The CAGE Framework identifies the Cultural, Administrative, Geographic, and Economic differences between the various countries that companies should address and take care of whilst working on and crafting international strategies. The framework can also be used to understand the patterns of capital, trade, the flow of people, and information that work as crucial factors for the organization. CAGE Framework was developed by Pankaj Ghemawat, the renowned professor of Global Strategy at the University of Navarra- IESE Business School in Barcelona, Spain.
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Understanding the CAGE Framework :
The impacts of the distances and differences figured out by the CAGE Framework between the countries have been demonstrated in a quantitative manner via gravity models. It is an excellent analytical tool for the various companies and organizations that develop international strategies with an intention of the global expansion of their businesses.
When looking to expand our business into the foreign markets, any differences that arise are termed as the cultural differences between the two countries. It should be noted that cultural differences are hard to change whereas differences due to the legal and economic structures can be changed easily.
CAGE Framework helps the companies to identify the middle ground between the one size that fits all and the mass customization of the extremes that are typically applied to most global strategies and efforts towards the product development. It carefully analyzes the cultural, administrative, geographic, and economic forces and determines how similar market functions in a distinguished manner in different countries.
As a result, aftermath the identification of the countries with the common market environment, the companies are able to develop the unique bundle of products and service offerings best suited to the local market conditions and structures of the identified countries. It helps the countries to develop the new type of products and services that help in venturing into the global markets in an efficient and effective manner.
It helps the companies to have an easy access to risks involved, potential possibilities of growth and barriers of the different international markets. Owing to the rational and analytical approach, it eliminates the guesswork of selecting which country to enter for the business expansion. It also helps to identify the current range of products that are best suited and easily transplantable to the foreign markets at a minimum cost.
The distance framework helps the management of the company to assess and identify the impact of the distance on various industries and their business operations. If two or more countries differ across these dimensions of the framework, the foreign target market is riskier in nature. And the similarities suggest the great potential for growth of the company.
The analysis of the CAGE Framework helps the company to identify the odds and gaps and thereby invest in the profitable foreign markets. The application and working of CAGE Framework help the company to identify the attractive and lucrative international markets based on the raw material costs, easy access to target markets and consumers, access to potential human resources, and other such crucial business criteria’s.
However, a strong international expansion strategy is required as a back up with the help of specific resources and capabilities of the firm, irrespective of how rosy the picture of CAGE Framework and analysis is.
Practical advice by Ghemawat :
- It makes the distance and differences of the various international markets clearly visible to the management and key members of the company.
- The clear analyses of the distances across the countries help to iron out the flaws and bottlenecks that might make the company handicap as compared to the local competitors in the international market.
- It helps the company to find out the competitive advantages that the local companies have and enjoy in the international market and this result in formulating the international expansion strategy accordingly.
- It helps the company to compare markets from the perspective of profits and how lucrative the particular international market will be.
- The CAGE Framework emphasizes the fact that the different types of distances and differences matter to the different extents depending on the industry domains. For example, the cultural differences affect the product preferences of the customer whereas geographic differences affect the aspects of cost of transportation if the company manufactures heavy or bulky products.
Analysis of each facet of the Frameworks :
1) Cultural Distance
Cultural distance is the first and foremost facet of the CAGE analysis and it is also one of the most perplexing ones for the management of the company. It is invisible in nature but it has a huge impact on the values and behaviors of the people of the country that affects the international strategy and sales of the firm. Quite many researches from all over the world have done research on the significant cultural differences amongst the various countries and here are its dimensions.
Power Distance :
Within the hierarchy and organizational structure of the firm, it signifies the distance to which the individuals accept the inequalities of various forms between the subordinates and superiors.
Uncertainty Avoidance :
The willingness of the individuals working together to coexist amidst the uncertainty about the future.
It harps on the fact that how the individuals living in the social value the individualistic behaviors as opposed and compared to the collective ones.
Predominant Values :
People of the country give more importance to the materialistic pleasures of life or strong emphasis is on the interpersonal relationships. It signifies that people give importance to which aspect of life, quality or quantity.
Short-term and Long-term orientation :
The focus of the people of the country is on the future rewards or they are more concerned about the aspect of stability relates to the past and present.
2) Administrative Distance
This facet of the CAGE analysis harps on the aspect of the historical and present legal and political association between the two countries. It helps to determine whether the relationship or association between the native country of the company and the particular international country will favor the business operations and the international expansion strategy or will act as an obstacle. The laws and regulations of the country can have a serious effect on the trade practices between the countries.
3) Geographic Distance
The Geographic distance determines the physical aspect of distance between the two countries such as the size of the country, the nature of transportation and information, climatic conditions, and more. It also harps of the geographic distance between the two countries in terms of miles or kilometers that separates the company from the target market or suppliers. However, the factors of the internet, social media, and technology have shrunk the distance of transportation time and now with the facility of digital products and services, the constraint of geographic distance has been almost eliminated.
4) Economic Analysis
The fourth and last aspect of the CAGE analysis talks about the differences between the countries relating to income, the purchasing power of the target market, distribution of wealth, and disposable income levels. It can work as one of the biggest obstacles for the company to expand its business operations on the international level in particular countries.
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