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RelativeResourceManager - TOOL KIT Companies routinely...

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Unformatted text preview: TOOL KIT Companies routinely exaggerate the attractiveness offoreign markets, and that can lead to expensive mistakes. Here’s a more rational approach to evaluating global opportunities. [stance Stl" Matters The Hard Reality of Global Expansion by Pankaj Ghemawat WHEN IT WAS LAUNCHED IN 1991, Star TV looked like a surefire winner. The plan was straightforward: The company would deliver television programming to a media-starved Asian audience. It would target the top 5% of Asia’s socioeconomic pyramid, a newly rich elite who could not only afford the services but who also represented an attractive advertising market. Since En- glish was the second language for most of the target consumers, Star would be able to use readily available and fairly cheap English—language programming rather than having to invest heavily in creating new local programs. And by SEPTEMBER 2001 using satellites to beam programs into people’s homes, it would sidestep the constraints of geographic distance that had hitherto kept traditional broad- casters out of Asia. Media mogul Rupert Murdoch was so taken with this plan — especially with the appeal of leveraging his Twentieth Century Fox film library across the Asian market—that his com- pany, NeWS Corporation, bought out Star’s founders for $825 million between 1993 and 1995. The results have not been quite what Murdoch expected. In its fiscal year ending June 30, 1999, Star reportedly lost $141 million, pretax, on revenues of 137 TOOLKIT - Distance Still Matters $111 million. bosses in fiscal years 1996 through 1999 came to about $500 mil- lion all told, not including losses onjoint ventures such as Phoenix TV in China. Star is not expected to turn in a positive operating profit until 2002. Star has been a highvprofile disaster, but similar stories are played out all the time as companies pursue global ex- pansion. Why? Because, like Star, they routinely overestimate the attractive- ness of foreign markets. They become so dazzled by the sheer size of untapped markets that they lose sight of the vast difficulties of pioneering new, often very different territories. The problem is rooted in the very analytic tools that managers rely on in making judgments about international investments, tools that consistently underestimate the costs of doing business internationally. The most prominent of these is country portfolio analysis (CPA), the hoary but still widely used technique for deciding where a company should compete. By focusing on national GDP, levels of consumer wealth, and people’s propen- sity to consume, CPA places all the em- phasis on potential sales. It ignores the costs and risks of doing business in a new market. Most of those costs and risks result from barriers created by distance. By dis- tance, I don't mean only geographic sep— aration, though that is important. Dis- tance also has cultural, administrative or political, and economic dimensions that can make foreign markets consid- erably more or less attractive. Just how much difference does distance make? A recent study by economists Jeffrey Frankel and Andrew Rose estimates the Measuring the Impact of Distance Economists often rely on the so—called gravity theory of trade flows, which says there is a positive relationship between economic size and trade and a negative relationship between distance and trade. Models based on this theory explain up to two~thirds of the observed variations in trade flows between pairs of countries. Using such a model, economists Jeffrey Frankel and Andrew Rose‘ have predicted how much certain dis tance variables will affect trade. Distance Attribute income level: G DP per capita (1% increase) economic size: GDP (1% increase) physical distance (1% increase) physical size (1% increase)* access to ocean" common border common language common regional trading bloc colony-coionizer relationship common colonizer common polity common currency Change in International Trade (9s) +0.7 +0.8 -1.‘| -O.2 +50 +80 +200 +330 +900 +190 +300 I +340 1. Jeffrey Frankel and Andrew Rose, "An Estimate ofthe effects ofCurrency Unions on Growth," I Lin pu ished working paPEl', May 2000. “’Esrimnted efii‘r is exclude the instjow variables in the table. 138 impact of various factors on a country’s trade flows. Traditional economic fac- tors, such as the country’s wealth and size (GDP), still matter; a 1% increase in either of those measures creates, on average, a 3% to .896 increase in trade. But other factors related to distance, it turns out, matter even more. The amount of trade that takes place between coun— tries 5,000 miles apart is only 20% of the amount that would be predicted to take place if the same countries were 1,000 miles apart. Cultural and administrative distance produces even larger effects. A company is likely to trade ten times as much with a country that is a former colony, for instance, than with a country to which it has no such ties. A common currency increases trade by 340%. Com- mon membership in a regional trading bloc increases trade by 330%. And so on. (For a summary of Frankel and Rose's findings, see the exhibit “ Mea- suring the Impact of Distance") Much has been made of the death of distance in recent years. It's been argued that information technolo— gies and, in particular, global com- munications are shrinking the world, turning it into a small and relatively homogeneous place. But when it comes to business, that‘s not only an incorrect assumption, it's a dan- ger0us one. Distance still matters, and companies must explicitly and thoroughly account for it when they make decisions about global expansion. Traditional country port- folio analysis needs to be tempered by a clear-eyed evaluation of the many dimensions of distance and their probable impact on opportu- nities in foreign markets. The Four Dimensions of Distance Distance between two countries can manifest itself along four basic di- mensions: cuitural, administrative, geographic, and economic. The types of distance influence different busi- nesses in different ways. Geographic distance, for instance, affects the costs of transportation and commu- nications, so it is of particular im- HARVARI'.) BUSINESS REV! EW TOOL KIT - Distance Still Matters The CAGE Distance Framework The cultural, administrative, geographic, and economic (CAGE) distance framework helps managers identify and assess the impact of distance on various industries. The upper portion ofthe table lists the key attributes underlying the four dimensions of distance. The lower portion shows how they affect different products and industries. Cultural Distance different languages different ethnicities; lack of connective ethnic or social networks different religions different social norms attributes creating distance products have high linguistic content (TV) products affect cultural or national identity of consumers (foods) product features vary in terms of: - size (ca rs) - standards (electrical appliances) - packaging products carry country- specific quality associations (wines) industries or products afiected by distance Administrative Distance absence of colonial ties absence of shared monetary or political association political hostility govern ment policies institutional weakness government involvement is high in industries that are: - producers of staple goods (electricity) - producers of other "entitlements" (drugs) - large employers (farming) - large suppliers to government (mass transportation) - national champions (aerospace) - vital to national security (telecommunications) - exploiters of natural resources (oil, mining) ‘-subject to high sunk ‘ costs (infrastructure) Geographic Distance physical remoteness lack of a common border lack of sea or river access size of country weak transportation or communication links differences in climates products have a low value—to—weight or bulk ratio (cement) products are fragile or perishable (glass, fruit) communications and connectivity are important (financial services) local supervision and operational requirements are high (many services) Economic Distance differences in consumer incomes differences in costs and quality of: - natural resources -financial resources - human resources - infrastructure - intermediate inputs - information or knowledge nature of demand varies with income level (cars) economies of standardi- zation or scale are important {mobile phones) labor and otherfactor cost differences are salient (garments) distribution or business systems are different (insurance) companies need to be responsive and agile .(home appliances) portance to companies that deal with heavy or bulky products, or whose op erations require a high degree of coor- dination among highly dispersed peo— ple or activities. Cultural distance, by Pankaj Ghemawat is the jaime and josefina Chub Tiampo Professor ofBusi- ness Administration at Harvard Business School in Boston. His article “The Dubious Logic of Global Mcgomergers," contiv firmed by Far-iborz Ghadnr, was published in the fully—August 2000 issue ofHBR. 140 contrast, affects consumers’ product preferences. It is a crucial consideration for any consumer goods or media com- pany, but it is much. less important for a cement or steel business. Each of these dimensions of distance encompasses many different factors, some of which are readily apparent; others are quite subtle. (See the exhibit “The CAGE Distance Framework" for an overview of the factors and the ways in which they affect particular industries.) In the following pages, I will review the four principal dimensions of distance, starting with the two overlooked the most — cultural distance and adminis- trative distance. Cultural Distance. A country's cul- tural attributes determine how people interact with one another and with com- panies and institutions. Differences in religious beliefs, race, social norms, and language are all capable of creating dis- tance between two countries. Indeed, they can have a huge impact on trade: All other things being equal,trade between HARVARD BUSIN ESS REVIEW TOOLKIT - Distance Still Matters countries that share a language, for ex- ample, will be three times greater than between countries without a common language. Some cultural attributes, like lan- guage, are easily perceived and under- stood. Others are much more subtle. Social norms, the deeply rooted system of unspoken principles that guide indi- viduals in their everyday choices and interactions, are often nearly invisible, even to the people who abide by them. Take, for instance, the long—standing tolerance of the Chinese for copyright infringement. As William Alford points out in his book To Steal a Book Is an Elegant Oflense (Stanford University Press, 1995), many people ascribe this social norm to China’s recent commu— nist past. More likely, Alford argues, it flows from a precept of Confucius that encourages replication of the results of past intellectual endeavors: “I transmit rather than create; I believe in and Iorre the Ancients.” Indeed, copyright in- fringement was a problem for Western publishers well before communism. Back in the 19205, for example, Merriam Webster, about to introduce a bilingual dictionary in China, found that the Commercial Press in Shanghai had al- ready begun to distribute its own ver- sion of the new dictionary. The US. pub- lisher took the press to a Chinese court, which imposed a small fine for using the Merriam Webster seal but did noth- ing to halt publication. As the film and music industries well know, little has changed. Yet this social norm still con- founds many Westerners. Most often, cultural attributes create distance by influencing the choices that consumers make between substitute products because of their preferences for specific features. Color tastes, for example, are closely linked to cultural prejudices. The word “red” in Russian also means beautiful. Consumer durable industries are particularly sensitive to differences in consumer taste at this level. The Japanese, for example, prefer automobiles and household appliances to be small, reflecting a social norm common in countries where space is highly valued. 142 Sometimes products can touch a deeper nerve, triggering associations related to the consumer’s identity as a member of a particular community. In these cases, cultural distance affects entire categories of products. The food industry is particularly sensitive to reli« glous attributes. Hindus, for example, do not eat beef because it is expressly forbidden by their religion. Products that elicit a strong response of this kind are usually quite easy to identify, though some cormtries will provide a few sur- prises. In Japan, rice, which Americans treat as a commodity, carries an enor- mous amount of cultural baggage. Ignoring cultural distance was one of Star TV’s biggest mistakes. By supposing that Asian viewers would be happy with English-language programmingthe com pany assumed that the TV business was insensitive to culture. Managers either dismissed or were unaware of evidence from Europe that mass audiences in countries large enough to support the development of local content generally prefer local TV programming. If they had taken cultural distance into account, China and lndia could have been pre— dicted to require significant investments in localization. TV is hardly cement. Administrative or Political Dis- tance. Historical and political associa- tions shared by countries greatly affect trade between them. Colony-colonizer links between countries, for example, boost trade by 900%, which is perhaps not too surprising given Britain’s con- tinuing ties with its former colonies in the commonwealth, France's with the franc zone of West Africa, and Spain's with Latin America. Preferential trad- ing arrangements, common currency, and political union can also increase trade by more than 300% each. The integration of the European Union. is Industry Sensitivity to Distance The various types ofdistance affect different industries in different ways. To estimate industry sensitivity to distance, Rajiv Mallick, a research associate at Harvard Business School, and I regressed trade between every possible pair ofcountries in the world in each of7o industries (ac- cording to their SIC designations) on each dimension ofdistance. The results confirm the impor~ tance ofdistinguishing between the various components ofdistance in assessing foreign market opportur nities. Electricity, for instance, is highly sensitive to administrative and georgraphic factors but not at all to cultural factors. The following table lists some ofthe industries that are more and less sensitive to distance. CULTURAL DISTANCE Linguistic Ties meatand meat preparations cereals andcereal preraratianr _ miscellaneous edible producb and preparations more sensitive tobacco and to_ba_c_c_o_ products office machines and automatic data-processln g eq u i pment , photographic apparatuses. “ , optical goods, Watches roadrvehicles less sensitive cork and wood metalWorking machinery » electricity current more sensitive HARVARD BUSIN E55 REVlEW probably the leading example of delib- erate efforts to diminish administrative and political distance among trading partners. (Needless to say, ties must be friendly to have a positive influence on trade. Although India and Pakistan share a colonial history—not to mention a bor- der and linguistic ties—their mutual hos- tility means that trade between them is virtualiy nil.) Countries can also create adminis» trative and political distance through unilateral measures. indeed, policies of individual governments pose the most common barriers to cross—border com- petition. In some cases, the difficulties arise in a company’s home country. For companies from the United States, for instance, domestic prohibitions on bribery and the prescription of health, safety, and environmental policies have a dampening effect on their interna- tional businesses. Distance Still Matters a TOOLKIT More commonly, though, it is the tar- get country’s government that raises barriers to foreign competition: tariffs, trade quotas, restrictions on foreign di- rect investment, and preferences for domestic competitors in the form of subsidies and favoritism in regulation and procurement. Such measures are expressly intended to protect domestic industries, and they are most likely to be implemented if a domestic industry meets one or more of the following criteria: -it is a large employer. Industries that represent large voting blocs often re- ceive state support in the form of subsi- dies and import protection. Europe’s farmers are a case in point. -It is seen as a national champion. Re- flecting a kind of patriotism, some in- dustries or companies serve as symbols of a country’s modernity and competi- tiveness. Thus the showdown between Boeing and Airbus in capturing the large passenger-jet market has caused feelings on both sides of the Atlantic to run high and could even spark a broader trade war. Also, the more that a govern- ment has invested in the industry, the more protective it is likely to be, and the harder it will be for an outsider to gain a beachhead. -it is vital to national security. Govern- ments will intervene to protect indus» tries that are deemed vital to national security~especially in high tech sectors such as telecommunications and aero space. The FBI, for instance, delayed Deutsche Telekom’s acquisition of Voice- stream for reasons of national security. - It produces stapies. Governments will aiso take measures to prevent foreign companies from dominating markets for goods essential to their citizens’ everyday lives. Food staples, fuel, and electricity are obvious examples. ADMINISTRATIVE DlSTANCE Preferential Trading Agreements gold, nonmonetary _ electricity current _ coffee, tea,_cocoa, spices _ textilefibers sugar, sugar preparations, 7 and honey gas, natural and manufactured travel goods, hand bags footwear sanitary, plumbing, heating, and lighting fixtures furniture and furniture parts SEPTEMBER 2001 GEOG RAPH IC DISTANCE Physical Remoteness electricity current gas, natural and manufactured paper, paperboard live animals sugar, sugar preparations, _ and. honey pulp and waste paper photographic appa ratuses, optical goods, watches telecommunications and sou nd-recording apparatuses coffee, tea, cocoa, spices gold, non monetary ECONOMIC DISTANCE Wealth Differences (economic distance decreases trade) nonferrous metals manufactured fertilizers meat and meat preparations iron and steel pulp and waste paper (economic distance increases trade) coffee, tea, cocoa, spices animal oils and fats office machines and automatic data-processing equipment powergenerating machinery and equipment photographic apparatuses, optical goods, watches '» less sensitive 143 TOOL KIT - Distance Still Matters - It produces an “entitlement”good or ser- vice. Some industries, notably the health care sector, produce goods or services that people believe they are entitled to as a basic human right. In these indus— tries, governments are prone to inter- vene to set quality standards and control pricing. - It exploits natural resources. A country’s physical assets are often seen as part of a national heritage. Foreign compa- nies can easily be considered robbers. Nationalization, therefore, is a constant threat to international oil and mining multinationals. - It involves high sunk-cost commitments. Industries that require large, geography- specific sunk investments—in the shape, say, of oil refineries or aluminum smelt- ing plants or railway lines — are highly vulnerable to interference from local governments. Irreversibility expands the scope for holdups once the investment has been made. Finally, a target country’s weak in- stitutional infrastructure can serve to dampen cross-border economic activity. Companies typically shy away from doing business in countries known for corruption or social conflict. Indeed, some research suggests that these con- ditions depress trade and investment far more than any explicit adminis- trative poliCy or restriction. But when a country‘s institutional infrastructure is strong — for instance, if it has a well- functioning legal system — it is much more attractive to outsiders. Ignoring administrative and political sensitivities was Star TV‘s other big mis- take. Foreign ownership of broadcast- ing businesses—even in an open society like the United States - is always po- litically loaded because of television’s power to influence people. Yet shortly after acquiring the company, Rupert Murdoch declared on record that satel- lite television was "an unambiguOus threat to totalitarian regimes every- where” because it permitted people to bypass govemment-controlled news sources. Not surprisingly, the Chinese government enacted a ban on the re- ception of foreign satellite TV services soon thereafter. News Corporation has 144 How Far Away Is China, Really? As Star TV discovered, China is a particularly tough nut to crack. In a recent survey of nearly 100 multinationals, 54% admitted that theirtotal business performance in China had been "worse than planned," compared with just 25% reporting "better than planned." Why was the failure rate so high? The survey provides the predictable answer: 62% of respondents reported that they had overestimated market potential for their products or Services. A quick analysis ofthe country along the dimensions ofdistance might have spared those companies much disappointment. Culturally, China is a long way away from nearly everywhere. First, the many dialects of the Chinese language are notoriously difficult for foreigners to learn, and the local population's foreign-language skills are limited. Second, the wellrdeveloped Chinese business culture based on personal connections, often summarized in the term guonxi. creates barriers to economic interchange with Westerners who focus on transactions rather than relationships. it can even be argued that Chinese consumers are “home-biased ”; market research indicates much less preference for foreign brands over domestic ones than seems to be true in India, for example. In fact, greater China plays a disproportionate role in China's economic relations with the rest ofthe world. Administrative barriers are probably even more important. A survey of members of the American Chamber ofCommerce in China flagged marketaccess restrictions, high taxes, and customs duties as the biggest barriers to profitability in China. The level of state involve— ment in the economy continues to be high, with severe economic strains imposed by loss—making state—owned enterprises and technii cally insolvent state-owned banks. Corruption,too, is a fairly signifi- cant problem. In 2000, Transparency International ranked the country 63rd out of 90, with a rating of one indicating the least perceived corruption. Considerations such as these led Standard & Poor’s to assign China a political-risk ranking offive in 2000, with six being the worst possible score. 50. yes, China is a big market, but that is far from the whole story. Distance matters, too, and along many dimensions. begun to mend fences with the Chinese authorities, but it has yet to score any major breakthroughs in a country that accounts for nearly 60% of Star TV's potential customers. Murdoch of all people should have foreseen this out- come, given his experience in the United States, where he was required to become a citizen in order buy the television com- panies that now form the core of the Fox network. Geographic Distance. In general, the farther you are from a country, the harder it will be to conduct business in that country. But geographic distance is not simply a matter of how far away the HARVARD BUSINESS REVIEW country is in miles or kilometers. Other attributes that must be considered in- clude the physical size of the country, average within—country distances to borders, access to waterways and the ocean, and topography. Man-made geo graphic attributes also must be taken into account—most notably, a country’s transportation and communications infrastructures. Obviously, geographic attributes in- fluence the costs of transportation. Products with low value-to—weight or bulk ratios, such as steel and cement, incur particularly high costs as get» graphic distance increases. Likewise, costs for transporting fragile or perish- able products become significant across large distances. Beyond physical products, intangible goods and services are affected by geo» graphic distance as well. One recent study indicates that cross-border equity flows between two countries fall off sig- nificantly as the geographic distance be- tween them rises. This phenomenon 'www.intelligencedata.com > clearly cannot be explained by trans- portation costs—capital, after all, is not a physical good. Instead, the level of information infrastructure (crudely measured by telephone traffic and the number of branches of multinational banks) accounts for much of the effect of physical distance on cross-border equity flows. interestingly, companies that find ge- ography a barrier to trade are often ex- pected to switch to direct investment in local plant and equipment as an alter- native way to access target markets. But current research suggests that this ap proach may be flawed: Geographic dis- tance has a dampening effect, overall, on investment flows as well as on trade flows. in short, it is important to keep both information networks and trans- portation infrastructures in mind when assessing the geographic influences on cross-border economic activity. Economic Distance. The wealth or income of consumers is the most impor- tant economic attribute that creates dis— HISTORY IS DECiDED B‘f SUWERIOR iNTELLIGENCE. NOW (50 MAKE HiS‘i'ORV’. Distance Still Matters - TOOL KIT tance between countries, and it has a marked effect on the levels of trade and the types of partners at country trades with. Rich countries, research sug- gests, engage in relatively more cross— border economic activity relative to their economic size than do their poorer cousins. Most of this activity is with other rich countries, as the positive cor- relation between per capita GDP and trade flows implies. But poor countries also trade more with rich countries than with other poor ones. Of course, these patterns mask varia- tions in the effects of economic dispari- ties—in the cost and quality offinancial, human, and other resources. Compa- nies that rely on economies of experi- ence, scale, and standardization should focus more on countries that have sim- ilar economic profiles. That’s because they have to replicate their existing busi~ ness model to exploit their competitive advantage, which is hard to pull off in a country where customer incomes — not to mention the cost and quality of THOMSON FINANCIAL INTELLIGENCE DATA DE AND CONDUER" TOOL KIT 0 Distance Still Matters Country Portfolio Analysis: A Flawed Approach Here’s how country portfolio analysis KEY; mm” ,0 be”, mam) (CPA) works. A company’s actual and @sanpi mam potential markets are plotted on a @ POLAND simple grid, with a measure of per mm capita income on one axis and some 400 measure of product performance, often penetration rates, on the other. The location 0fthe market on the grid reflects the attractiveness of the mar- ket in terms of individual consumer wealth and propensity to consume. The size of the bubble represents the total size ofthe market in terms of GDP or the absolute consumption of the product or service in question. ' The bubbles provide a rough estimate of how large the relative revenue opportunities are. This CPA rnap compares a number of non—U.S. markets for fast—food ‘51000 0 5,000 10.000 15,000 20,000 25.000 30.000 35.000 40,000 restaurants. per capital income (3) @ MALAYSIA @ GERMANY nusrrtnm ® THAILAND 9 NEW ZEALAND @ S..‘.\FRlCA @ SINGAPORE u: G D per capitafastfood consumption (3) Country Portfolio Analysis: _ Adjusted for Distance Taking distance into account dra- matically changes estimates of 400 market opportunities. In the chart at rig ht, each of the fast-food markets has been adjusted for a number ofdistance attributes, ' based on the estimates by Frankel and Rose. The relative sizes of the bubbles are now very different. For example, Mexico, which was less than one-tenth the size of the largest international markets, Japan and Germany, ends up as the second largest opportunity. Clearly, the CPA approach paints an incom- plete picture,unleSSitisadjusted o _ for distance. —5,000 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 300 200 100 per capitafast—food consumption (3) per capita income (5) 146 HARVARD eusmess REVIEW resourceseare very different. Walsh/tart in India, for instance, would be a very different business from WalrMart in the United States. But Wal-Mart in Canada is virtually a carbon copy. In other industries, however, compet— itive advantage comes from economic arbitrage - the exploitation of cost and price differentials between markets. Companies in industries whose major cost components vary widely across countries — like the garment and foot wear industries, where labor costs are importanteare particularly likely to tar- get countries with different economic profiles for investment or trade. Whether they expand abroad for pur— poses of replication or arbitrage, all com- panies find that major disparities in sup— ply chains and distribution channels are a significant barrier to business. A re- cent study concluded that margins on distribution within the United States - the costs of domestic transportation. wholesaling, and retailing—play a bigger role, on average, in erecting barriers to imports into the United States than do international transportation costs and tariffs combined. More broadly, cross-country com- plexity and change place a premium on responsiveness and agility, making it hard for cross-border competitors, particu- larly replicators, to match the perfor- mance of locally focused ones because of the added operational complexity. In the home appliance business, for in stance, companies like Maytag that con- centrate on a limited number of geog- raphies produce far better returns for investors than companies like Electro lux and Whirlpool, whose geographic spread has come at the expense of sim- plicity and profitability. A Case Study in Distance Taking the four dimensions of distance into account can dramatically change a company's assessment of the relative attractiveness of foreign markets. One company that has wrestled with global expansion is Tricon Restaurants inter- national (TRI), the international oper- ating arm ofTricon, which manages the Pizza Hut, Taco Bell, and KFC fast-food SEPTEMBER 2001 chains, and which was spun off from Pepsico in 1997. When Tricon became an independent company, TRl’s operations were far- flung, with restaurants in 27 countries. But the profitability of its markets var- ied greatly: "Mo-thirds of revenues and an even higher proportion of profits came from just seven markets. Further- more,TRl's limited operating cash flow and Tricon’s debt service obligations left TR] with less than onertenth as much money as archrival McDonald’s inter- national to invest outside the United States. As a result, in 1998, TRl’s presi- dent, Pete Bassi, decided to rationalize its global operations by focusing its eq- uity inveslnlenls in a limited number of markets. But which markets? The exhibit “Country Portfolio Analysis: A Flawed Approach” provides a portfolio analysis of international markets for the fast- food restaurant business, based on data used by TR] for its strategy discussions. The analysis suggests that the com- pany’s top markets in terms of size of opportunity would be the larger bub- bles to the center and right of the chart. Applying the effects of distance, how ever, changes the map dramatically. Consider the Mexican market. Using the CPA method. Mexico, with a total fast-food consumption of $700 million, is a relatively small market, ranking 16th of 20. When combined with esti- mates of individual consumer wealth and per capita consumption, this rank- ing would imply that TRI should dis- pose of its investments there. But the exhibit “Country Portfolio Analysis: Ad« justed for Distance” tells a different story. When the fast-food consumption numbers for each country are adjusted for their geographic distance from Dal- las, TRl’s home base, Mexico’s consump- tion decreases less than any other coun- try’s, as you might expect, given Mexico’s proximity to Dallas. Based on just this readjustment, Mexico leaps to sixth place in terms of market opportunity. Further adjusting the numbers for a common land border and for member- ship in a trade agreement with the United States pushes Mexico’s ranking Distance Still Matters r TOOL ItIT all the way up to second, after Canada. Not all the adjustments are positive: adjusting for a common language —not a characteristic of Mexico— pushes Mex- ico into a tie for second place with the United Kingdom. Additional ad just— ments could also be made, but the overall message is plain. Once distance is taken into account, the size of the mar— ket opportunity in Mexico looks very different. If TRI had used the CPA ap— proach and neglected distance, the com- pany‘s planners might well have ended up abandoning a core market. Instead, they concluded, in Bassi’s words, that "Mexico is one of T'Rl’s top two or three priorities." Factoring in the industry effects of dis- tance is only a first step. A full analysis should consider how a company’s own characteristics operate to increase or re- duce distance from foreign markets. Companies with a large cadre of cos- mopolitan managers, for instance, will be less affected by cultural differences than companies whose managers are all from the home country. In TRl’s case, consideration of company—specific fea— tures made Mexico even more attrac- tive. The company already owned more than four-fifths of its Mexican outlets and had a 38% share of the local market, well ahead of McDonald’s. Consideration of the interaction of company-specific features and distance is beyond the scope of this article. But whether the analysis is at the industry or company level, the message is the same: Managers must always be con— scious of distance—in all its dimensions. The CAGE distance framework is in— tended to help managers meet that challenge. While it is necessarily subjec— tive, it represents an important comple- ment to the tools used by most compa— nies seeking to build or rationalize their country market portfolios. Technology may indeed be making the world a smaller place, but it is not eliminating the very real—and often very high—costs of distance. 6 Reprint R0108l( To order reprints, see the last page of Exec utive Summaries. 147 ...
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