Sector Analysis - Essay Example

? Sector Analysis It has become extremely important for corporations and managers to continuously innovate and think new ways of churning more money. If a firm or a manager fails to innovate and does not come up with new ways of profit extracting, the ideas will eventually become obsolete and the business will stop making any money at all. This is a dangerous sign, and many companies try to continuously update and innovate their business models in order to achieve success in terms of profitability and growth. Sector analysis is one of the new innovations that are being used by corporations and managers. It is a spin-off from Financialization. Financialization can be described as a process whereby financial markets and organizations dictate the economic policy of a country. In other words, Financialization is process where financial elites dictate the business policies formulation by the government. (Froud et al. 2006) Sector matrix defines the activity horizon of a company. As a result, it is sometimes also called “activity matrix”. Sector matrix is nothing but a representation of overall finances or revenues of a company coming into the business from its various areas of operations. The matrix is based on modern business and financial thinking. The old way of thinking about the supply was to consider it the function of technology and product. The supply can only be increased if there are significant improvements in the production technology. This concept soon become obsolete and the new way of thinking was developed which stated that firm as a whole should be considered on the basis of its business model and various sources of income. A business usually makes money from diverse sources of profits and, hence, all of these sources should be taken into account before the supply and demand function of a business can be determined. Similarly, the old thinking about the demand was about winning the nameplate competition. It was all about improving or differentiating the brand from other competing brands in order to generate demand and make sales. However, the new way of thinking demand is about capturing the expenditure that consumers spend on substitutes and encouraging a complement product in order to increase the overall revenue of the firm. (Bowman & Singh 1993) The differentiating factors of the sector matrix and supply chain industry are that related products or complements are demanded together, therefore, a firm can achieve great success and double its sales if it starts producing complementary products. It is also believed that the firm operates in a boundary or in a particular sector. For example, a firm producing motor cars can produce car lubricants or wheels, but it will not immediately start a healthcare business. Hence, business models have boundaries. Similarly, a firm will try to enter into new businesses to lever its profits and in doing so there are chances that it may attract competition that may follow a similar matrix as this firm. However, it must be remembered that no existing firm exists in a particular matrix before the entry of this firm. The sector matrix can be explained more aptly by using two examples from different industries. The first example is taken from the Car Manufacturing Business and the second example is from Healthcare Business. The reason for choosing these two sectors is to determine the applicability of the model in service and goods sector. This approach will check whether or not the model can be used for both goods and service sectors or whether or not this model is applicable for only one sector. (Brigham & Ehrhardt 2010) Example 1: Figure1: Sector Matrix of Car Assembly Source: (Froud et al. 2006) The above diagram shows that a car manufacturer exists in the upper left corner. This is unrewarding business because the industry is saturate and there are enough cars in the market that many people tend to buy used cars. This leads to demand substitution and demand for the firm’s products goes down. This has resulted in declining revenue for car manufacturers something that flustered them. However, car manufacturers knew that they needed to improve their business model to improve their profitability position. They need to expand their business model and should diversify into new products and services. However, there are sector boundaries or sector limitations that these firms need to take into account. These firms can move into a product or a service that has a complementary demand for cars. This would not affect the firm whether the customer has bought a new car or using a used car because the ancillary services treatment is similar for both new and used cars. The demand for the ancillary services usually increases and does not decline with the time unlike the assembly or manufacturing business. Therefore, most of the car assemblers have moved into these new businesses that have a complementary demand with car use. It must also be noted that the new cars or the original manufacturing sector’s product offerings are more durable and create demand for ancillary services for more years than the used demand substitution products such as used cars. The reason for this difference is because the life of newly-manufactured products is more than used products. The above example clearly shows that sector matrix is a realistic model for arriving at the reasons why diversifications take place and why firms extend their business model. It specifies pretty sound reasoning for the increase in ancillary and auxiliary service providers in the automobile industry and why big names like Toyota Motor Company, Ford, BMW and Mercedes-Benz are moving into new business ventures. Example 2: However, the model has limitations and it may not look applicable to all the sectors and business models. There are some problems with the model that will be identified in another example that will follow the example of automobile segment. This will highlight the weaknesses in the model and why this model fails to gain as much recognition as value-chain model. The healthcare sector can be taken as our next example. A healthcare company, hospital or clinic may decide to venture into a new business following a slump in demand for the medical services because of increased numbers of doctors in the economy. The hospital can venture into opening a pharmacy, medical insurance company or it may diversify into production of medicines. The model in this example does not specify the correct boundaries of this sector. It is still unclear whether the tax insurance company or medicines production unit fall under the same sector. This is one weakness of the model that it fails to identify the boundaries of a sector. There is no proper description or limitation of the sector that is provided in the model. Hence, the model becomes obsolete for certain businesses which can fall under two or three different industry. For example, a medical insurance company can be a part of medical sector and it can also be a part of financial sector. Therefore, there is a chance that by venturing into this business, a firm may shift the sector and sector matrix will become useless in this situation. (Clement, A'unno & Poyzer 1993) Examining the sector matrix of a healthcare industry one may see hospitals and clinics in the upper left and most unrewarding sector. This may not be true because hospital margins can be very high, the only thing they suffer from is low customer/patient volumes. Similarly, demand substitution for healthcare organizations will be caused by competition offering. There is no concept of replication of such a specialized service. Therefore, one can say that sector matrix is more apt for the manufacturing businesses than service organizations. This is another flaw of this model that has resulted in this model fading away without making any groundbreaking impact in the field of organizational strategy. Many firms are unable to use this model because this model does not fit into their business model. This means that this concept is very limited and still a great deal of work is needed to be done to innovate and modify this model so that it can be used as a strategy matrix for all businesses irrespective of the product and services offering of a business. (Hafield, Opler & Liebeskind 1996) Supply interaction for healthcare organizations again comes from the competition. The matrix is repetitive as it fails to make any discrimination between demand substitution and supply interaction. Both concepts can mean different things for different industry and again this model loses its validity when the model is applied from one industry to another. Since the nature of model changes with every industry, it becomes very difficult to compare the sector matrix of different industry. In fact there is nothing common in the sector matrix of different industries and hence inter industry comparisons become increasingly difficult. Therefore it is an extremely limited model and cannot be used for inter-company comparisons. (Van Horne & John 2008) The model also fails to deliver or show the impact of ancillary services. Although it may look very good on paper, but the correct and accurate impact of adding new product offerings on the revenue is not explained in the model. The model can be used for marketing and strategic implications, but makes no attempt to explain the financial implications of strategic decisions as promulgated by sector matrix. It can be concluded from the paper that although sector matrix is a new strategic tool that organizations are using these days to make their important strategic decisions regarding expansion of the business and diversifications into new product and service offerings. The model, however, is not uniform for all the industries, goods and services types. There is a need to make slight changes when the model is being applied to different industries. The model also talks about demand substitution and supply-interaction. However, it fails to differentiate between the two. As a result of this the accurate demand and supply cannot be determined using this model for a firm that has diverse sources of profits (Lipsey & Chrystal 2003). The model also fails to spell out the financial changes of the expansion of the business model. Although the model is a spinoff from Financialization, it is valid only for the fields of strategy and marketing and speaks nothing about finance. References Bowman, E. & Singh, H., 1993. Corporate Restructuring: Reconfiguring the Firm. Strategic Management Journal, vol 14, no. Special Issue, pp. 5-14. Brigham, E. & Ehrhardt, M., 2010. Corporate Finance, 5th edn, South-Western College, Chicage. Brue, S. & McConnell, C., 2006. Economics, McGraw-Hills, New York. Clement, J., A'unno, T. & Poyzer, B.L., 1993. Hospital Corporate Restructuring and Financial Performance. Medical Care, vol 31, no. 3, pp. 971-990. Daft, R., 1994. Management, The Dryden Publishing, New York. Froud, J., Sukhdev, J., Leaver, A. & Williams, K., 2006. Financialization and Strategy: Narrative and Numbers, 6th edn, Routledge, New York. Hafield, D., Opler, T. & Liebeskind, J., 1996. The Effects of Corporate Restructuring on Aggregate Industry Specialization. Strategic Management Journal, vol 17, no. 1, pp. 55-70. Lipsey, A. & Chrystal, M., 2003. Economics, Oxford University Press, Oxford. Saloner, G., Shephard, A. & Podolny, J., 2001. Strategic Management, 1st edn, Wiley, New York. Van Horne, J. & John, W., 2008. Fundamental of Business Finance, 13th edn, Prentice Hall, New York. Read More