The CAGE Distance Framework is a model that can take some of the guesswork out of deciding which country to target for international expansion.
By using the CAGE Distance Framework, you will understand which markets are straightforward for you to enter and which might be more challenging.
As your company grows, you may decide to expand internationally. Success in implementing an international expansion strategy starts with selecting the right country to enter.
The first step in this process is usually to identify those markets with the greatest sales potential. However, alongside sales potential, a key question to answer is how difficult will it be to grow your business in that country.
Pankaj Ghemawat, a professor of management and strategy at New York University, created the CAGE Distance Framework to answer this question.
The origins of the framework came about when Ghemawat noticed something peculiar – that profit margins tend to be correlated with proximity to a company’s headquarters. For example, Walmarts’s largest profit margins are in Mexico and Canada, and its worst margins are in Germany and China.
From this observation, Ghemawat created the CAGE Distance Framework. CAGE stands for Cultural, Administrative, Geographic, and Economic.
By examining all four categories you’ll get a much better understanding of the “distance” between two countries than just the miles between them.
Ultimately, the CAGE Distance Framework can help you understand the risks of international expansion. Based on this, you can decide whether to:
There are two parts to performing a CAGE analysis.
One key feature of the CAGE Distance Framework is that it takes into account both bilateral and unilateral factors:
Let’s take a closer look at each of the four categories:
Cultural differences are the differences in beliefs, behaviors, language, values, and norms between two countries.
Typical cultural differences to consider include:
Administrative differences are the political and legal differences between the two countries. Administrative differences to consider include:
Geographic distance is the physical distance between the two countries. Geographic distance is comprised of more than just how many miles separate two countries and include:
Economic distance is the financial distance between two countries’ wealth, income, and labor costs. Economic factors to consider include:
For this example, imagine you have a game app that you currently sell in your home market, the US. You want to expand internationally.
You know the biggest market globally by population is China, so you want to investigate launching there. The other country you’re considering is Canada simply because it’s in such proximity to your home market.
Let’s begin by looking at some of the CAGE factors that are most relevant to your industry:
As you can see from the image, some significant differences exist when we’re investigating launching in China, namely:
As you can also see, although the profit potential might not be anywhere near as large, there are far fewer barriers to launching in Canada.
Once you’ve completed your CAGE Distance Framework analysis, it’s then up to you to balance risk against reward and decide which territory makes the most sense for you to enter.
If you’d like to conduct your own analysis using the model, you can download out CAGE Distance Framework Templace here.
There are several advantages and disadvantages associated with the model.
The advantages of the model include:
The disadvantages of the model include:
Success in implementing an international expansion strategy starts with selecting the right country to enter.
The CAGE Distance Framework is a model that can take some of the guesswork out of deciding which country to expand into. It helps you to understand the frictions that exist between your home country and the country you’re considering expanding into.