Cage analysis example

Differences and the CAGE Distance Framework 1

Pankaj Ghemawat

After analyzing the cases in section 1, the reality of semiglobalization

and the importance of cross-country differences should be clear. This

section introduces the CAGE distance framework, which is used to

identify and prioritize the differences between countries that companies

must address when developing cross-border strategies. 2

Begin by considering the example summarized in exhibit 2-1, which

plots Walmart’s operating margin by country in 2004 against the

distance between each country’s capital and Walmart’s headquarters in

Bentonville, Arkansas. The impact of geographic distance is obvious, but

what other types of difference or distance can you identify that separated

the markets that were profitable for Walmart from those that weren’t?

Exhibit 2-1

Walmart International’s Operating Margin by Country (2004 estimates)

Figure 2-1: Wal-Mart International’s Operating Margin by

Country, 2004 (Estimated)

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The CAGE distance framework disaggregates distance or difference into

four major categories: Cultural, Administrative, Geographic, and

Economic. Differences along these dimensions generally have a negative

effect on many cross-border interactions, although in some cases,

differences along a limited subset of CAGE dimensions can actually

encourage rather than discourage such interactions. 3 Each of these broad

types of difference or distance is illustrated by the Walmart example.

 Cultural distance: Culture can be defined as the collection of beliefs, values, and social norms—the unwritten, unspoken rules

of the game—that shape the behavior of individuals and

organizations. Cultural distance encompasses differences in

religious beliefs, race/ethnicity, language, and social norms and

values. Societies even differ in their social attitudes toward

market power and globalization in ways that have important

effects, both formally via regulation and informally, on how

businesses operate. 4

Interestingly, Walmart’s four profitable

markets share linguistic, religious and ethnic similarities or, at

least, ties through large diaspora.

 Administrative distance: Historical and political associations between countries—colonial links, free trade agreements, the

tenor of current relationships—profoundly affect economic

exchange between them—which is the same as saying that

differences along these dimensions matter a great deal. So, of

course, do administrative attributes specific to a particular

country such as autarchic policies or weak institutions and high

levels of corruption. In the Walmart example, note that two of the

profitable countries, Canada and Mexico, partner with the United

States in a regional free trade agreement, the North American

Free Trade Agreement (NAFTA). And a third profitable ―country‖

as classified by Walmart, Puerto Rico, is officially an

unincorporated territory of the United States.

 Geographic distance: The geographic dimension of distance involves more than just how far two countries are from each

other: other attributes to be considered include contiguity, a

country’s physical size, within-country distances to borders,

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access to the ocean, topography, and even time zones. Exhibit 2-

1 makes it clear that the capital city of each of Walmart’s four

profitable ―countries‖ is geographically closer to Walmart’s

headquarters than the capitals of any of the unprofitable ones; in

addition, Canada and Mexico share a common land border with

the United States.

 Economic distance: Consumer wealth and income and the cost of labor are the most obvious (and related) determinants of

economic distance between countries. Others include differences

in availability (or lack) of resources, inputs, infrastructure and

complements, and organizational capabilities. It seems a bit

harder for Walmart to do well in poorer countries—although the

number of data points is very limited. Note, however, that

economic distance has not been entirely or even primarily a

liability for Walmart. The company saves more money by

procuring merchandise from China—exploiting economic

distance, particularly in terms of labor costs—than it makes from

its entire international store network. We will return to such

strategies in section 5, which discusses arbitrage.

What the Numbers Tell Us

International economists have adapted Newton’s law of universal

gravitation to describe trade and other international economic

interactions. Thus, the simplest gravity model of international trade

between two countries predicts that trade will be directly related to their

economic sizes (a unilateral attribute of each country) and inversely

related to the physical distance between them (a bilateral or country-pair

attribute). Augmented gravity models add measures of other types of

differences as well as unilateral attributes. Exhibit 2-2 shows the results

of one such analysis that evaluated cultural, administrative, geographic,

and economic effects on trade.

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