Sector Matrix Framework - Essay Example

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. Introduction The objective of this essay is to investigate the relevance of three tools for analysing and prescribing remedies for improving company performance; Porter’s Value Chain, Gereffi and Korzeniewicz’s Global Commodities Chain framework and finally the Sector Matrix approach as described by Froud.The Business case approach will be focussing commodity value chain Jubilant Organosys which is a one of the largest custom research and manufacturing services companies in India. Jubilant has a presence across the pharmaceutical value chain The Value Chain “Every firm is a collection of activities that are performed to design, produce, market, deliver and support its product. All these activities can be described using a value chain…” (Porter, 1985: pp. 36) To analyze specific activities for gaining competitive advantage, porter formulated a strategy to use set of interrelated generic activities performed as common practice. The term ‘Value Chain’ was used by Michael Porter in his book "Competitive Advantage: Creating and Sustaining superior Performance" (1985). The value chain analysis describes the activities the organization performs and links them to the organizations competitive position. Value chain analysis describes the activities within and around an organization, and relates them to an analysis of the competitive strength of the organization. Porter argues that the ability to perform particular activities and to manage the linkages between these activities is a source of competitive advantage. Activities of the Value chain framed by Porter Porter distinguishes between primary activities and support activities. Primary activities are directly concerned with the creation or delivery of a product or service. They can be grouped into five main areas: inbound logistics, operations, outbound logistics, marketing and sales, and service. Each of these primary activities is linked to support activities which help to improve their effectiveness or efficiency. There are four main areas of support activities: procurement, technology development (including R&D), human resource management, and infrastructure (systems for planning, finance, quality, information management etc.). Value chain analysis A typical value chain analysis can be performed in the following steps: Analysis of own value chain – which costs are related to every single activity Analysis of customers value chains – how does our product fit into their value chain Identification of potential cost advantages in comparison with competitors Identification of potential value added for the customer – how can our product add value to the customers value chain (e.g. lower costs or higher performance) – where does the customer see such potential Value system. In most industries, it is rather unusual that a single company performs all activities from product design, Production of components, and final assembly to delivery to the final user by itself. Most often, organizations are elements of a value system or supply chain. Hence, value chain analysis should cover the whole value system in which the organization operates. Within the whole value system, there is only a certain value of profit margin available. This is the difference of the final price the customer pays and the sum of all costs incurred with the production and delivery of the product/service (e.g. raw material, energy etc.). It depends on the structure of the value system, how this margin spreads across the suppliers, producers, distributors, customers, and other elements of the value system. Each member of the system will use its market position and negotiating power to get a higher proportion of this margin. Nevertheless, members of a value system can cooperate to improve their efficiency and to reduce their costs in order to achieve a higher total margin to the benefit of all of them (e.g. by reducing stocks in a Just-In-Time system) Gereffi and Korzeniewicz’s Global Commodities Chain framework According to Gereffi Commodity chains are most simply defined as the link between successive processes of manufacturing that result in a final product available for individual consumption. Each production site in the chain involves organizing the acquisition of necessary raw materials plus semi finished inputs, the recruitment of labour power and its provisioning, arranging transportation to the next site, and the construction of modes of distribution (via markets and transfers) and consumption. The contributors to this volume explore and elaborate the global commodity chains (GCCs) approach, which reformulates the basic conceptual categories for analyzing varied patterns of global organization and change. . . In this essay we can witness the evidenced of how the commodity chains framework facilitates the dynamics of global industries, and the development prospects for nations and firms within them using Jubilant Organosys. Our analysis of the power structure of commodity chains leads to the hypothesis that development requires selective linkage with distinct kinds of “lead firms” in global industries, which have varying prospects for mobility in the world economy. Buyer -driven commodity chains are those in which large, usually prospective buyers play the central roles in determining the distribution networks (including their backward and forward linkages). This is characteristic of capital‑ and technology‑intensive industries for companies aiming at achieving globalisation like India is today Jubilant Organosys is typical example of Buyer‑driven commodity chains playing the pivotal roles in setting up decentralized production networks in a variety of exporting countries, typically located in the third world. This pattern of trade‑led industrialization has become common in labour‑intensive, harm. Production is generally carried out by tiered networks of third world contractors that make finished goods for foreign buyers. The specifications are supplied by the large retailers or marketers that order the goods. . Profits in buyer-driven chains derive not from scale, volume, and technological advances as in producer-driven chains, but rather from unique combinations of high-value research, design, sales, marketing, and financial services that allow the retailers, designers, and marketers to act as strategic brokers in linking overseas factories and traders with evolving product niches in their main consumer markets (Gereffi, 1994). Sector Matrix The orientation of Sector Matrix can be projected as below Operational efficiency – the impact on a company’s costs It may include Operational costs, for example: production costs, disposal fees, material and transport costs Productivity: amount of product or service produced per employee, contract labour, and capital, related for example to: material use and waste generation, employee turnover and absenteeism. staff satisfaction and employee motivation Fines and penalties due to compliance breaches. Access to capital – access to debt or equity capital, the cost of capital It is influenced by Balance-sheet health Risk profile Stability of cash flows Internal rates of return (IRR). Risk management and license to operate – the control of loss, damage or disruption, ensuring ongoing acceptance of the company’s operations. It may include ability to manage: Business disruption Supply chain reliability Vulnerability to changing regulations Political risk Company’s license to operate, either formal (granted by regulator)or informal (through acceptance by society). Talent and human capital – the knowledge, skills and talent of employees and contract labour, knowledge, skills and talent of the company’s employees and contract labour, which are important in determining its ability to innovate and compete. This factor may include: Ability to attract and retain employees Staff satisfaction and employee motivation Employee empowerment and ability to innovate. Brand value and reputation –public perception of a company, its products and its brands, s. This would include the reputation of the company, the personal reputation of the company manager/owner as well as the brand value of the company. Brand value and reputation are difficult to measure, but can be indicated by Customer satisfaction surveys, indicating improved customer service ranking in lists (e.g. most admired company) Perception in public opinion polls Formal valuation of the company’s Overall brand. All the indices of sector matrix aim at achieving strategic development towards the commodity chain. Business case Company profile Jubilant has a presence across the pharmaceutical value chain: from drug discovery, functional chemistry and clinical research services to custom research and manufacturing for advance intermediates, fine chemicals, active pharmaceutical ingredients and dosage forms. It is example of buyer driven commodity. Jubilant Organosys is recognised as a leading global player in generics and a supplier to the pharmaceuticals industry. This success has been driven by its growing skills base, by big improvements in quality, and by a new breed of entrepreneur. Revenues from international sales account for about 60% of total revenues for the Fine Chemicals division. Even purchases by domestic customers often end up in international markets, as customers are frequently the outsourced operations of international companies. Business objective Operational efficiency through environmental efficiency License to operate through community development Access to capital through transparency & governance Strategic Focus on Integration through Industrial upgrading Jubilant’s business model is built on its ability to provide high value-added specialty chemicals and quality research and development services to clients in a cost-effective manner. Jubilant has succeeded in integrating management of environmental issues throughout its operations and thereby reducing costs. Effluent treatment costs, for example, are built directly into product development costs. The company has also chosen to use molasses – abundantly available in India as a by-product of sugar production – as its chemical feedstock. Molasses has less cost and supply volatility than the crude oil-based feedstock’s used by international competitors, and is also more environmentally friendly. Jubilant also uses biodegradable effluents for crop irrigation, which it supplies to the surrounding communities for free, helping build good relations and reduce operating risks. As stated by Gereffi industrial upgrading requires not only physical and human capital, but also social capital – i.e., relevant and effective networks. (Porter, 1990). Industrial upgrading within the pharmaceutical commodity chain involves building and coordinating networks with different kinds of lead firms that have access to distinct pools of design, production, and marketing resources needed to create new forms of national and regional competitive advantage. Jubilant’s business model integrates industrial upgrading and globalization as strategy for continued success in global commodity market. Jubilant is hoping for continued rapid growth, based on its relatively low (though rising) Cost base and its ability to retain highly qualified scientists. It is Jubilant’s aim to be among the top three in the world in all its major markets. The company is close to being the second largest producer of pyridine and its derivatives globally, cateringto leading pharmaceutical and agrochemical companies. Given its strong customer relationships and its proven reliability, Jubilant expects to be the market leaderThus Jubilant is a standing example for strategy focus in industrial upgrading of he commodity chains with a set of tools for understanding not only the importance of strategic positioning by firms and nations in global industries. Business Strategy The Sector matrix approach vogues the business strategy for Jubilant. The effective orientation of sector matrix can be influenced by the below factors. Operational efficiency through environmental efficiency Measuring and benchmarking energy and resource consumption, Jubilant identified gaps and improved performance – with links to the bottom line. Jubilant’s use of sugarcane molasses as feedstock means lower cost and greater reliability of supply compared with international competitors. Jubilant re-uses effluents as production inputs and for biogas, which reduces operating costs. For example, biogas saves Jubilant the equivalent of 250 tonnes of coal a day, with corresponding cost savings and lower CO2 emissions. Currently, the payback period for investment in biogas plant is three years. Licence to operate from community development Many facilities are in economically backward regions. Disparities between employees and the local population plus general distrust of the chemical industry could cause tensions and disruption. Jubilant’s participatory approach to social investment, however, brings tangible benefits: avoidance of social conflicts, support from farmers and ease in obtaining environmental clearances. Jubilant gained the trust of government, which started using the company as a partner on various social projects. . Access to capital through transparency and sustainability governance Sustainability, transparency, Industrial upgrading and audited reports give national and international investors confidence in the company. Major international investors like CitiGroup and General Atlantic Partners are considering Jubilant’s sustainability credentials before deciding to invest. As confidence increased, institutional investors increased their stake – from 7% of Jubilant’s shares in 2004 to 32% in 2006. Conclusion Jubilant, for instance, decided to build on India’s competitive advantage in scientific talent and move up the value chain to provide research and development services for the global pharmaceutical industry. Increasing globalisation and international competition are going to require Jubilant to compete with multinationals not only financially, but right across the triple bottom line of economic, social and Environmental performance. Thus sector matrix’ framework gives a better strategic understanding of product markets than the concepts of ‘product’ or ‘commodity’ chains and Jubilant is the standing example for the same Bibliography Froud et al (2006) Strategy and Financialisation: Narrative and Numbers, Routledge Gereffi, G. (1994). The organization of buyer-driven global commodity chains: How U.S. retailers shape overseas production networks. Pp. 95-122 in G. Gereffi and M. Korzeniewicz (eds.), Commodity chains and global capitalism. Westport, CT: Praeger. Gereffi, G. (1995). Global production systems and Third World development. Pp. 100-142 in B. Stallings (ed.), Global change, regional response: The new international context of development. New York: Cambridge University Press. Gereffi, G. (1996). Global commodity chains: New forms of coordination and control among nations and firms in international industries. Competition & Change 1, 4: 427-439. Gereffi, G. (1997). Global shifts, regional response: Can North America meet the full-package challenge? Bobbin 39, 3 (November): 16-31. Gereffi, G. (1998). Commodity chains and regional divisions of labor in East Asia. Pp. 93-124 in E. M. Kim (ed.), The four Asian tigers: Economic development and the global political economy. San Diego, CA: Academic Press. Read More