Comparisons between Commodity Chain and Sector Matrix Analysis: Ford Motor Company - Case Study Example

Comparisons between Commodity Chain and Sector Matrix Analysis - A Case Study on Ford Motor Company Table of Contents Introduction 3 2.Understanding Commodity Chain and Sector Matrix using Ford Motor Company as an example 3 2.1 Background Information on Ford Motor Company 6 3.Findings and Analysis 6 4.Conclusion and Recommendations 9 Reference List 11 1. Introduction In the present age of extreme commodification and globalisation affecting all sectors of production chain, analytical tools like the sector matrix framework and commodity chain analysis are imperative to the growth and development of businesses across the world. In order to capture the total business scenario, inventorization of the product market, with a detailed view of all complicated infrastructure and complementary services, might be helpful. In this direction, Julie Froud’s concept of sector matrix is usually applied to complex products which deploy complicated manufacturing and services delivery, such as, automobile or motoring industry (Julie, 1998). The product markets for such enterprises should have usually reached a particular maturity stage and there is too much of competition in the global market. An in-depth analysis of the commodity and value chain in comparison to sector matrix will explain the strategic product market in relation to the chosen automobile industry, elaborating on the demerits of traditional linear and simplistic product and supply chains. In this essay, the case of Ford Motor Company has been analysed to draw comparative inferences using both the sector matrix and commodity chain frameworks. 2. Understanding Commodity Chain and Sector Matrix using Ford Motor Company as an example With unprecedented change in the demand and supply patterns of production pathways all over the world, analysis of production chains is very relevant to develop a competitive edge from an organizational point of view. It is needless to say that businesses nowadays are interconnected and knowing the product market is just not enough to gain a comparative advantage. It expands to the marketplace economics as well wherein all buyers and sellers assemble to sell out their product ranges. In this perspective, the demand and supply linkages are equally important to take note of. In relation to product market analysis, there are many analytical tools existing such as, Porter’s value chain, Gereffi’s commodity chain framework and the Julie Froud’s sector matrix analysis which is an extension of the former two (Porter, 1985, 1990; Julei, 1998). Commodity chain is a concept of integrated economic bonds involving nations, markets and corporations in a labour market, meant for global sourcing and marketing of the finished good supplies (Raikes, et. al., 2000). Global commodity chain analyses the production and trade of primary commodities generating from less developed countries, inspired from the roots of structuralist development economics. The economic structures and behaviours in OECD countries influence the industrialization upgradation of the commodities originating in the less developed countries. The products are dispersed and integrated on a global system, which also counts on the social and environmental impacts of supply chain of activities and production of commodities (Rodrigue, et. al., 2013); could be producer-driven or buyer-driven in terms of their source and manner (Gereffi, 1994; 1999; Gereffi and Korzeniewicz, 1994; Gibbon, 2000). Michael Porter (1985) coined the term value chain, as the basic tool for analysing competitive advantage to create and sustain it. It is a collection of activities, beginning with designing, production, marketing, delivering and support to the production cycle. Through this chain of activities, the firms achieve competitive advantage as a core component of its business modalities. The activities could be classified into primary or support activities. The elements of inbound logistics, operations, outbound logistics, marketing and sales, and services encompass the primary while procurement, technology development, human resource management and firm infrastructure ascribe to the support activities. Primary activities help in physical creation of the product, its sale and transfer to the buyer along with imparting after-sale assistance. Support activities, on the other hand, support primary activities and vice versa with inputs, technology, human resource and various other firm-wide functions. Mainly, there are three major support activities which include human resource development, technology development and procurement. The fourth component, firm infrastructure might not be directly associated to the primary activities, but lends a supports to the entire chain (Porter, 1985, 1990). Julie, et. al., (1998) explained the concept of Sector Matrix as one which constructs supply in over-simple linear terms and considers demand as a series of reverse relations through the entire production and distribution cycle. Previous empirical research on automobile industry has been able to establish the fact that Sector matrix analysis helps in generating a better understanding of the product market in comparison to Value Chain or Commodity analysis (Haslam, et. al., 2000) In reference to Ford motor company, a representative transnational automobile industry and the branded king in automobile innovation, has underwent an acceleration and integration of people, resources and places, connecting them through a chain of economic transaction. One important perspective of globalization is not just the geographical extension of economic activities across national and international boundaries, but also functional integration of all its activities across the value chain. In such a backdrop, it becomes imperative to explore the trade chain, which has transcended from a hierarchical structure to global value chain, integrated vertically like spider webs (Reich, 1991; Dicken, 1998). 2.1 Background Information on Ford Motor Company Established in the year 1903, Ford Motor Company was serving as the hubs of European Ford organization in the year 1929. It later developed into Ford Motor Company Europe in 1967. Thereafter, it has been progressing globally by entering new markets by adopting a marketing strategy of studying local requirements and demands of customers suiting the choice and affordability of the local customers. Ford adopted a unique production strategy of its own. Instead of choosing the popular product lines in US and UK market, Ford launched its own range, such as, Lincoln, Volvo, Mercury, Mazda and Aston-Martin in the popular markets of the US and UK. The company made a record loss after a controversial leader, Lord Alex Trotman, took over its reigns. He could however beckon a steady revival by reaching a gain of $7 billion of profits after a period of five years, following which the share of Ford Motor Company on Wall Street raised from $11.45 to $32.25 per share (Nasser, 1999; The Economist, 2005. Ford adopted a central legal framework of its own to record the market risks, hazard risks, operational risks, counter-party risks, enabled them to establish their global risk management strategies in a collaborative learning mode. A data warehouse was created in order to generate reports in a graphical format that helped interpreting probabilistic trends for future, based on the knowledge of past risks (Bedell, 2001). 3. Findings and Analysis Other than Ford Motor Company, other renowned names in the industry are General Motors and Chrysler Corp (now known as Daimeler-Benz-MG) which accounted for 68% of the producer cars in the US in 1997 The remaining 32% came from Asian and European transplant units (Ford Motor Company, 2013). Using Gereffi and Korzeniewicz (1994) concept of producer –driven and buyer-driven commodity chains, it would be easier to interpret the case of Ford Motor Company. Buyer-driven commodity chains operate in labour-intensive consumer-goods industries by utilising a decentralised production network in a variety of exporting countries. Producer-driven commodity chains are meant for large scale manufacturers, those who operate in a high capital and technology-intensive labour markets in developed countries. Hopkins and Wallerstein (1986) further elaborated that the entire commodity chain follows a network of nodes, including acquisition, organization of inputs (raw materials and finished products), labour project and its provisioning, transportation, distribution (via markets or transfers, and its consumptions. Well coordination of all these vital node points help further enhance the competitive advantage (Nasser, 1999) As highlighted by Gereffi’s (1999), Ford follows a producer-driver supply chain, constantly optimizing their supply chain through restructuring, rationalizing, and integration of the commodity chain activities. Ford’s Annual Report of 2013 further revealed its innovative product strategies by assigning the All Wheel Drive systems to Haldex Traction AB and handing over the four-wheel drive systems to its own Ford Freestyle and Volvo models. Ford planned to dissipate resources on operations relevant to core competencies by reducing costs through a limited workforce. Ford further incorporates an international dimension to their production network, by assembling Ford escort in fifteen different countries, since 1994 (Haldex Traction Systems, n.d.; MotorTrader, 2005, Ford Motor Company Annual Report, 2013). Global Commodity chain ignores the essential elements of demand substitution and supply interaction, which commonly occur in the motoring sector, say for instance, when lower income group consumers purchase more affordable second hand automobiles from car dealers rather than get new automobiles from manufacturers. This is applicable in the case of second-hand cars diluting the automobile market. Previously Porter’s and thereafter Gereffi’s framework proclaim of a process flow that simplifies the competition by using simple technologies to produce competing products. In this approach, the creators of the concepts have seemed to overlook the importance of the role of complementary goods, which draws other products to markets. Additionally, the spare parts, repairs and servicing, fuel, tax and insurance, finance generate a high percentage of revenue in motoring sectors. To maintain competitiveness, managers need to be well versed to the concept of demand complementarity (BBC News, 2005, Nasser, 1999). Focussing only on manufacturing might get the organization into other problems, such as, market saturation or fierce competition, deterring the ability of an organization to manage product development or technology processing. The sector matrix analysis imparts possibilities of profit maximization by analysing the demands from firms and households outside the named sectors. Interestingly, the surplus generated could be injected to other sectors of firms which operate at the national and international level. Therefore, only taking account of not only the substitutable finished product but also complementary products that sometimes accompany finished products is also important as consumers can obtain a direct view of a broader range of products and services (Wilson, 2006, Nasser, 1999, Rodrigue, et. al., 2013). Former Ford CEO, Jacques Nasser made a very radical move by purchasing Kwik-Fit, UK’s car-servicing company in the year 1999 in order to expand their subsidiary portfolio. This was to increase shareholder value and expand consumer focus, both at the same time. At that time, Ford also comprised of a car rental company, Hertz, an automotive parts subsidiary, Visteon and a financial service company, Ford credit. Thereafter, Ford has been performing well in business through, it sold-off its car-rental subsidiary, Hertz and the services company, Kwik-Fit in the year 2005. This was further followed by severing of all ties from Visteon in 2000, also staged during the Nasser-era (BBC News, 2005; Visteon, 2008). In this elaborate case study of Ford Motor Company, it is clear that industry supply interactions encompass a complex web of business-relations. Other than the sale of brand new ones, the sale of second hand cars at a discounted price from consumers owing it for less than two or three years would also be considered. This scenario clearly presents a fact that car firms can sell their cars at a discounted rate to their own workforce and provide demonstration through models to dealers. Similarly, the expenses never end on as the purchases on new cars keep continuing (Julie, et. al. 1998). Between the year 1999 to 2001, Ford managed to optimise its costs by deploying an inbound Supply Chain Planning software system, called SynQuest. This functionality helped practice differentiation in operative activities. Through a service-led company and take over brands like Volvo, an end-to-end car assembly chain was planned by Ford. Till date, Ford continues to cut down operative costs under the current way-forward restructuring plan (Wilson, 2006). 4. Conclusion and Recommendations The age old economical production systems, in the form of concepts of value chain or product commodity chains, envision a linear chain of activities to deliver a finished product. Sector matrix analysis, on the other hand, looks into de-linking the entire production process, by splitting the demand and supply side relationships into two broad areas, in the light of the same product and service consumption. This places Sector matrix analysis into an advantageous position in comparison to traditional value chain analysis frameworks. However, it goes without saying that in reference to the profitability and productivity of the organization, each of these analytical frameworks has their advantages and the outputs of each are not indispensible or exclusive. Likewise, by understanding the importance of inter-connectedness and inter-dependency in businesses, predicting the market outcomes might be necessary for an organization to show how well they understand the local as well as global market patterns. However, there is another point of concern which has to do with impacts of production and supply chains, social and environmental, in addition to economic analysis. Global commodity chain gives an opportunity to analyse such impacts, combining all process with an end-objective of getting the finished product. Sector matrix framework may view the commodities in a broader sense, across a horizontal and vertical matrix, but does not much implicate on the social and environmental impacts, which would be applied to generate a more robust and comprehensive approach to the product market and competitiveness analysis for an organization. Reference List BBC News, 2005. Kwik-Fit to be sold in 800m deal (BBC News). [online] Available at: [Accessed 6 January 2015]. Bedell, D., 2001. Ford Counters Global Risk. Corporate Finance, 19, pp. 1-2. Dicken, P., 1998. Global Shift: Transforming the World Economy. 3rd edn. New York: Guilford Press. Ford Motor Company, 2013. Annual Report on Form 10-K. US Securities and Exchange Commission. Washington, DC. Gereffi, G. and Korzeniewicz, M., 1994. Commodity Chains and Global Capitalism. Westport, CT: Praeger. Gereffi, G., 1999. International trade and industrial upgrading in the apparel commodity chain. Journal of International Economics, 48(1), pp. 37-70. Gereffi, G., Humphrey, J., Kaplinsky, R. and Sturgeon, J. T., 2001. Introduction: Globalisation, Value Chains and Development. IDS Bulletin, 32(3), pp. 1–8. Gibbon, P., 2000. Global Commodity Chains and Economic Upgrading in Less Developed Countries. Centre for Development Research Working Papers 0, 2. Copenhagen: Centre for Development Research. Haldex Traction Systems, no date. About Us. [online] Available at: [Accessed 6 January 2015]. Haslam, C., Neale, A. and Johal, S., 2000. Economic in Business Context. Thomsom Learning: London. Hopkins, Terence K., and Wallerstein I., 1986. Commodity chains in the world-economy prior to 1800. Review (Fernand Braudel Center), pp. 157-170. Julie, F., 1998. Breaking the Chain- A Sector Matrix Analysis for Motoring. Competition and Change, 3, pp. 293-334. Julie, F., 2006. Financialization and Strategy. Abingdon: Roultedge. MotorTrader, 2005. Ford sells Hertz car rental unit. [online] Available at: [Accessed: 6 January, 2015]. Nasser, J., 1999. 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Visteon, 2008. Spin-off Information. [online] Available at: [Accessed 6 January 2015]. Wilson, A., 2006. Ford Overhauls Way Forward. [online] Available at: [Accessed 6 January 2015]. Read More