Sector Matrix, the Concept of Value Chain - Coursework Example

Introduction The traditional industry framework has largely surrounded around the concepts of value chain as well as global commodity chains. The concept of value chain which was popularized by Michael Porter basically dealt with assessing the competitive advantage of the firms and the question of how to find and sustain it. The concept of value chain, therefore, greatly increased the understanding of how a firm can be considered as a collection of different processes which must be performed best in order to achieve the competitive advantage. The chain concept has been dominant concept within theoretical framework of economics as well as strategy studies as different theoretical frameworks such as BCG and Porter’s ideas gave rise to the overall concept of the value chain. However, on a much bigger scale, the idea of value chain encompasses a much larger significance because it interconnects different industries either within the borders or outside the borders of the company. This therefore also means that the global supply chain management is not just a mere concept but a social as well as economic phenomenon. The concept of global commodity chains emphasized on the spatial and territorial dimensions of doing business and is based on the concepts of global chains. A new and more innovative concept is the concept of sector matrix which outlines the interplay of demand and supply forces. By emphasizing the demand distribution and supply interaction, the sector matrix increases the field for visible as it attempts to define much more complicated activities and put more focus on redefining competition not from the perspective of the competing manufacturing systems but from really divergent prospective. This essay will discuss whether the sector matrix provides a much better strategic understanding than the concepts of product and commodity chains. Value Chain Globalization of economic resources of the world have given rise to a new phenomenon where products are hardly produced in the domestic markets as there are innumerable linkages between different players which collectively contribute towards the development of chains which regulate the whole process of manufacturing activity. For example, NIKE outsources almost all of its manufacturing facilities and goods sold in US are made in various countries of the world. Porter’s ideas on the five forces indicate how the firm in a particular industry can gain the competitive advantage. The Porter’s five forces discuss the impact of buyer and suppliers on the given firm as the interaction of both the entities on the firm defines the overall competitive advantage of the firm. What is also however, critical to note that the existing rivalry between the firms as well as the threats of substitutes are two more threats which give rise to the different competitive dynamics within the industry. The five forces are critical in the sense that they define the firm as a collective result of different forces which combine together to define the overall status and position of a firm in the industry. If the firm has the internally generated core competencies, it may be able to withstand all such forces and can convert them to its own benefit otherwise the same may destroy the very existence of the firm in the given industry. This interdependence also means that the firms has to work in an environment which is interdependent upon each other and as such produce a combined effect on the firm. The concept of value chain is therefore one of the critical aspects of understanding and studying the behavior of different entities within the value chain which give rise to the overall value chain of any organization. From an economics point of view, value chain is considered as a process of connected activities which are responsible for procuring inputs to churning out output of the organization. This whole process is therefore one of an strategic process where different activities are broken down into strategically decided activities and as such the whole chain is considered as an step by step of some strategic activities which contributes to the overall success and failure of the organization. This activity is therefore done in order to understand how costs would behave and how the sources of differentiation can be located. The concept of value chain was refined and developed by Michael Porter who is credited with the development of this concept. In Competitive Advantage, Michael Porter outlined a generic model of value chain analysis which broke down the value chain of the organization within different strategic activities and as such created a matrix which defined the value generating activities for organization primarily into two groups of primary as well as secondary activities. This product related chain outlined that the primary activities of the firm include inbound logistics, Operations, outbound logistics, Marketing and Sales as well as service. This concept therefore defined the economic activities performed by the organization a result of the coordinated activities leading to the finished goods1. What is however, also critical to understand that this value chain is a linear relationship between the different strategic activities and as such only captures the economic substance of these activities. The coordination between the different strategic activities and the link between them outlines as to how the relationship between the supply and demand dynamics within the economy would be settled. Different studies have attempted to study such linkages within the regional perspectives where regional integration is seen as a valid construct for creating the regional core competencies. Porter’s ideas were largely focused on individualistic approach of assessing the core competencies of a firm working in a particular geographical environment however, as the supply chain is increasingly becoming global, the regional integration of activities is also considered as one of the sources of the core competencies for the firms.2 (Siddiqi, 2000). The traditional views about the chain analysis is based on the assumption that the firms are linked with each other in many respects as the interplay of demand and supply as the firm’s output or supply on one hand creates and replicates the demand on the other side of the market. This web of interlinkages therefore have been defined as a chain which basically connects firms with each other in a way that the activities of the organizations seems to be sequential in nature and creates a zero sum game for the industry as a whole. The product chains however present a slightly different view of the same problem as it focuses on such activities sequentially and do not consider compartmentatilization or segementation of the industry itself. The concept of value or product chain is considered as a coordinated effort as the new competitive advantage of the firms is emerging by realizing that the competitive advantage in future would only be achieved through coordination betwee different players of the industry.3 This coordination of activities therefore gives rise to a chain which creates networks at domestic as well as international level and these networks often result into the development of clusters. Clusters are defined as “networks of interdependent firms, knowledge producing institutions, technology-providing firms, bridging institutions and customers, linked in a value creating production chain”.4 Clusters are created through multiple coordination of the different insitutions and organizations to create more value for the firms hence the industry’s value chain is considered to be consisted of the different interdependent firms. Commodity Chains The development of clusters and interdependence between the demand and supply dynamics of the firms give rise the need for associating more socio-economic concepts because it is now considered as more than just an economic transaction. What is also critical to note that the clusters and the value chain provide an opportunity to view the firms within a larger perspective of the society and as such all the subsequent theoretical attempts have been based on viewing it from this perspective? The global Commodity chain is one such emerging concept which attempt to further refine this concept from a much larger perspective of socio-economic variables. The global commodity chain is considered as a network of processes which are involved from the starting the product and then convert it into the finished good or commodity. Though apparently the idea seems to be the one which resembles with the value chain analysis of the Porter however, on a bigger note these concepts encompasses different dimensions of the supply and demand dynamics faced by the firms in an international setting. However, both the concepts of value chain as well as commodity chains have their own deficiencies and may not lead to the correct strategic understanding of the product as well as commodity markets and as such the concept of sector matrix may be considered as a viable alternative which can be used to define the strategic understanding in much bigger and larger perspective. The subsequent section will discuss whether the sector matrix can provide a better understanding than the product and commodity chains. Sector Matrix Value chain analysis and commodity chains are just limited to manufacturing activities and as such to determine the strategic significance of industries such as internet, automobiles etc, and sector matrix can present a better alternative because of its emphasis on considering the supply and demand as two different concepts. Since the demand and supply dynamics in industries like healthcare and automobile are markedly different because they are consisted of the web of the different associated activities therefore such complexities can be better defined when the demand and supply dynamics of the industry are considered as two different and distinct realities. Rather than viewing the organization as a collective chain of activities, sector matrix attempt to define it as two distinctive capabilities. Studies by Froud J indicates that the application of sector matrix to the motoring industry and clearly establishes the link between the vertical as well as horizontal links between the supply chains of the industry. The article presents two distinctive scenarios of mass production and lean production as example of sector matrix can result into better efficiencies and help to understand the product and commodity market in much larger perspective. Toyota adapts the lean production system where almost every link within the supply chain is clustered around the manufacturing facilities of the Toyota. What is also important to understand is the fact that Sector matrix assumes that through financial closure, the money flows back to the suppliers and as such the demand reverses the supply. This also indicates that the relationship between the two is distinctive as well as based on separate and more plausible assumptions. Froud J also cited the example of reordering the factory of Caterpillar in order to achieve the global competitiveness and as such made a daring effort to understand as to how the priori approach- as discussed by Froud J earlier can be used to create linkages between the socio-economic characteristics of the research done on Caterpillar.5 It has also been discussed that considering the firm as a collective social process and manufacturing activities as just a standalone type of technological construct. However, a clear linkage between the two has allowed Caterpillar to make the desire changes in its plant. Considering factory reorganization from dual perspective of internal economy as well as considering it as an engine of competitive require that the implicit link between different actors at each stage must corroborate with each other to create the desired strategic impact. It also envisages as to how the relationships between the different actors at each stage of the change can result into better and more plausible strategic understanding of the product markets. Conclusion Sector matrix outlines the strategic understanding of the more complex products and services as value chain analysis as well as global commodity chain concepts does not fully define such complications. Global Commodity Chain though to some extent successfully define the multiple perspectives of the production process however, it still fail to clearly distinguish between the supply and demand dynamics of the problem as by studying them separately provide a much better strategic understanding of the product market. Bibliography 1. Bititci, U. S., Martinez, V., Albores, P., & Parung, J. . (2004). Creating and managing value in collaborative networks. International Journal of Physical Distribution & Logistics Management. 3/4 (3/4), p251-268. 2. Froud, J., Haslam, C., Johal, S., & Williams, K. (1998). Breaking the Chains? A Sector Matrix for Motoring. Competition and Change. 3 (0), p293-334. 3. FROUD J, K. W., JOHAL, C. H., & WILLIAMS, J. (1998). CATERPILLAR: TWO STORIES AND AN ARGUMENT. Accounting, Organizations and Society. 23 (7), p685-708. 4. Jones A .2002. Cluster and market failure in the small business sector : Proceedings of the The Competitiveness Institute 5th Annual Global Conference, Carins: 5. Siddiqi, S. (2000). CUSTOMIZING CORE COMPETENCIES: THE REGIONAL CHALLENGE. International Journal of Commerce and Management , 10 (1), P91-104. Read More