When crafting international strategies businesses 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:
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.
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
- Political hostility
- Colonial ties
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
- Sea or river access
- Common land border
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.