4.2 Global Market Opportunity Assessment – CAGE Analysis

CAGE Analysis

Pankaj “Megawatt” Ghemawat (2001) is an international strategy guru who developed the CAGE framework to offer businesses a way to evaluate countries in terms of the “distance” between them. In this case, distance is defined broadly to include not only the physical geographic distance between countries but also the cultural, administrative (currencies, trade agreements), and economic differences between them. As summarized in Table 6.1 “The CAGE Framework”, the CAGE (cultural, administrative, geographic, and economic) framework offers a broader view of distance and provides another way of thinking about location and the opportunities and concomitant risks associated with global arbitrage (Ghemawat, 2003).

Table 4.1 The CAGE Framework

Figure Source: (Ghemawat, 2001)

To apply the CAGE framework, identify locations that offer low raw material costs, access to markets or consumers, or other key decision criteria. You might, for instance, determine that you’re interested in markets with strong consumer buying power, so you would use per capita income as your first sorting criterion. As a result, you would likely end up with some type of ranking. Ghemawat provides an example for the fast-food industry, where he shows that on the basis of per capita income, countries like Germany and Japan would be the most attractive markets for the expansion of a North American fast-food company. However, when he adjusts this analysis for distance using the CAGE framework, he shows that Mexico ranks as the second most attractive market for international expansion, far ahead of Germany and Japan (Ghemawat, 2001).

Recall though, that any international expansion strategy still needs to be supported by the specific resources and capabilities possessed by the firm, regardless of the picture presented by the CAGE analysis. To understand the usefulness of the CAGE framework, consider Dell and its efforts to compete effectively in China. The vehicles it used to enter China were just as important in its strategy as its choice of geographic arena. For Dell’s corporate clients in China, the CAGE framework would likely have revealed relatively little distance on all four dimensions—even geographic—given the fact that many personal-computer components have been sourced from China. However, for the consumer segment, the distance was rather great, particularly on the dimensions of culture, administration, and economics. For example, Chinese consumers didn’t buy over the Internet, which is the primary way Dell sells its products in the United States. One possible outcome could have been for Dell to avoid the Chinese consumer market altogether. However, Dell opted to choose a strategic alliance with distributors whose knowledge base and capabilities allowed Dell to better bridge the CAGE-framework distances. Thus the CAGE framework can be used to address the question of where (which arena) and how (by which entry vehicle) to expand internationally.

CAGE Analysis and Institutional Voids

While you can apply CAGE to consider some first-order distances (e.g., physical distance between a company’s home market and the new foreign market) or cultural differences (e.g., the differences between home-market and foreign-market customer preferences), you can also apply it to identify institutional differences. Institutional differences include differences in political systems and in financial markets. The greater the distance, the harder it will be to operate in that country. Emerging markets in particular can have greater differences because these countries lack many of the specialized intermediaries that make institutions like financial markets work. Table 6.2 “Specialized Intermediaries within a Country or Other Geographic Arena” lists examples of specialized intermediaries for different institutions. If an institution lacks these specialized intermediaries, there is an institutional void. An institutional void refers to the absence of key specialized intermediaries found in the markets of finance, managerial talent, and products, which otherwise reduce transaction costs.

Table 4.2 Specialized Intermediaries within a Country or Other Geographic Arena

Three Strategies for Handling Institutional Voids

When a firm detects an institutional void, it has three choices for how to proceed in regard to the potential target market: (1) adapt its business model, (2) change the institutional context, or (3) stay away.

For example, when McDonald’s tried to enter the Russian market, it found an institutional void: a lack of local suppliers to provide the food products it needs. Rather than abandoning market entry, McDonald’s decided to adapt its business model. Instead of outsourcing supply-chain operations like it does in the United States, McDonald’s worked with a joint-venture partner to fill the voids. It imported cattle from Holland and russet potatoes from the United States, brought in agricultural specialists from Canada and Europe to improve Russian farmers’ management practices, and lent money to farmers so that they could invest in better seeds and equipment. As a result of establishing its own supply-chain and management systems, McDonald’s controlled 80 percent of the Russian fast-food market by 2010. The process, however, took fifteen years and $250 million in investments“ (Economic Times of India, 2010).

An example of the second approach to dealing with an institutional void—changing the institutional context—is that used by the “Big Four” audit firms (i.e., Ernst & Young, KPMG, Deloitte Touche Tohmatsu, and PricewaterhouseCoopers) when they entered Brazil. At the time, Brazil had a fledgling audit services market. When the four firms set up branches in Brazil, they raised financial reporting and auditing standards across the country, thus bringing a dramatic improvement to the local market (Khanna et al., 2005).

Finally, the firm can choose the strategy of staying away from a market with institutional voids. For example, The Home Depot’s value proposition (i.e., low prices, great service, and good quality) requires institutions like reliable transportation networks (to minimize inventory costs) and the practice of employee stock ownership (which motivates workers to provide great service). The Home Depot has decided to avoid countries with weak logistics systems and poorly developed capital markets because the company would not be able to attain the low cost–great service combination that is its hallmark (Khanna et al., 2005).

Case: McCain Foods

McCain Foods is a Canadian firm that specialized in frozen potato products. With activities in over 160 countries, the corporation has a significant worldwide footprint. McCain Foods’ motives for entering worldwide markets include extending its client base, generating revenue, and capitalizing on economies of scale.

Countries Entered and How:

McCain Foods entered the global market through partnerships and joint ventures with local enterprises in several nations. In the 1960s, the corporation expanded its activities to the United States, and later to other nations such as Europe, Asia, and South America. McCain Foods has also expanded into new areas such as China and India, where demand for ready foods is increasing quickly.

Challenges Faced:

McCain struggled with expansion in India. In 2013, McCain entered the Indian market with the acquisition of a potato processing plant in the state of Gujarat. However, the company faced a number of challenges, including issues with supply chain management, local regulations, and cultural differences (Taneja, 2018). These challenges ultimately led to slower-than-expected growth in the Indian market.

Export Strategy:

Entry into the Chinese market in 2005. McCain partnered with a local company, the Luhua Group, to establish a joint venture that would produce and distribute frozen potato products in China (McCain Foods Limited, n.d.). This strategy allowed McCain to leverage the local knowledge and expertise of its partner to navigate the complex Chinese market, while also providing access to McCain’s technology and expertise in frozen food production.

CAGE Framework:

The CAGE framework is being used by McCain in its entry into the Russian market. In 2011, McCain established a potato processing plant in the Lipetsk region of Russia, which was designed to serve the local market as well as export to neighbouring countries (Bolshakova & Soboleva, 2015). To overcome the cultural and administrative differences between Canada and Russia, McCain formed a joint venture with a local company, the Agroholding “Voskhod” group, which helped them navigate local regulations and customs.

Marketing Strategies:

McCain Foods’ “It’s All Good” campaign, launched in 2014 to showcase the firm’s dedication to utilizing basic, healthful ingredients in its products, is one example of a marketing technique utilized by the company. The worldwide campaign, which featured television commercials, social media promos, and in-store displays, was launched in the United States, Canada, and Europe. McDonald Foods (2014)

Bukunmi Gabriel Ogunsola, March 2023

Core Principles of International Marketing – Chapter 6.3 by Babu John Mariadoss is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.