Article Review: Distance Still Matters, The Hard Reality of Global Expansion
Summary
Pankaj Ghemawat’s article, “Distance Still Matters: The Hard Reality of Global Expansion” discusses the reasons and rationale that drive companies to over-estimate profit potential in foreign markets. Ghemawat analyzes the failures of different companies’ (News Corp, Tricon Restaurants, etc..) foreign expansion endeavors to determine what these failures had in common. From his analysis, Ghemawat concludes that these failures share one common attribute: a failure to account for distance.
As Ghemawat describes it, companies erroneously utilize an antiquated and incorrect modality when deciding on foreign expansion: the country portfolio analysis (CPA). The CPA focuses on national GDP, levels of consumer wealth, and people’s propensity to consume but ignores “the costs and risks of doing business in the market.”[1] These costs are grouped into a category classified as “distance” which itself is sub-divided into four dimensions: cultural distance, administrative distance, geographic distance, and economic distance [CAGE]. Ghemawat proceeds to list factors that influence distance and industries that are affected by the specific dimension. These results are framed in an artificially created schematic: the CAGE Distance Framework. Important attributes contributing towards cultural distance include different languages, different ethnicities, different religions, and different social norms. Important attributes contributing towards administrative distance include absence of colonial ties, absence of shared monetary or political association, political hostility, government policies, and institutional weakness. Factors toward geographic distance include physical remoteness, lack of a common border, lack of sea or river access, size of country, weak transportation or communication links, and differences in climate. Factors towards economic distance include difference in consumer incomes and differences in cost and quality of different resources. Adjusting a company’s CPA for a company incorporating distance results in a radically different result of a given country’s growth potential.
Analysis
Ghemawat develops a novel methodology, complete with an understandable schematic (the CAGE framework and the concept of distance) in assessing foreign expansion opportunities for different companies. While Ghemawat’s thought processes are clearly outlined, he fails to label his assumptions or his audience. For example, which companies should utilize the CAGE frameworks? One’s that are prospectively evaluating expansion or one’s that are retroactively looking at expansion failures? Without identifying a clear audience (or identifying if this a prospective, retrospective, or combination too), Ghemawat lessens the utility of his theory. Additionally, Ghemawat’s most important conclusion is his incorporation of distance in a CPA analysis. However, he fails to explain how he added a qualitative metric [distance] in a quantitative model [CPA]. Without detailing how, the conclusion and overall efficacy of his theory is questionable.
Rajeev SinghPage 1
[1] Ghemawat, Pankaj. “Distance Still Matters: The Heard Reality of Global Expansion.” Harvard Business Review. September 2001.