Sector Matrix - a Good Tool to Understand the Strategic Characteristics of Different Product Markets - Essay Example

Introduction There has been a long debate within economics as to how to exactly define the behavior of the firms and how accurately can the availableliterature on economics could lead to the better understanding of the demand and supply dynamics faced by the firms. The conservative theories of economics such as transaction theories attempted to define behaviors such as outsourcing as a result of the cost benefit analysis but failed to clearly appreciate the linkages or chain such strategic decisions create within the economy. Some of the initiatives such as outsourcing, franchising and other similar concepts gave rise to the largely held belief that they are the result of the market oriented strategies however on much larger scale they were the result of larger shift into the overall perception in the market regarding how to achieve and sustain the competitive advantage. Many believed that strategic decisions like outsourcing was an attempt to focus one’s attention to core competencies of the firm however, what was not realized is the fact that the resulting chain effects were largely directed at creating linkages between the demand as well as supply dynamics of the respective industries. The evidence from Japan and other East Asian countries suggested that the inter-organizational cooperation between the different players in the market indicated towards a much larger picture of how the inter-relatedness between the industries as well as companies can lead to the creation of chains. The emergence of subsequent ideas on the value chain as well as commodity chains attempted to define such relationships and linkages however, they lacked the theoretical as well as empirical validity and as such a more unique and innovative method of sector matrix was introduced to overcome the deficiencies of the above two concepts. This essay will discuss whether the sector matrix provide better understanding of the product markets rather than the value chain as well as global commodity chains. Value Chain and Porter Michael Porter was one of the earliest proponents of the value chain concept as he considered it as something through which firms can achieve and sustain their competitive advantage. By focusing on the primary as well as secondary activities, firms can effectively achieve the competitive advantage as both the activities are considered as mutually reinforcing each other to achieve the desired strategic objectives. What is also however, critical to note that the value chain, for the first time presented a concept which linked different activities of the firm together and as such the overall success and failure of organizations largely depended upon how successfully the organization managers all these activities. Porter’s five forces as well as his ideas on core competencies proved the cornerstone for this research on value chain. Five forces discussed how different forces combined together to determine the competitive advantage of the firm in any industry. Five forces included how suppliers’ bargaining power can affect the firm and how buyers’ bargaining power can also creates the competitive advantage. Further, it is also important as to how the rivalry between the firms within the industry can lead to such competitive advantage. The significance of Porter’s five forces also can be assessed from the fact that they provide a great insight into understanding the firm as a collective entity being affected by different external as well as internal forces. The ability of the firm to successfully meet with all such forces, it is important that the firm must generate its own internal core competencies so that it develops its in-house response to such changes taking place within the market. Core competencies also allow the firm to concentrate on those activities at which they are good at and it is because of this reason that most of the MNEs rely heavily on outsourcing as one of the alternative means of maintaining the competitive advantage. (Crain and Abraham). Value chain can effectively be defined in two distinctive stages as one stage deals with the internal process of organization where organization is faced with managing different valued added stages right from procurement of raw materials to its conversion into finished goods. However, on the other hand, it also considered as comprising of different value adding stages as the industry itself. (Crain and Abraham). This second explanation of the value chain gives rise to a much larger concept which encompasses the socio-economic elements of the value chain into the account. This is also important because of the fact that increasing level of globalization have resulted into greater integration of economies with each other therefore value addition at stage defines each separate industry and indicates the link between the different industries with each other. Porter’s ideas shaped the overall concept of value chain by categorizing the activities into primary as well as secondary activities of in-bound logistics, operations, outbound logistics, and marketing/sales. These concepts define a clear linkage between these activities however, when these activities are analyzed at the industry level, they present a much larger picture of how the industries at each level can collaborate with each other to contribute towards creating the finished good. Over the period of time, value chain concepts however remained constrained because of the conservative managerial approaches as well as the de-constructive approach as initially, it was considered that the value chain analysis potentially de-compose the activities into different activities so that the costs and profits can be separated and core costs and profitability to be analyzed to analyze the competitive advantage of the firm. What is also however, associated with the concept of the value chain is the fact that it was more dominated by many major organizations of the world and as such from socio-economic and political perspectives; value chain was something of a bane for the developing countries. (Cooke). The examples of Wal-Mart and NIKE are now considered as open secrets because of the involvement of both these firms into activities which can not be considered as ethical in its true sense. To overcome such deficiencies, a more broader and comprehensive concept of global commodity chains were developed. The following section will discuss global commodity chain and will lead to the discussion of sector matrix. Global Commodity Chain a commodity chain is being defined as a network of different labor as well as other production processes which combined together to produce a finished good. Global commodity chains are therefore considered as an intra as well as inter- firm networks which almost connect everyone in the process of value chain. (Cooke). The Global Commodity Chain or GCC is therefore considered as both a buyer driven as well as supplier driven concept as it views both the elements of GCC within a larger perspective of globalization which has given rise to the producer as well as buyer driven commodity chains in the world. The ideas and concepts of GCC were developed by Gerrefi who outlined the three different dimensions of such chains. These dimensions included input-output structure which basically defined how a product is converted from raw material to the finished good and how the different players involved in each stage can lead to the creation of linkages with each other. Secondly, the geographical or spatial aspect of such activities is also considered because due to globalization process, the production process as a whole has hardly remained a domestic activity as large multinationals not only procure materials from different locations across the globe but also set up their manufacturing facilities across the borders too. The spatial dispersion of input-output structure activities therefore are considered as the critical in the overall GCC process. Finally, Greffi also discussed governance structure as the third dimension of the same. Greffi’s ideas on GCC are critical because of the fact that they have been able to clearly distinguish between the producers driven as well as buyer driven actions which can easily led to the clear segregation as well as understanding of the different markets and products. For example, producers driven commodity chains would exists in industries which are largely technology driven and require substantial capital and as such the presence of multi-layers systems in such organizations provide a perfect example of how such global commodity chains can be created and sustained in different industries. Similarly, buyer driven GCCs refer to those products and markets which rely more on the buyers as such the bargaining power of buyers is relatively higher in such product markets. For example, buyer driven GCC can easily be applied to large retailers as they have to face the increasing pressures from their customers to reduce the costs every day. It is also because of this reason that the large retailers often locate their manufacturing facilities at such places which offer cost advantage i.e. countries where labor is abundant and relatively cheap besides having adequate raw materials. Such industry characteristics however, often force large retailers to adapt to the policies which may not be entirely considered as ethical because they have to exercise such options because of the inherent nature of the industry within which they work . Sector Matrix One of the most important deficiency of above concepts is the fact that value chain as well as GCC are limited only to the manufacturing activities and as such do not attempt to discuss such industries as e-commerce, services etc. the relative complexity of such industries outline that a new and more robust framework may be developed which can overcome all such deficiencies. Sector Matrix is one such approach which can be utilized to better understand the strategic significance of the different products and markets as it clearly segregate the product markets based on the supply and demand dynamics of the product and argue that both attempt to cancel each other as the financial closure of such transactions result into the reversing the effects of supply as demand reverses such effects. Sector matrix therefore attempt to define the product markets into two unique and separate activities of demand and supply so that organization is not just viewed as a sequence of certain value added activities but as a sequential and interconnected process. The ideas of sector matrix was propagated by Froud and provided the practical aspects of the concept by applying it on the motoring industry. Froud discusses as to how the differences in the production methods i.e. mass production as well as lean production can lead to the emergence of separate but connected networks of different players within the overall supply chain. (Froud, Haslam and Johal) Sector matrix provide a much better understanding because it provides a more comprehensive and larger perspective of the whole issue of better understanding the strategic significance of the product markets. By clearly separating the activities into demand and supply, the matrix has virtually attempted to cover and embarrass everything and anything which is part of the supply chain no matter whether it belongs to a social or economic aspect of doing the business. The socio-economic as well as socio-political aspects of such product markets therefore can be best understood by following sector matrix. Conclusion Sector matrix is considered as a better tool to understand the strategic characteristics of the different product markets as it attempts to study the demand and supply dynamics separately and advocates a much broader framework to analyze the different product markets. It also envisages that due to globalization, the businesses have more social touch in them therefore the demand and supply dynamics of the product markets shall carry the impact of such factors into account also. The socio-economic as well as socio-political aspects of the product markets can be easily understood and exploited better under the sector matrix as against the value chain and global commodity chains. Both the concepts of value chain as well as global commodity chains effectively deal with the manufacturing firms however sector matrix can also be applied to different service industries also. This also means that the sector matrix can also be applied to more complicated industries since value chain as well as GCC cannot be applied to much complicated industries. Works Cited 1. Cooke, William N. Multinational companies and global human resource strategies. London: Greenwood Publishing Group, 2003. 2. Crain, David W. and Stan Abraham. "Using value-chain analysis to discover customers strategic needs." Strategy & Leadership 38.4 (2008): 29-39. 3. Froud, Julie, et al. "Breaking the Chains? A Sector Matrix for Motoring." Competition and Change 3 (1998): 293-334. Read More