Production Chain and Sector Matrix - Research Paper Example

Chain and Matrix We can begin this paper with a discussion of the "Financialisation of Firms", which refers to a complex phenomenon whereby the management strategies of firms are geared towards enhancing the market performance of their stocks to satisfy the expectations of financial markets. It used to be the other way round, but sometime in the 1980s a reversal of attitudes somehow took place (Froud et al., 2005, 23). Crotty (2002) attributed this to the rise in power of financial markets as a result of "deterioration in real economic performance" (p. 13) in firms. In reaction to the low profits and high cost of capital in the 1980s and 1990s, several firms embarked on a wave of financialisation - creating, buying, or expanding financial subsidiaries to acquire financial assets - for the purpose of giving management greater flexibility in managing earnings, creating shareholder value, and satisfying the capital markets (p. 34). Most publicly listed firms, therefore, were "pressured" to show good results on a regular basis using the basic language familiar to capital markets: stock price reflects shareholder value that is a function of operating efficiency, lower expenditures, growth in turnover and earnings, and a steady flow of dividends. The more consistent the numbers, the better, as Froud et al., (2005) pointed out in their study of the American company GE. The main challenge to managements in a financialised universe of firms was to make ambitious strategic plans and deliver consistently on their promises. Firms became slaves to a ruthless capital market that, with a single recommendation, can punish poor performers by depressing a firm's stock price and raising its cost of capital. In a world obsessed with financial performance, managements searched for suitable analysis and planning tools. The production chain and the sector matrix were two of the many that, in this age of globalisation and management fads, were developed to help firms map out value-creation strategies. We explain each briefly, then compare and differentiate them with examples. The Matrix The matrix is a strategic tool that presents in a grid or table the strategic factors affecting the firm. The coordinates of the grid can vary, as shown in examples of two well-known models. The first is H. Igor Ansoff's product/market expansion grid or matrix (Ansoff, 1957) that recommends four strategies (market penetration, market development, product development, and diversification) a firm can adopt to grow or increase its turnover depending on the life cycle of the firm's new or current products and markets. The other is the Boston Consulting Group's Market Growth-Share matrix (Henderson, 1970, 1976a, 1976b) designed to help the firm identify businesses/product types by market share (an indicator of the firm's ability to compete) and market growth (indicator of market attractiveness). Firms, in effect, can manage their businesses as a portfolio of investments, much like a bank or an investor would hold, buy, or sell financial instruments. Firms that want to grow should hold or buy stars (high growth and high share businesses) or cows (low growth, high share, cash generating businesses), sell dogs (low growth and share), and think of what to do with question marks (high growth, low share, needs cash injections, but risky). Example of Matrix Use A prime example of how the matrix was used for strategic management is recounted in the study (Froud, et al., 2005, pp. 8 and 38) of General Electric (GE) that, with the help of consulting firm McKinsey and Co., adapted the BCG matrix and developed its own Nine-Cell Industry Attractiveness-Competitive Strength Matrix (Thompson and Strickland, 2001, 327-330), a three-by-three grid that mapped out alternative business positions and attractiveness of markets, on which are superimposed several scaled circles representing different markets and their sizes and showing the firm's market share within each market (See Figure 1). [Insert Figure 1 here] GE claimed that the matrix provided at a glance the position of the firm's diversified portfolio of businesses and that its design is flexible enough to take into account the broader issues facing the firm (Sutherland & Canwell, 2004, 97). As can be seen in the figure, the BCG box's horizontal coordinate 'market share' was broadened into 'competitive strength/business position' that covers more in terms of the ability to compete, whilst its vertical coordinate 'market growth' broadened into 'long-term industry attractiveness', which potentially might include all those things that make an industry/market attractive. The GE matrix allowed the firm to manage by using strategic portfolio analysis, whereby the conglomerate's divisions are managed as distinct strategic units. Each division may consist of a part of the firm (e.g., Transport Division) or wholly- or partially-owned subsidiaries (e.g., Penske Truck Leasing Company, L.P.) with different corporate cultures and core competences (GECC, 2005, 52). As Froud et al. (2005, 53) pointed out, using the matrix easily allowed GE's top management to either add to or subtract from the size of the division through mergers and acquisitions based on the division's position in the matrix. The matrix also helped in ensuring that these buy or sell decisions did not adversely affect other divisions. Using the matrix allowed GE to discover the value of providing services to their customers, a highly profitable venture that grew in its share of revenues in several of its business units. They cite (p.8-9) the inclusion of logistics management with its truck leasing business, and the bundling of aircraft leasing, flight training, and the purchase of aero engine maintenance businesses from British Airways and Varig of Brazil into its GE Industrial unit. Ford under its then-CEO Jacques Nasser, a Welch admirer, applied the same method. Hindsight teaches us that where Welch succeeded in using the sector matrix as a strategic management tool, Nasser did not. The Chain Production Chains evolved in the 1990s from the concept of Porter's value chain, which he defines as the series of activities in a firm that add value to its products or services and that contributes to the firm's competitive advantage (Porter, 1985, 36). Gereffi and Korzeniewicz (1994) redefined the concept and expanded it into a basic framework for describing global commodity chains in terms of their input/output structures, geography, governance, and institutional structures. Since then, several management strategy studies have considered the concept of production chains as more appropriate for use in firms facing the challenges of globalisation. A production chain is sometimes called as a value network, an activities chain, or a production network. Sturgeon (2000, 6) states that while these terms have a great deal in common, there is need to distinguish between chains and networks: a chain maps the vertical sequence of events leading to the delivery, consumption, and maintenance of a particular good or service, while a network maps both the vertical and horizontal linkages between economic actors, recognising that various value chains often share common economic actors and are dynamic in that they are reused and reconfigured on an ongoing basis. Similarities and Differences A picture is worth a thousand words. The matrix and production chains are both useful and helpful to management in mapping out a firm's strategic environment. By providing a framework to analyse the firm's products and markets, using the matrix diagram or the graphic chain/network concept gives at a glance a mental picture of the firm's position in its business environment. Both tools can help the firm decide how best to increase its shareholder value by looking at different aspects of one and the same reality. Whilst similar, the sector matrix and chain concept provide different perspectives of looking at the firm and its strategic position. The matrix, originally designed to help decision-making on resource allocation to different parts of a single organisation, starts from within then goes out of the firm to focus on the characteristics of the market (customers) and their demands (wants and needs), and then looks inward once again. The firm's resources are then channelled to those parts of the organisation where the market is attractive or growing and where needs of customers would best be satisfied. The sector matrix is used by financialised firms because it provides financial analysts the firm's financial prospects at a glance and in a manner that is easily comprehended. The production chain, its proponents claim, is more attuned to a globalised economy because of its multiple dimensions of organisational and spatial scale, production actors, and governance styles (Sturgeon, 2000) or its ability to investigate different factors like social and organisational dimensions of global trade that operate within an industry (Gereffi and Korzeniewicz, 1994). This allows productionist firms (e.g., those with global production networks) to investigate its organisation and go beyond itself onto its whole supply chain with its unique spatial (international or global networks) scale, enabling it to make strategic decisions like buying or selling firms or raw materials, transferring technology, discovering new suppliers, establishing worldwide logistics networks, or finding ways to squeeze value from any point in the chain. Production chains allow the identification of commonalities in the market by way of standardisation, quality improvements, commoditisation of raw materials that will bring down costs, and potential downward trends in costs as the supply of competitors offering the same or highly similar products increases. Examples of Production Chains Production chains have been used as an analytical framework in several industries, e.g., agriculture (Gibbon, 2001), apparel (Gereffi, 1999 and 2002), and automotive (Humphrey and Memedovic, 2003). We focus on the first two: agriculture and clothing. Agro-commodities Chain. Gibbon (2001) used in his paper Gereffi's commodity chain framework to tackle a major (strategic) policy challenge: how to lower entry barriers in agro-commodity value chains (for coffee, cotton, cocoa, and rubber) without destroying it. He compared the value chains for agricultural commodities before and after the 1980s, which marked a shift from producer-driven to buyer-driven forms of organisation. He identified two types of buyer-driven chains: one with low entry barriers that is experiencing downgrading, and one with high entry barriers that is experiencing upgrading. His challenge was to find an institutional means to lower entry barriers to the second kind of chain, whilst preserving the upgrading trajectory. The commodity chain framework proved useful in analysing the multidimensional nature of the problem. Table 1 shows Gibbon's comparison of the two phases of the agro-commodity chain framework according to its input-output, geographical, governance, and institutional dimensions, allowing the author to conclude his analysis (pp. 9-10) with a socially broad-based regulatory strategy that would assure the "common good". [Insert Table 1 here] Apparel Production Chain. Gereffi (2002) maps out the Apparel Commodity Chain (Figure 2) showing five networks (raw material, component, production, export, and marketing) and their input-output, geographical, and institutional (textile companies, apparel manufacturers, and retail outlets) dimensions. The diagram gives us at a glance the different components of the value chain for apparels sold in North America, providing firms all over the world a starting point for creating value. [Insert Figure 2 here] An example of how the value chain operates is documented in a recent article on the global supply chain management giant Li & Fung (Meredith, 2005, 40-41). A linen sweater sold by the shop Eileen Fisher in New York is the result of a combination of several institutions within the network of chains: high-quality flax from France are transformed into threads in Shuozhou, dyed in Guangzhou, knitted into sweaters in Hong Kong (travelling 1,400 miles all over China) following designs from Fisher in the U.S., and airlifted through a Korean airline company back to New York. Li & Fung also use a network of Indian suppliers of textiles to turn out apparel sown in China and sold by Eileen Fisher in New York. Conclusion The use of the sector matrix and the production chain reflects two schools of thought in strategic management (Devlin, 1997). The first is market led, whereby the firm's outputs or offerings are the main focus of competitive strategy, which has as its primary aim to compete effectively in particular markets by delivering a competitive bundle of benefits, or value, to the consumer. The "positioning" of the offering relative to those of competitors is of prime importance. The other school of thought concentrates on the resources of the organisation and postulates that superior resources and processes, designed to utilise such resources efficiently, will lead to competitive advantage (Barney, 1991; Peteraf, 1993). These two approaches can be linked (Hunt and Morgan, 1995; Verdin and Williamson, 1993) to provide a complete and theoretically sound basis for devising competitive strategy in the age of 21st century globalisation, helping the firm's management and financial analysts to understand the dynamic and complex nature of productive activity. Reference and Bibliography Ansoff, H.I. (1957) Strategies for diversification. Harvard Business Review. September-October. Barney, J.B. (1991) Firm resources and sustained competitive advantage. Journal of Management, Vol. 17 No. 1, 99-120. Crotty, J. (2002) The effects of increased product market competition and changes in financial markets on the performance of non-financial corporations in the neo-liberal era. Political Economy Research Institute, University of Massachusetts Amherst, Working Paper Series, No. 44. Devlin, J. F. (1997) Adding value to service offerings: the case of UK retail financial services. European Journal of Marketing, 32, 11/12, 1091-1109. Froud, J., Johal, S., Leaver, A. & Williams, K. (2005) General Electric: the conditions of success. University of Manchester, CRESC Working Paper Series No. 5, September. GECC (General Electric Capital Corporation) (2005) Form 10-K/A. Submitted to the Securities and Exchange Commission, U.S. File 1-6461, 6 May. Gereffi, G. (1999) International trade and industrial upgrading in the apparel commodity chain. Journal of International Economics, 48, 37-70. Gereffi, G. (2002) Outsourcing and Changing Patterns of International Competition in the Apparel Commodity Chain. Paper presented at the conference on: Responding to Globalisation: Societies, Groups, and Individuals, April 4-7, 2002. Boulder, Colorado. Gereffi, G. and Korzeniewicz, M. (1994) Commodity Chains and Global Capitalism. London: Praeger. Gibbon, P. (2001) Agro-commodity chains: an introduction. Speech during a Conference on Rural Development and Food Security: Towards a New Agenda held 23 May 2001. Overseas Development Institute [online] Available from [Accessed 20 February 2006]. Henderson, B.D. (1970) The Product Portfolio, Boston Consulting Group. Henderson, B.D. (1976a) The Star of the Portfolio, Boston Consulting Group. Henderson, B.D. (1976b) Anatomy of the Cash Cow, Boston Consulting Group. Hunt, S.D. and Morgan, R.M. (1995) The comparative advantage theory of competition. Journal of Marketing, Vol. 59 No. 2, 1-15. Meredith, R. (2006) Commercial crossroads: birth of a sweater. Forbes Asia. 9 January, pp.37-41. Peteraf, M.A. (1993) The cornerstones of competitive advantage: a resource-based view. Strategic Management Journal, Vol. 14, 179-191. Porter, M.E. (1985) Competitive advantage: creating and sustaining superior performance. New York: Free Press. Sturgeon, T. J. (2000). How Do We Define Value Chains and Production Networks Background Paper Prepared for the Bellagio Value Chains Workshop, 25 September to 1 October 2000, Rockefeller Conference Centre. Bellagio, Italy. Sutherland, J. & Canwell, D. (eds.) (2004) Palgrave Key Concepts in Strategic Management. London: Palgrave Macmillan. Thomson, A.A. & Strickland, A. J. (2001). Crafting and executing strategy: text and readings, International 12th ed. London: McGraw-Hill. Humphrey, J. & Memedovic, O. (2003) The global automotive industry value chain: what prospects for upgrading by developing countries. Vienna: UNIDO. Verdin, P. and Williamson, P.J. (1993) Core Competence, Competitive Advantage and Market Analysis: Forging the Links. France: INSEAD. Table 1. Example of a Global Chain Analysis of Agro-commodities Classical (1930-1980) New (1990-present) Input-output Rain-fed Seasonally-uneven State-owned or regulated export monopolies International producer associations controlled prices via buffer stock agreements and export control Bulk form of trading Differentiation of commodities according to basic properties Partial disintegration of agro-commodity chains due to "filamentation" Diversity in principles of governing their organisation Liberalised producer country markets Privatised or liquidated state marketing monopolies Falling supply predictability Falling margins and increased risk of contractual non-compliance Stronger bargaining position of upstream processors Geography Highly dispersed world supply Relatively concentrated world demand (mostly industrialised countries) Common in African and Asian colonies of European powers and Latin American independent states Free competition between large numbers of private exporters National markets divided into distinct geographical monopolies let to large-scale, often foreign, private traders Privatised state monopolies remain powerful Emergence of powerful contract manufacturers worldwide, e.g., cocoa-to-chocolate chain Differentiation of consumer tastes and emergence of luxury brands, e.g., of cotton, coffee, and chocolate Governance Coordinative roles by state export marketing monopolies and producer associations (at international level) States provided credit, free extension services, and maintained quality control (uniformity) Control over prices for both capital inputs and outputs, both pan-territorial and pan-seasonal basis through season-on-season price stabilisation Horizontal control by national export organisation Arm's length vertical control by international trading/brokering companies (Cargill, ED&F Man, Louis Dreyfus, etc.) via contract-based relations with suppliers and end-users. States lost the power to valorise peasant production via credit-based input schemes, etc. Private local agents taken over the state function via contract farming schemes Private marketing oligopolies (e.g., cotton in Zimbabwe) Disappearance of international horizontal coordination between producing countries Arm's length vertical coordination persists, with rise of direct forms via international traders direct procurement or secondary processing Specialized industrial processors (e.g., giant food cos.) in developed countries coordinate with supplier groups in developing countries Institutional Suppliers and traders linked via simple and inclusive quality conventions Producer-driven production systems Undermining/abandonment of classical matrixes of crop quality Crops being sold in undifferentiated forms, e.g., Cocoa (Ghanaian as the only recognised standard) Larger role for commodity futures markets and diminished roles of producers and industrial consumers Traded volumes increase faster than physical volumes, so price movements reflect trends in other financial markets (not crop supply/demand) (Source: Gibbon, 2001, pp. 2-8) Figure Captions Figure 1. The General Electric Matrix. Figure 2. The Apparel Commodity Chain. Figure 1. (Source: Sutherland & Canwell, (eds.), Palgrave Key Concepts in Strategic Management, Fig. 22, p. 98) Figure 2. (Source: Gereffi, 2002, Figure 1, p. 39) Read More