Strategic Understanding of Product Markets - Essay Example

Topic: Using an extended example critically examine whether the ‘sector matrix’ framework gives a better strategic understanding of product markets than the concepts of ‘product’ or ‘commodity’ chains. The present scenario of globalization has brought an interesting change to the way production of commodities has usually taken place. The production of a single commodity might not remain confined to one particular country; it can be spread to a number of regions. Different components of a commodity can be produced in different countries depending on the comparative advantage enjoyed by that country or region in production of that component. This has given rise to the concept of commodity chain. Different firms with heterogeneous geographical distribution engaged in production activities of a commodity is said to constitute a global commodity chain. This is known as the Global Commodity Chain (GCC) model. (Dicken P., 2003) According to Hopkins and Wallerstein a commodity chain is defined as “a network of labor and production processes whose end result is a finished commodity”. The process of production of a commodity is of main importance in the commodity chain. The entire process can be thought of being comprised of a network of points where each point is related to its preceding one in terms of procuring raw material, production, distribution and consumption. These interorganaisational points are technically defined as ‘nodes’. The geographical location of the nodes is generally different from one another. This explanation provides an innovative view for explaining the global inequalities in development. The nodes that are located at the periphery of the network are open to more competition than the nodes at the centre. As a result, central nodes are subject to more aggregate wealth than the peripheral nodes. This distribution is augmented by competitive pressures of innovation that flows from the centre to the periphery. It is natural that the core areas will enjoy better support facilities like infrastructure than the peripheral area. (Birch K., April 2006) The Value Chain Analysis developed by Michael Porter is an important tool in the hands of business managers that help to increase the value of the offering by a firm.. The generic value chain model suggests of breaking the entire set of activities undertaken by a firm into primary activities and support activities. The primary value chain activities include inbound logistics, operations, outbound logistics, marketing and after sales services. The support or secondary activities constitute of procurement of raw materials, research and development, human resources management and other firm activities. The value chain analysis guides the firm to concentrate on its core activities and maybe, outsource the rest. This maximizes the firm’s competitive advantage and increase the profit margin by providing value to the customer in excess of costs. The different activities that constitute primary and secondary activities are interdependent and connected by linkages. Linkages occur when the process of any activity has an influence on the effectiveness of other activities. (Porter M.E., 1986) The GCC model bears certain resemblances with Porter’s value chain analysis. The generic value chain demonstrates how breaking up of activities helps a firm to attract increased productivity and profit. Since the industry is made up of firms related by similar lines of product, it can be stated that global firms need to manage the linkages in their commodity chain to ensure a winning hand over their competitors. (Dr. Jean-Paul Rodrigue, January 2009) However Porter is of the view that “lower-order” competitive advantage in the form of low cost labour is inferior to “higher order” competitive analysis in the form of innovation and constant up gradation of technology, customer relationship and brand image when deciding about global competitiveness. (Gereffi G. and Korzeniewicz M., 1994) The market economy judges the efficiency of the management of any company in terms of financial performance. The economic implication of this is firms aim to increase the supply of their products by providing goods to the customers at a low price. This increase in supply is achieved through production activities, which is technically defined as transformation of raw materials into finished goods and services by the application of capital and labor. This can be further elaborated by stating that as capital or money moves down the value chain, the goods or services gets created. Technology plays an important part in production activities, depending on which firms are classified as capital or labor intensive. This concept leads to the definition of industry which is the aggregation of firms that produce similar goods and services using a common technology. At this stage, we examine the aspect of production in light of Porter’s value chain. Production is defined as a chain of functions in a supply chain. The raw materials provided by the suppliers are acted upon by forces of production like labor to reach the end customer. In order to achieve competitive advantage over its rivals, any firm would have to critically analyze its supply chain in light of the industry it is operating in. An organization will try to achieve the minimum possible cost so that it enjoys the advantages of price leadership. Similarly, a firm that has access to innovative technology can expect to have a high growth rate by capitalizing on the increased demand which will finally lead to its expansion in the initial stages of business cycle. (Harmon P., 2003) Quality is an important parameter of customer value addition and in modern times, assumes particular importance as far as growth of a firm is concerned. In face of industry competition, a firm must ensure that it sticks to certain quality standards. The advent of six sigma measures and the pioneering works of Demming and Juran have made quality an important determinant of value. Many companies have resorted to total quality control measure to ensure that the entire quantity produced is saleable in the market and it does not have to incur costs for re-work and replacement. Quality control also aims at reducing wastage of cost from labor activity. All these different measures of cost reduction have been jointly referred under a single strategic concept of to as lean management in recent strategic management literature. A firm must work along with its partner firms in the supply chain to ensure that the overall efficiency of the firm is increased in the industry value chain. Works of Porter and Womack et al and Andersen consultants on lean enterprise in 1990s, suggest that the by taking out cost from the supply chain, value of a firm in the industry can be enhanced. The preceding discussion has provided us with the platform that explains the concept of industry value chain and its involvement in analyzing the performance of a firm. However, it is also argued that an inherent drawback of this analysis is due to analyzing business from the supply side only. The value chain model stresses the emphasis on relationship between suppliers of raw materials and final distributors of the product. It suggests of getting the advantage by reorganizing of the value chain. On the demand side, the competition is mainly between car assemblers producing similar products. This is evident because a business is confined to an industry sector. It does not consider the demand aspects that arise from selling goods and services to individual customers. This has led to the formation of the concept of Sector Matrix Framework. In modern business environment, this framework of analysis applies to all those goods which need complex supporting infrastructure and services. The matrix framework of analysis is based on two broad assumptions. The demand for a product encompasses all household demand. On the supply side, the concept of industry as a conglomerate of firms operating with similar technology base and in similar lines of products is extended to include institutions with a variety of activity across different sectors. The objective of the matrix analysis is to help strategists understand the complex demand-supply interaction that are often multi dimensional in nature, and plan their actions accordingly. (Gibbon P., n.d.) Sector matrix analysis has the unique feature of being a matrix of horizontal and vertical relations rather than being a pure industry value chain model. The application of sector matrix to make strategic decision by business managers can be illustrated through an example of the motor car industry which is complex by its nature of operation that involves operations spreading into a number of ancillary industries. It is important to note that the value chain analysis assumes that it captures information relevant to undertake strategic decisions. It will be only concerned to know which of the production techniques amongst Ford mass production, Toyota model or the German model is the best option to gain competitive advantage. From the demand side this will be an interesting analysis due to the existence of complement products. The car industry faces competition from close substitutes, the main being from used cars. Demand substitution occurs since customers replace their need for a new car by a used car to avoid the high depreciation values on a newly brought car. Eventually, they may postpone their demand for a new car till their financial resources permit. The matrix also incorporates the dealings of car manufacturers in order to take care of the demand of used cars. The motor car industry has another interesting feature. The expenditure of the customer does not end on buying the car, rather continuous expenses needs to be incurred in obtaining the necessary fuel and services to keep the car in a running condition. In addition to this arrangement for financing facilities have to be made to attract customers. This will require interaction with financing firms as well. The matrix takes a comprehensive view of all the factors from the demand as well the supply side that will facilitate the process of corporate decision making. Services sector is the latest revenue earner in developed economies. Car manufacturers, who were traditionally into manufacturing activities, have now diverged to allied activities like customer and dealer finance and maintenance works. Prominent examples for this would be Ford and General Motors. The latest strategic development in the car industry has been in the mode of selling cars through the use of new modes of finance. In an economy it is the household sector that provides for the labor in the production activities. The unequal distribution of income results in unequal distribution of demand for goods. This factor stems a concern for the car manufacturers because the demand for cars, both old and new is severely affected by household income distribution. The analysis of both the Sector matrix analysis and GCC model shows that the former is superior in strategic understanding of the product markets. The GCC is more explanatory for causes that lead to diversification of the business processes of a corporate body. It has been instrumental in analyzing the changes in the allocation of factors of production in the post liberalization era and in explaining the direction and composition of flow of technology and the pressure on economies devoid of innovative technologies. It is also instrumental in explaining how disparities in income and wealth occur across nations due to access (or lack of it) to technology. The sector matrix provides a balanced analysis of the factors from both the demand and supply side that needs to be followed by corporates in order to gain long term benefits in this age of globalization. Though both the models have improved the Porter’s value chain analysis model in their own way, the Sector Matrix analysis clearly stands out due to its all round analysis. (Haslam C., Neale A. and Johal S, 2000) References Birch K., (April 2006), Global Commodity Chains in the UK Biotechnology Industry: An Alliance-Driven Governance Model, Centre for Public Policy for Regions: Discussion Paper, retrieved March 19, 2009, from Dicken P., (2003), Global Shift - Reshaping The Global Economic Map In The 21st Century, Published by SAGE, ISBN 0761971505, 9780761971504, retrieved March 19, 2009, from Dr. Jean-Paul Rodrigue, (January 2009), Commodity Chain Analysis, retrieved March 19, 2009, from Gereffi G. and Korzeniewicz M.,(1994), Commodity Chains and Global Capitalism, Praeger Publishers, Westport, Connecticut London, retrieved March 19, 2009. Gibbon P., (No Date), Global Commodity Chain: Drivenness and Possibilities of Local intervention, Centre for Development Research, Copenhagen, retrieved March 19, 2009, from Harmon P., (2003), Business Process Change - A Manager’s Guide to Improving, Redesigning and Automating Processes, Published by Morgan Kaufmann, ISBN 1558607587, 781558607583, retrieved March 19, 2009, from Haslam C., Neale A. and Johal S, (2000), Competitive Business: Industry and Sector Matrix Analysis, Economics in a Business Context, Third Edition, retrieved on March 18, 2009, from Porter M.E., (1986), Competition in Global Industries, Published by Harvard Business Press, ISBN 0875841406, 9780875841403, retrieved March 19, 2009, from Read More