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Distance Still Matters. The Hard Reality of Global Expansion (Ghemawat, 2001).

Companies routinely exaggerate the attractiveness of foreign markets, and that can
lead to expensive mistakes. Here’s a more rational approach to evaluating global
opportunities.

Dr. Jorge Alcaraz

Clic para Global
Industry, editar título
Strategy and Distance
Distance SDll MaEers. The Hard Reality of Global Expansion (Ghemawat, 2001).

• Due to increased globaliza5on and improvements in communica5on technologies,

firms o<en5mes (inaccurately) assume that interna5onal business is becoming
simpler because the world “is coming together across all disciplines.”
• Many firms that have rushed into foreign markets OVERESTIMATE their odds of success
and profitability
• The problem lies in the tools they are using to analyze these markets.
• In short……
Distance Does MaEer!!!
Tradi5onal tools do not take into considera5on the different dimensions of distance.
Dr. Jorge Alcaraz
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Industry, editar título
Strategy and Distance

• Traditional • CAGE

• Analyzes sales potential using country • Analyzes probable impact of distance

profile analyses • Cultural
• National GDP • Administrative (Political)
• Consumer wealth • Geographic
• Propensity to consume • Economic
• Focuses on immensity of market • Used to evaluate odds of profitability in
• Ignores costs & risks of a new market foreign markets

Dr. Jorge Alcaraz

Clic para Global
Industry, editar título
Strategy and Distance
Distance Still Matters. The Hard Reality of Global Expansion (Ghemawat, 2001).

Dr. Jorge Alcaraz

• Analyzes the impact of
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various factors on a
country’s trade flows.
• Traditional economic
factors do matter but are
limited. Other factors
(such as those included in
the table) must be taken
into consideration.
• For example, trade
between two countries
5000 miles apart is only
20% of the trade that
occurs between two
countries only 1000 miles
apart (Ghemawat, 2001).
Dr. Jorge Alcaraz
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CAGE editar título
Model
Discussion #1

1. Do you believe that the traditional country profile analysis is insufficient? Why or
why not?

2. According to the Frankel & Rose study, having a colony-colonizer relationship,

common policy, and common currency are the factors that most influence trade. Do
you agree with these points? Can you think of any examples to support them?

3. Can you think on any other factors that might be influential in trade? Why would
they be relevant?

Dr. Jorge Alcaraz

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The paradimensions
editar títuloof distance: CAGE model
Distance between two countries can manifest itself along four basic dimensions:
cultural, administrative, geographic, and economic.

Dr. Jorge Alcaraz

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The paradimensions
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Cultural distance:
A country’s cultural attributes determine how people interact with one another and
with companies and institutions. Differences in religious beliefs, race, social norms,
and language are all capable of creating distance between two countries.

Some cultural attributes, like language, are easily perceived and understood. Others
are much more subtle. Social norms the deeply rooted system of unspoken principles
that guide individuals in their everyday choices and interactions, are often nearly
invisible, even to the people who abide by them.
• Books, film industry, music industry

Dr. Jorge Alcaraz

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The paradimensions
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Most often, cultural attributes create distance by influencing the choices that
consumers make between substitute products because of their preferences for specific
features. Color and tastes, for example, are closely linked to cultural prejudices.
• Red in Russian, also mean beautiful
• Japanese prefer automobiles and household appliances to be small
• Social norm: space is highly valuated

Deeper:
• Consumer’s identity as a member of a particular community.
• The food industry is particularly sensitive to religious attributes.
• Hindus, do not eat beef
• In Japan, rice, carries cultural baggage.

Dr. Jorge Alcaraz

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The paradimensions
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Administrative or Political Distance:
Historical and political associations shared by countries greatly affect trade between
them. Colony-colonizer links between countries, for example, boost trade by 900%.

Preferential trading arrangements, common currency, and political union can also
increase trade by more than 300% each.

The integration of the European Union is probably the leading example of deliberate
efforts to diminish administrative and political distance among trading partners.

Dr. Jorge Alcaraz

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The paradimensions
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Countries can also create administrative and political distance through unilateral
measures. Indeed, policies of individual governments pose the most common barriers
to cross-border competition.

It is the target country’s government that raises barriers to foreign competition: tariffs,
trade quotas, restrictions on foreign direct investment, and preferences for domestic
competitors in the form of subsidies and favoritism in regulation and procurement.

Such measures are expressly intended to protect domestic industries, and they are
most likely to be implemented if a domestic industry meets one or more of the
following criteria:

Dr. Jorge Alcaraz

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The paradimensions
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• It is a large employer. Industries that represent large voting blocs often receive state
support in the form of subsidies and import protection. Europe’s farmers are a case
in point.
• It is seen as a national champion. Reflecting a kind of patriotism, some industries or
companies serve as symbols of a country’s modernity and competitiveness.
• It is vital to national security. Governments will intervene to protect industries that
are deemed vital to national security—especially in high tech sectors such as
telecommunications and aerospace.
• It produces staples. Governments will also take measures to prevent foreign
companies from dominating markets for goods essential to their citizens’ everyday
lives. Food staples, fuel, and electricity are obvious examples.

Dr. Jorge Alcaraz

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The paradimensions
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It produces an “entitlement” good or service. Some industries, notably the health care
sector, produce goods or services that people believe they are entitled to as a basic
human right.

It exploits natural resources. A country’s physical assets are often seen as part of a
national heritage.

It involves high sunk-cost commitments. Industries that require large, geography-

specific sunk investments—in the shape, say, of oil refineries or aluminum smelting
plants or railway lines—are highly vulnerable to interference from local governments.

Dr. Jorge Alcaraz

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The paradimensions
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Finally, a target country’s weak institutional infrastructure can serve to dampen cross-
border economic activity. But when a country’s institutional infrastructure is strong—
for instance, if it has a well-functioning legal system—it is much more attractive to
outsiders.

Dr. Jorge Alcaraz

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The paradimensions
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Geographic Distance. Other attributes that must be considered, average within-
country distances to borders, access to waterways and the ocean, and topography.
Man-made geographic attributes also must be taken into account, a country’s
transportation and communications infrastructures.

Geographic attributes influence the costs of transportation. Products with low value-
to-weight or bulk ratios, such as steel and cement, incur particularly high costs as
geographic distance increases.

Likewise, costs for transporting fragile or perishable products become significant

across large distances. Beyond physical products, intangible goods and services are
affected by geographic distance as well.

Dr. Jorge Alcaraz

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The paradimensions
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Economic Distance. The wealth or income of consumers is the most important
economic attribute that creates distance between countries, and it has a marked effect
on the levels of trade and the types of partners a country trades with.

Rich countries, research suggests, engage in relatively more cross-border economic

activity relative to their economic size than do their poorer cousins.

All companies find that major disparities in supply chains and distribution channels are
a significant barrier to business.

Dr. Jorge Alcaraz

More Sensitivie Less Sensi5vie
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The paradimensions
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Dr. Jorge Alcaraz

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The paradimensions
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Discussion #2

• Can you name some examples of companies that took into account the four
dimensions (or a few) abroad?

• Which country would be a good investment considering Colombia as the home-

country?

• Which of the four dimensions is almost always taken into account the least? Why?

Dr. Jorge Alcaraz

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The paradimensions
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Case Study #1: Star TV Expectations
• The company wanted to deliver television programming to a media-starved Asian
audience.
• It would target the top 5% of Asia’s socioeconomic pyramid
• A newly rich elite, could afford the services, and represented an attractive
advertising market.
• Star would be able to use cheap English-language programming rather than having to
invest heavily in creating new local programs
• English was a second language of the target group
• Satellites would beam programs into people’s home
• Sidestep the constraints of geographic distance.
Dr. Jorge Alcaraz
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The paradimensions
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Case Study #1: Star TV Reality
• Star TV ignored cultural distance -one of its biggest mistakes.
• By supposing that Asian viewers would be happy with English-language
programming, the company assumed that the TV business was insensi5ve to
culture.
• Ignoring administra5ve and poli5cal sensi5vi5es was its second mistake
• Foreign ownership of broadcas5ng businesses is always poli5cally loaded because
of television’s power to influence people.
• Satellite television was “an unambiguous threat to totalitarian regimes
everywhere” because it permijed people to bypass government-controlled news
sources.

Dr. Jorge Alcaraz

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Case Study #2: Tricon Restaurants International

• TRI’s president, Pete Bassi, decided to rationalize its global operations by focusing its
equity investments in a limited number of markets
• Country Portfolio Analysis: A Flawed Approach
• Using the CPA method, Mexico, with a total fast-food consumption of $700 million, is a relatively
small market, ranking 16th of 20
• Country Portfolio Analysis: Adjusted for Distance
• Applying the effects of distance, Mexico leaps to sixth place in terms of market opportunity

Dr. Jorge Alcaraz

Country Portfolio Analysis:
A Flawed Approach

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The paradimensions
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Dr. Jorge Alcaraz

 Country PorWolio Analysis:
Adjusted for distance

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The paradimensions
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Dr. Jorge Alcaraz

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The paradimensions
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Positive Adjustments Negative Adjustments
Adjusting for a common land border and Adjusting for a common language pushes
for membership in a trade agreement Mexico into a tie for second place with the
with the United States pushes Mexico’s United Kingdom.
ranking all the way up to second, after
Canada.

• TRI might have ended up abandoning a core market with the CPA method. Instead,
they concluded that “Mexico is one of TRI’s top two or three priorities.

• Also, TRI already owned more than 4/5 of its Mexican outlets and had a 38% share of
the local market (well ahead of McDonald’s)
Dr. Jorge Alcaraz
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The paradimensions
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Discussion #3:

1. What could Star TV had done to ensure they were more successful in Asian markets?
• Could you propose an alternative action plan?
2. Were you surprised by how much the CAGE framework impacted TRI’s analysis? Why
do you think it did have such a large influence?
3. To what extent should a business rely on the traditional CPA and CAGE framework
methods of analysis?
4. Having seen all the content, which method (CPA or CAGE) do you prefer and why?

hjps://www.coursera.org/lecture/global-business/3-the-cage-distance-framework-99Ile Dr. Jorge Alcaraz