cage distance framework

When crafting international business strategy, companies need to
evaluate the affected countries in terms of their distances, or in other words their
differences. Pankaj Ghemawat identified this issue and has in turn proposed the
CAGE Distance Framework which assesses the cultural, administrative, geographic
and economic differences between the countries within an international
strategy. These four factors are explained in more detail below:

Cultural Distance

The first element of the Cage framework is the Cultural distance
and looks into the values and behaviors of the people within those countries. The
primary dimensions examined are:

  • Power distance: Illustrates
    whether individuals accept the inequalities of power between superiors and subordinates
    within a society.
  • Uncertainty avoidance:
    Looks into how individuals view the uncertainty of the future.
  • Individualism: Examines
    the social values of individualistic vs collective societal views.
  • Predominant values: Assesses
    the role of materialistic values versus internal values within one’s self.
  • Short term vs Long term
    orientation:Focuses on how people
    view future rewards as well as the present stability.

Administrative Distance

The second facet of the CAGE analysis is the Administrative distance
and attempts to examine the past and current legal and political associations
among two countries and whether these will favor or impede the organization. Some
main factors considered are:

  • Legal systems, legal
    institutions and corruption
  • Government regulation
    and policy framework
  • Societal conflict
  • Currency
  • Political hostility
  • Colonial ties

Geographic distance

The third element of the CAGE analysis looks into the physical
distance between the two countries. Although the era of digitalization is
making this distance less and less important, it is still a factor that needs
to be taken into account when implementing an international strategy. Some main
factors of consideration are:

  • Country size
  • Climate and
    environmental conditions
  • Transportation and
    communication links
  • Infrastructure
  • Sea or river access
  • Common land border

Economic distance

The last element of the CAGE analysis is the Economic
distance and is compromised by the differences among consumers, the
availability of resources and size of economy. Main points of focus are:

  • Differences in consumer
    incomes such as distribution of wealth, per capital income, purchasing power
    etc.
  • Differences in
    availability of resources including natural resources, financial resources, infrastructure,
    knowledge and human resources

Application of the CAGE
framework

The CAGE analysis provides the cultural, administrative,
geographic and economic factors that determine the differences between two
countries with different culture, norms and social values. By identifying these
differences and categorizing them in these groups, allows businesses to develop
the right international business strategy. Here, the firm will decide what to
standardize and what differentiate in order to adapt to local tastes, as well
as develop new products unique to the respective markets. The CAGE framework is
a very important model for the modern strategist that emphasizes the importance
of distance in business competitiveness. The CAGE model is becoming more and more
relevant in today’s globalized world.