffee beans that are of higher quality. Nespresso has gone even further by advising farmers on farming practices that improve the yield of beans farmers get per hectare. The results have proven beneficial to all parties: farmers earn more money, Nespresso gets getter quality beans, and the negative environmental impact of the farms has diminished.[footnote]Michael E. Porter and Mark R. Kramer, \u201cThe Big Idea: Creating Shared Value,\u201d Harvard Business Review<\/em>, January\u2013February 2011, accessed January 23, 2011, http:\/\/hbr.org\/2011\/01\/the-big-idea-creating-shared-value\/ar\/pr<\/a>.[\/footnote]<\/span>\r\n\r\n<\/div>\r\n
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    Key Takeaways<\/h3>\r\n