CAGE Distance Framework

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Are you expanding into the right foreign markets?

Imagine that, five years ago, your organization expanded into a new overseas market. It had high hopes of success, but the venture turned out to be a big mistake.

First, transport costs were higher than expected because of difficult road conditions. Then, a flood damaged stock at the warehouse. Finally, customers complained that the marketing campaign was culturally inappropriate.

Your organization had to withdraw from this market. It lost money, and the unsuccessful venture damaged its reputation among potential investors.

The expansion went wrong because leaders in your organization had not seen the "bigger picture" in their planning. They saw a large potential market and high levels of disposable income among customers, and assumed that the expansion would bring in more than enough revenue to cover costs.

However, they overlooked a number of other factors that added cost and risk to the venture. These, ultimately, caused it to fail.

In this article, we'll look at the CAGE Distance Framework, a tool that you can use to think about how market-related factors can affect an expansion into a new region. We'll then explain how to use this framework when you're researching a foreign market.

About the Tool

Pankaj Ghemawat, a professor at IESE Business School in Barcelona, Spain, developed the CAGE Distance Framework. He outlined it in the September 2001 Harvard Business Review.

In his research, Ghemawat looked at several failed international expansions, and noted that some of the leaders involved had overestimated the appeal of overseas markets. He also saw that these leaders had underestimated the extent to which differences between the home market and the new foreign one could add cost and risk to their plans.

Ghemawat developed the CAGE Distance Framework as a tool to help leaders explore the impact of these differences, and the effect that they could have on international expansion.

He grouped the differences into four dimensions that he called "distances":...