The Sector Matrix Framework - Essay Example

QUESTION 3: A Critical Analysis of the Sector Matrix Compared to the Concepts Of ‘Product’ Or ‘Commodity’ Chains Using Automobile Industry as an Example. Name: Course: Tutor: Date: Introduction The business world is characterised by high competition at both domestic and international levels. Business entities fight to stay on top of their competitors, and for them to do so, they must have a clear understanding of the market (Cravens, 2011). There are three common frameworks that are popular and relevant in analysing markets, and providing information about organizational performance. These are; global commodities chain, the value chain, and the sector matrix theory (Haslam, Neale & Johal, 2000). These frameworks are important in the analysis of product markets, but have different capabilities. Some have limiting capabilities while one or two may be considered appropriate for a specific industry. Such is the case of sector matrix framework. It is perceived that this analysis tool gives a better strategic understanding of product market than global commodity chain, and value chain (Haslam, Neale & Johal, 2000). The aim of this essay is to critically analyze whether sector matrix framework is better in strategic understanding of product markets than the concept of commodity chains. Sector Matrix Compared to Value Chain and Commodity Chains Sector matrix has been proved to be most appropriate for analysis of markets especially considering demand and supply. It incorporates ideas from both commodity chain, and Porter’s value chain. Sector matrix is a framework with the capability of working with far much complex products and processes, unlike commodity chains and value chains. For strategic reasons, it is important to know the market demand of a product. Information about demand guides production considering consumer tastes, level of demand, and so on. Different industries and firms have different operations, production systems, and different sectors involved for the final product to be out in the market. These differences determine the level of complexity in a product market, hence the type of analysis tool to understand it better (Haslam, Neale & Johal, 2000). This essay shows why value chain and commodity chain frameworks, cannot be used in a complex industry like the automobile industry, and provide valid reasons for sector matrix preference instead. The automobile industry is characterised by complex distribution channels, complex products, and high commodity price (Haaslam, Neale & Johal, 2000). The Value Chain This framework is established on the idea that every firm is a collection of activities that are performed to produce, design, deliver, market, and support its products. Within this chain of activities, each firm has to have a successful generic strategy which it uses to achieve its competitive advantage. The generic strategy can be based on differentiation, focus, or even cost leadership. Porter argues that within this chain of activities, there are those that are primary to the firm, which are involved in the physical manufacturing of the product, its sale, distribution, and after sales service (Henry, 2011; Expeditors, 2011). There are also those that just act like support to the firm’s primary activities by providing human resources, inputs, technology, and various firm-wide functions. Primary activities are such as operations, in bound logistics, marketing and sales outbound logistics, and service. Support activities are such as technology development, procurement, firm infrastructure, and human resource management. The main argument as formulated by Porter is that a firm’s competitive advantage cannot be understood by looking at the firm as a whole (Bidgoli, 2010). Specific consideration has to be given to the activities that the firm carries out to give it its unique level of productivity or performance. Within a chain of activities, that is, from designing, production, distribution, to marketing, there is a value that a firm implements to ensure a certain level of performance in the product market (Skjott-Larsen, 2007; Haslam, Neale & Johal, 2000). Value chain can be used as a basic tool for diagnosing a firm’s competitive advantage, but it restricts such analysis to one type of business. Using such an analysis tool in the motoring industry may not yield informative results because of the complex nature of the industry; so many sectors, products, distribution channels, and other firms are involved (Skjott-Larsen, 2007). This chain analysis looks at what is produced, what is shipped, and what is received, among other activities in the chain; limiting the analysis to production type of firms, and leaving out firms like insurance companies, that form part of automobile industry operations. Because of its limiting ability, it is not the best analysis tool for complex and diversified companies, and industries (Leyshon, Lee, McDowell & Sunley, 2011). Global Commodity Chain This is also about a series of processes that lead to the production of a commodity. According to Bair (2009), the global commodity chain is an organization of labour and production processes of a specific product. The processes are each characterised by acquisition and or organization of inputs, for example semi finished products or raw materials, labour power, distribution, and consumption. An effective coordination of these processes leads to a firm’s competitive advantage. This analysis tool is almost similar to the value chain. It also argues that a firm’s competitive advantage is achieved from the activities; in this case the processes, of the firm. One common feature in these two chains is the perception of firms as linear chains. The automobile industry however, consists of several linear chains, and other complicated production networks that cannot be analysed using these types of frameworks only (Bockel & Tallec, 2005). According to Bockel and Tallec (2005), there are two types of commodity chains; buyer-driven and producer-driven. Automobile industry belongs to the producer-driven commodity chain for the reason that it demands high expertise and capital, as well as complex production networks. In the automobile industry, multinational manufacturers play crucial roles in the harmonization of these multifaceted production networks. This type of production chain cannot be aligned to the linearity of the value and global commodity chain (Bockel & Tallec, 2005; Lessmeister, 2008; Gereffi, 2001; Gereffi, 2002). The commodity chain for example, has these three major dimensions; its input-output structure, territoriality, and corporate governance. The input-output structure is a system of services, and products that are connected by a specific value implemented in a chain of activities. This is supposed to influence production of the end product. Territoriality determines the amount of sales that the company is supposed to make based on gathered market share. This is determined by the firm’s sales and marketing activities. The firm’s corporate governance is all about its authority, and distribution of power. This plays a role in the management of the firm’s material, financial, and human resources in the chain of activities. Both value chain and commodity chain will make use of such dimensions in the analysis to understand the product market (Bockel & Tallec, 2005; Bair, 2009). Consider the case of a complex industry like the automobile industry, where there are numerous suppliers and high level of fragmentation. Automobile industry has an auto parts segment divided into replacement market, and original equipment manufacturers. Replacement market deals with players who manufacture substitute components to the original assemblies. Original equipment companies are those that manufacture components for new vehicles. Suppliers and distributors of these two segments may be back-up business units of larger organizations, or autonomous organizations. These producer-driven chains are also, in most cases, driven by brand owners. Take an example of Ford being driven by owns Volvo (Froud, Johal, Leaver & Williams, 2006). Such a complex system of company and industry cannot be aligned to a common linear supply of chains as expected of firms, and a common technological platform as expected of the industry. In the course of an analysis to reduce manufacturing costs, and enhance recovery cost, focus is constrained to industry-centred view of the business world, and linear supply chain. Linear supply chain does not provide the right information for strategic planning (Froud, Johal, Leaver & Williams, 2006). Due to the limiting capability of commodity and value chain analysis, companies that work with complex systems have to use different technique, one which is the sector matrix technique. Sector matrix incorporates both value and commodity chain concepts, and with a capability of dealing with complex supply and demand settings. Sector matrix analyzes overall household expenditure, and consumer’s disposable income. Due to this factor, it provides the interested and responsible parties in the automobile industry, with relevant and adequate information to establish the level of demand in the market. During recession times for example, sector matrix is able to show that the demand is low through availing consumers’ disposable incomes. The companies can then decrease supply to match the current economic conditions (Froud, Johal, Leaver & Williams, 2006). Additionally, sector matrix is able to show the capability of a consumer to buy a product by showing the consumers’ disposable incomes and preference in expenditures. Automobiles are not products that can be bought on a daily basis. It takes months or even years for a consumer to decide to buy, for example, a car. It is therefore important to have information about the consumers’ income that they may be willing to spend on such products for strategic planning. Such information also helps the companies determine the type of products that the consumers can easily go for during specific periods, and the level of demand. If a company for example, finds out that people’s disposable income has reduced, and will reduce for the next five years, it can make use of such information to produce cheap and affordable cars. Sector matrix provides an organization with information about its manufacturing costs, its capabilities, and a clear picture of what the market looks like (Froud, Johal, Leaver & Williams, 2006). In the modern business world, sometimes, the supply is determined by issues relating to financial consolidation, and the type and number of activities in the industry. It is therefore, important to understand the manufacturers and products of that industry to know more about supply in the same industry. Sector matrix provides such kind of information. It suits the automobile industry because of various connections that the automobile has with other industries and the number of sectors within it. Sector matrix provides all necessary information about the financial positions of other industries involved in car assembly and other sectors of the automobile industry, enabling the right decisions to be made about production (Froud, Johal, Leaver & Williams, 2006). If for example, the costs are high, the companies within the industry will know that the production capability has reduced, and so they will restrict supply. Sector matrix helps in understanding the details of the sectors that may affect demand and supply. As indicated earlier, automobile industry involves a lot of sectors and other industries, failure of just one sector or industry can influence supply or demand. If for example, one sector’s financial position affects supply, sector matrix can reveal this, through an analysis of the industry’s overall production capability. This will then help the industry understand that, even if supply is affected, and manufacturers try to cover the costs by increasing vehicle prices, the consumers may not be able to buy the products because of lack of availability of disposable income. Sector matrix provides information about the level of activities across various sectors in a complex industry, and the cost of uniting these activities, when it comes to understanding supply (Haslam, Neale & Johal, 2000; Froud, Johal, Leaver & Williams, 2006). Conclusion It is evident that the Sector Matrix framework provides a better strategic understanding of product markets than the concepts of product or commodity chains. From the above analysis, it is clear that global commodity chain mainly focuses on the creation of an effective marketing network, value chain model give emphasis to on the excellence of production, and the Sector Matrix incorporates the essential doctrines of both these frameworks. Sector matrix comprehends interaction between demand and supply, therefore, a more balanced and focussed framework that helps in achieving growth and profitability, through its capability to align the organizational activities with its goals, and efficient scanning of the business environment. The analysis of sector matrix with respect to the automobile industry shows its suitability as an efficient tool of evaluating technology and capital intensive industry. It is shown that it is capable of aligning business operations to ensure reduced cost of production (Froud, Johal, Leaver & Williams, 2006). It has the ability to analyse complex business situations that commodity chain and value chain methods cannot do. It is capable of showing expenditure households and disposable incomes which are important in determining the consumer’s purchasing power, hence the demand level. It also provides a clear way of determining and industry’s supply capability. Sector matrix can be applied in a variety of industry activities. In this paper, the main example used to illustrate its capability and difference is the automobile industry. Automobile industry is complex in its distribution channels and production processes, therefore, the most appropriate for showing the difference in application of the three models of market analysis. References Bair, J., 2009, Frontiers of Commodity Chain Research, California: Stanford University Press. Bidgoli, H., 2010, The Handbook of Technology Management: Supply Chain Management, Marketing and Advertising, and Global Management, New Jersey: John Wiley & Sons. Bockel, L. and Tallec, F., 2005, Commodity Chain Analysis: Constructing the Commodity Chain Functional Analysis and Flow Charts, EASYPol Module 043. Retrieved from: http://www.fao.org/docs/up/easypol/330/value_chain_analysis_flow_charts_043en.pdf Cravens, D. W., 2011, Examining Marketing Strategy from a Contingency Perspective, New York: Marketing Classics Press. Expeditors, 2011, Value Driven Supply Chain Management, Retrieved from: http://www.expeditors.com/news-media/featured-information/2011/value-driven-supply-chain.asp Froud, J., Johal, S., Leaver, A. and Williams, K., 2006, Financialization and Strategy: Narrative and Numbers, London: Routledge. Gereffi, G., 2002, Outsourcing and Changing Patterns of International Competition in the Apparel Commodity Chain, Paper presented at the conference in Boulder, Colorado. Retrieved from: http://www.colorado.edu/ibs/pec/gadconf/papers/gereffi.html Gereffi, G., 2001, Shifting governance structures in global commodity chains, with special reference to the Internet, The American Behavioral Scientist, 44(10): 1616-1637. Haslam, C., Neale, A. and Johal, S., 2000, Economics in a Business Context, Boston, MA: Cengage Learning EMEA. Skjott-Larsen, T., 2007, Managing the Global Supply Chain, Koge, Denmark: Copenhagen Business School Press DK. Henry, A., 2011, Understanding Strategic Management, New York: Oxford University Press. Lessmeister, R., 2008, Governance and organisational structure in the special tourism sector – buyer-driven or producer-driven value chains?: The case of trekking tourism in the Moroccan mountains, Erdkunde, 62(2):143–157. Leyshon, A., Lee, R., McDowell, L. and Sunley, P., 2011, The SAGE Handbook of Economic Geography, SAGE Publications Ltd. Read More