Sector Matrix Versus Commodity Chain - Essay Example

Sector Matrix versus Commodity Chain Introduction The business environment in modern world is characterized by competition among different organizations want to be better placed to exploit existing resources and markets for their goods and services. To be competitive in their markets, organizations have invested in a number of studies about industry trends especially taking into consideration the effects that demand and supply forces play in the production process. The two most popular models of analysing trends in the business environment are commodity chain analysis and sector matrix analysis. Due to the incorporation of both value chain analysis and commodity chain analysis, sector matrix analysis stands out as the most effective tool for businesses to generate better strategic understanding of product markets (Froud, Johal, Leaver and Williams, 2006). The sector matrix offer information about complex product markets unlike commodity chain analysis that is based on a linear analysis. This study will first expose the inherent weaknesses in the commodity chain analysis that makes the model ineffective in the modern product markets before embarking on suitability of sector matrix as the preferred tool that should be used to determine business policies. Commodity Chain Analysis A commodity chain for any given product covers the necessary processes that take place to ensure at the end of the undertaken activities is a finished product. Since the development of commodity chain analysis, researchers have identified number of issues that limits the ability of the concept to provide an up to date analysis of product market situations (Kutting, 2004). This criticism has not only been from scholars outside the commodity chain perspective, but also from within. For instance, the different perspectives by scholars who use the commodity chains concept has resulted in the presence of two schools of thought where there are those in favour of the traditional world systems approach who are attributed with the introduction of commodity chain concept. The other school of thought that includes scholars such as Gary Gereffi and colleagues are in favour of a more encompassing tool for analysis and are therefore credited with the introduction of the global commodity chain (Bair, 2005). For instance, the transformation brought by globalization can be experienced when in the clothing industry the raw material is harvested in India but manufactured into yarn in Portugal. The yarn is then transported to Taiwan for colouring then to Poland where it is weaved. The other parts like buttons and rivets are produced in China before all the components are shipped to the Vietnam for sewing. The final processing of the cloth takes place in Greece and shipped to Switzerland for consumption. The global commodity chain (GCC) analysis is therefore concerned with the production and marketing of the product through modern global trading system that is currently characterized by a high degree of integration. Gereffi introduced this concept of competitive analysis in the 1990s based on number of theories such as world-system theory and dependency theory. When introducing the GCC, Gereffi and colleagues noted that globalization had drastically changed the nature of chains for a commodity, therefore there was a need for commodity chain scholars to include studies on a country’s potential to mobilize resources in the international economy. Based on the assertion that globalization has an implication for even the local producer of consumer of the commodity, GCC scholars argue that commodity chain fails to view the whole market situation by limiting the analysis to the state level (Bair, 2005). Earlier concepts of GCC covered only the aspects of material inputs necessary for the preparation of products for consumption but the scope of analysis has changed to include other factors such as value creation, distribution processes in addition to controls present in the transnational networks. This analysis of the chains from production to consumption further covers the joints related to the exploitation of raw materials, primary processing, the stages involved in trading and consumption through to waste disposal (Gereffi and Kaplinsky, 2001; Pelupessy, 2001). Proponents of commodity chain analysis have argued that global commodity chain is suitable analytical tools that can help multinationals comprehend the governance structure of specific chains and their significance within the areas of operations. One key notion created by the global commodity chain is that the market is driven by commodities that are buyer-driven and those that are producer-driven (Ruben, 2007). Commodity chain advocates such as Humphrey and Schmitz (2002) see this as being because of apparent “asymmetry of competence and power that favour one party” (1,018). Participants in a global commodity must not necessarily have the same capabilities therefore translating into unevenness where for instance buyers who have developed the capacity to stock produce, global supply networks and adequate capital reserves will have superior bargaining power compared to farmers with small-scale operations and negotiating with local monopolies in remote areas. The difference in capabilities established within a given industry led to the introduction of the concept of lead firms in the commodity chain analysis. The advantages of being a lead firm in the industry is that an organization has the necessary resources to delegate some aspects of the manufacturing to other countries where it can be done cheaply and therefore result into a reduction in the overall cost of production cost (Bair, 2009). An example of a producer driven commodity chain that incorporates the elements of delegation is the production Daimler Benz. The networks involved in production of Daimler Benz can include contracting firms from countries such as Portugal, Bulgaria and Mexico to supply the cable sets. Then South African company will deliver more cable sets in addition to parts of exhaust pipe while circuit boards are ordered from Malaysia and Philippines. Romanian, Canadian, Spanish and firms are then contracted to wooden parts, glass panels and fanfares respectively in addition to sheet pressing parts and air shrouds being supplied by Italian firms. The components of the Daimler Benz’s cooling and heating system while US firms supply sound systems. More components are sourced from Japan where parts such as radios, climate compression as well as components for the navigation system are shipped in at a lower price (Hopkin and Wallerstein, 1986). Even as proponents note the importance of global commodity chain in the determination of both social and economic relationships as the product moves through the supply chains, the concept has some shortcomings that are generated from the overall commodity chains analysis. Critics note the inclusion of global commodity chain only monitors the movements of the commodity with simple infrastructure like foodstuff but will not be helpful in the analysis of complex structures that will for instance need to include relationships between different but related industries or provide further details about the role played by consumer disposable income among other factors (Bair, 2009). For instance, the commodity chain analysis in manufacturing of Daimler Benz will need to further include the characteristics of each related industry that supplies various components for the production of a complete unit. Further, GCC has mainly focused on the analysis of some primary commodities and industrial sectors while neglecting the service industry in industries where the service is complete product or facilitates production of other tangible products (Bair, 2005). Such limitations make commodity analysis ineffective when dealing with industries with complex structures that are involved from the preparation of raw materials to the consumption and later disposal of the waste materials. Sector Matrix Analysis It was due to such shortcomings that led to the development of the sector matrix analysis, which had the capability introducing more information than what was presented in the commodity chain apart from the inclusion of other forms of analysis such a value chain analysis. While commodity chain analysis has been blamed for being linear sector matrix provides more information about the interaction between demand and supply of a commodity through the analysis of horizontal and vertical relations in order to determine the proper business policy for a firm (Froud, Johal, Leaver and Williams, 2006). For instance, automobile manufacturer, Ford being one of the major corporations in the industry is well diversified in provision of car models to suit different tastes, income and other consumer preferences while also running a business that is vertically integrated. The best business policy for such corporations operating through a complex system can be determined through sector matrix analysis that provides the necessary information about the internal dynamics of the operations and there effects on the value chain as well as commodity chain and sector matrix (Haslam, Neale and Johal, 2000). Thus, sector matrix is built upon different models by including aspects of efficiency in production as highlighted in value chain analysis as well as effective marketing strategies provided in the global commodity chain analysis. The complexity in the sector matrix that is generated from incorporation of important systems from value chain and commodity chain analysis creates an integrative model that provides insights into the interactions taking place during demand substitution and complementary supply (Kutting, 2004). While commodity chain analysis follows the flow of the commodity through a linear chain as well as best on the analysis of a single firm, sector matrix explores the demand and supply from an industry perspective as a means of highlighting how a commodity is distributed in the market. Such an analysis calls for the understanding of how a given market operates, how demand and supply functions, conceptualization of the market trends and a further analysis of all the firms operate within particular industry. To be able to provide all these information, sector matrix analysis relies on the analysis of demand and supply based on the awareness that most firms operate in a demand based production as a strategy for sustainability (Froud, Johal, Leaver and Williams, 2006). In the automobile industry for instance, where there the industry is characterized by complicated infrastructure and the presence of complementary services in addition to the existence of tiff competition among industry players, sector matrix is the best tool for the analysis of the most effective policy for a firm. Having the mentioned characteristics makes it impossible for firms to use more simplistic tool such as commodity chain analysis since a business strategy that only explores creating competitiveness using a single firm as opposed to the whole industry will not create a clear picture. For instance, sector matrix analysis highlights the effects of disposable income on the purchasing power of consumers therefore making it possible to determine the level of demand for a product though the analysis of market trends such as recessions (Kutting, 2004). Such an analysis will provide information about the number of units and prices that will suit the prevailing market condition as the disposable income in the economy acts as an indicator consumers’ spending power. The ability of disposable income to inform the level of demand in the automobile industry is based on the assumption that since the produced commodities are in most cases luxurious, in is mostly the individuals with high disposable income that will be interested in making purchases at any given time. Firms can therefore make cheaper cars when the analysis indicated consumer have low disposable income to ensure that available products suits financial ability of consumers (Haslam, Neale, ‎Johal, 2000). This is not the same for commodity chain analysis, which only indicates the household as the final point for a product instead of perceiving households as affecting the level of demand and supply (Kutting, 2004). On the supply side, sector matrix goes beyond the normal demand and supply forces which relies on the premises that when demand is high supply should also be increased to equal the potential number of consumers. Sector matrix is able to provide further information about the market trends such as market consolidation by given firms which informs the level of penetration into the market for a new firm or when diversifying into new market segments. In the automobile industry, a firm might resort to supplying low cost vehicles when as a way of introducing new products in to the market while also weighing the level of loyalty exhibited by the consumers of goods produced by a competing firm with a view of challenging for a share in the consolidated market (Ruben, 2007). Conclusion Although scholars who use commodity chain analysis have continued to improve the model for instance through introduction of global commodity chain analysis with a view of making it the best strategy for the understanding of product market, there are still limitations that makes sector matrix analysis the best model. Sector matrix analysis has been found to be more suitable especially when making an analysis of complex product markets such as the automobile industry that requires information about the industry as a whole in addition to factors outside the industry such as disposable income. Commodity chain analysis has been found infective due to its reliance on factors within the firm while neglecting those that affect the industry as a whole. In conclusion, sector matrix analysis is the best tool for a better strategic understanding of product market especially in the current competitive business environment. References Bair, J. (2005) From commodity chains to value chains and back again? MIMEO, Yale University Department of Sociology. Bair, J. (Ed.). (2009) Frontiers of commodity chain research. California: Stanford University Press. Froud, J., Johal, S., Leaver, A., & Williams, K. (2006) Financialization and strategy: Narrative and numbers. London: Routledge. Gereffi, G., & Kaplinsky, R. (Eds.) (2001) The value of value chains: spreading the gains from globalisation (Vol. 32). Brighton, East Sussex: Institute of Development Studies. Haslam, C., Neale, A., & Johal, S. (2000) Economics in a business context. Hampshire, UK: Cengage Learning EMEA. Hopkin, T. and Wallerstein, I. (1986) Commodity chains in the world economy prior to 1800. Review X (1) 157-170. Humphrey, J. and Schmitz, H. (2002) How Does Insertion in Global Value Chains Affect Upgrading in Industrial Clusters? Regional Studies, 36(9), 1017-27. Kutting, G. (2004) Globalization and the environment: greening global political economy. New York: SUNY Press. Pelupessy, W. (2001) Industrialization in global commodity chains emanating from Latin America, UNISA Latin American Report 17(2), 4-14. Ruben, R. (Ed.) (2007) Tropical food chains: governance regimes for quality management. Gelderland, The Netherlands: Wageningen Academic Pub. Read More