Sector Matrix Essay
In buyer-driven commodity chains retailers, branded manufacturers and branded marketers which usually operate in labor-intensive consumer goods industries (e.g. footwear, toys, and consumer electronics) play key parts in setting up decentralised production networks in a variety of exporting countries. In producer-driven commodity chains, however, large manufacturers usually operating in capital and technology-intensive industries (e.g. automobiles, aircraft, and computers) play pivotal roles in managing production networks, usually in developed countries. Global Commodity Chains overlooks important concepts known as demand substitution and supply interaction, which occur in the motoring sector when lower income consumers rather purchase more affordable second hand automobiles from car dealerships than new automobiles from manufacturers e.g. when second-hand cars dilute the automobile market. Competition is thereby oversimplified by Gereffi’s framework as a process that takes place within an industry of firms using similar technologies to produce competing products.
Furthermore, complementary goods e.g. spares and parts, repairs and servicing, fuel, tax and insurance, and finance generates a high percentage of revenue in the motoring sectors. Thus to maintain competitiveness within a sector, managers need to be familiar with the concept of demand complementarity. Gereffi, similarly to Porter, overlook the strategic importance of complementary goods, envisaging the processes that bring a commodity to the final product market. The sector matrix analysis mentioned by Froud (2006) fills these limitations; it constructs the demand side in terms of complementary and competing demands made by end users, and the supply side in terms of corporate consolidation of surplus from different activities inside and outside a specific demand matrix. Taking into account the weaknesses of Porter and Gereffi’sframework, Froud argues a need to abandon product-specific analysis for an alternative way of thinking, arguing that the firm should be seen as a unit that consolidates financial surplus from diverse sources of profit inside and outside an activity matrix. Rather than constructing the demand side in terms of substitutable end-products (e.g. new cars versus new cars), the Sector Matrix approach captures demand complementarity (e.g. new cars + services) and demand substitution (e.g. new cars versus used cars).
Therefore, thesector matrix approach gives a better understanding of the automobile product market than the concepts of Value Chains and Global Commodity Chains in that it captures the strategic importance of complementary services, simultaneously redefining competition. Solely manufacturing cars is financially unrewarding due to the problems associated with saturation in the automobile markets e.g. fierce competition due to competitor ability to manage product development and technology processing. For example, Ford understood that in order to continue to achieve superior shareholder returns they must sharpen consumer focus, that why their vision is to be the world leading consumer company that provides automotive products and services not just the world leading automotive company.Under this downstream vertical integration strategy, Ford purchased UK-based car-servicing company Kwik-Fit, broadening their subsidiary portfolio; already consisting of car rental company Hertz, and financial services company Ford Credit.
Furthermore, the Sector Matrix approach does not confine competition to the group of firms producing similar products; it extends the business relation to all the other firms that aspire to positions in the matrix. So, redefining competition may be a necessary exercise in order to effectively analyse the product market. Albeit useful, the applicability of Sector Matrix can be debated amongst academics, however. Froudrecognise that many industries (e.g. trainers and shirts) cannot be reworked as sectorsdue to their simple infrastructure. Other more complex industries e.g. health care are difficult to visualise in a sector matrix diagram due to vague demand function. Hence, while the Sector Matrix approach works well in the case of automobile industry, the universalism the framework is debatable.