Critically Examine How a ‘Sector Matrix’
With continually increasing complexity within corporations, new and more innovative means of analysis are required. A sector matrix approach “de-emphasizes the organization of production and instead separately analyses the two webs of demand and supply relations” (Froud et al, 1998). What we are examining is whether or not a value chain approach is sufficient for certain firms and how useful a sector matrix can be to a company involved in a more complex infrastructure. Connecting the way in which firms migrate into other activities the social and institutional context in which they operate allows us to understand why migration is possible in some sectors and not others” (Haslam et al, 2000). Respectively, we will be studying the British bread company Kingsmill in relation to Porter’s industry value chain, and the British mobile phone company and service provider Orange in relation to Froud et al’s sector matrix. Figure 1: Limitations of different analysis systems (McDonald, 2012)
Part I: Analysis of Value Chain and Sector Matrix In Breaking the Chains, Froud et al site not so much the flaws of Porter’s value chain, but its limitations. The group states that it “is not [the chain] that is wrong but [the users who] fail to recognize its limits of application” (1998). Value Chain Porter introduced his ‘value chain’ as a basic tool for competitive advantage for the first time in 1985, and since then business students and firms alike have been analyzing how its applications can benefit a real-world company.
When released, Porter claimed that his industry value chain could represent the design, production, marketing, delivery and support stages of a product’s development and distribution (Porter, 1985). These actions, divided into ‘primary’ and ‘support’ activities (see Figure 1 below), are meant to outline where the company is able to differentiate themselves from competitors. Figure 2 Porter’s Value Chain, c. 1985 Primary Activities Support Activities The industry value chain analyzes the organization of activities in a firm and provides a platform for decision makers to reform company structure.
Concordantly, it outlines a solid structure through which firms can engage, and assign their own strategy. The primary activities in the chain are considered to be crucial aspects of competing in an industry; although, depending upon the firm involved, some activities may be considered more important than others (Porter, 1985). Primary activities are also known as vertical linkages, or the ‘supply side’ (Haslam et al, 2000) of the value chain, as their stress lies with supply relationships and the direct linear structure between supplier and distributor.
Support activities are known as horizontal linkages and considered the ‘demand side’ (ibid), because they stress competition between firms of similar technologies and products as each firm is battling for market share. The examination of these different activity groups “identifies the points where cost can be reduced or features added to deliver cost advantage or product differentiation against competitors” (Froud et al, 1998).
Although value chains have an industry centred view, the subsets within a value chain can only be understood within the context of a single business unit (Porter, 1985); industry wide analysis would swell the chain too much, as the activities involved for an entity of that breadth would have to be simplified to a state of obsoleteness, in terms of being able to use the value chain for its analysis. One will see differences in value chains of firms within the same industry sometimes, as the variance from company to company depends on differences in strategic approach and whether or not the firms have the same breed of vertical supply linkages.
Analysis, being constrained by the aspects mentioned above, means the strategic options of a company are limited. Additionally, the value chain can only provide valid analyses to firms which operate within a single industry, defined by common technology (Haslam et al, 2000) (see Figure 1, p. 1). Further, if the company at hand is pertinent to this form of analysis, only the processes from acquiring any raw material to finished manufacture are involved. Sector Matrix The matrix Froud et al introduced in response to these short chains is a more complex system which adapts to more intricate networks of manufacturing and production.
This new scheme succeeds Gereffi’s studies on global commodity chains, which contributed to the initial development of additional chain analysis types but still followed an overly simple linear concept (Froud et al, 1998). Sector matrix focuses specifically on the extension of linear production chains. In developing a sector matrix, Froud et al “choose to start from demand,” and they believe “it is logical to suggest, therefore, that the limits of the sector should be defined by patterns of expenditure” (ibid).
It is a much more finance oriented body of analysis, where firms at the centre “consolidate income from a range of activities running across sectors” (Haslam et al, 2000). Figure 3: Froud et al’s Sector Matrix, c. 1998 “The objective of a matrix form of business analysis is to understand how a more complex web of demand and supply side relations interact and shape business policy responses” (ibid). Differentiating itself from the industry chain, sector matrix is a structured interlacing of horizontal and vertical linkages.
It also carries a different perception of the end user- instead of considering customers a single entity which consumes the product ‘alone’ as does the value chain, sector matrix regards one purchase as contributing to an entire household (Froud et al, 1998). Supply and demand sides exist, as supply interaction and demand substitution (ibid) but emphasis lies with the latter. Demand substitutions usually come from within the same sector but their common point is that they require services or servicing post-sale, hich is why motoring or service providers make for such good sectors of analysis. Suppliers in a matrix can include a multitude of businesses, which may or may not have varying technologies, since sector matrix analysis is not tied down to one industry. Matrices can be a more rewarding system for strategic analysis than the value chain since it has the ability provide a more abstract view, that does not blatantly direct to a solution which may not be the best route for the company to take.
Further, it is not implied “that sector matrix analysis is confined to a few important exceptions, because many simple commodities are now bundled with services” (Froud et al, 1998). Part II: Real-world examples Kingsmill and the Value Chain Because it is a very linear supply chain Porter’s system embodies, its analysis can only benefit most firms which manufacture ‘simple, durable, throw-away’ (Froud et al, 1998; Haslam et al, 2000) and/or ‘consumable’ products (Kotler et al, 2008)- in this case, Kingsmill is an applicable and relevant example of a firm which can and does benefit from this structure.
Other examples could include a variety of producers in the retail market, such as TOMS, Hellmann’s or Bic… although some of these firms wish to take their social responsibility further, those endeavors can be accented on the value chain as they cannot be linked directly to the end user. Figure 4 Kingsmill describe their supply chain as comprising of milling the flour that makes their bread, sourcing ingredients, baking the bread, distributing to retailers, and even putting the effort in to look over “how the loaf is used in the home and how any waste is dealt with” (Kingsmill, 2012).
Even though these last two activities can be considered post-sale actions, they are more a marketing concern rather than actual servicing; we can also recognize the linear context the entire process follows. “A sector matrix framework opens up the field of analysis and can better inform corporate actors as to the possibilities and limitations of particular courses of strategic action,” (Haslam et al, 2000) but as we can see from the case above, the value chain can benefit companies if all they require is a simple production structure.
Orange & Sector Matrix The layout discussed above would not be acceptable for companies with more complicated infrastructures such as a mobile communications service provider. Orange receives its products, sells them on, refurbishes some products in-house and constantly provides service to their customers. Orange does have obligations to its post-sale customers, but it is a new endeavor for the sector matrix to cover services that Orange provide, as its most popular services act in concordance with products.
Sector Matrix DURABLE SERVICES Mobile phone assembly Supply interaction Demand substitution New Mobile Refurbished Mobile Finance Servicing Insurance Exclusive offers Coverage Billing ‘Free’ phone for contract Software help Hardware repair ‘Orange Wednesdays’ Tailored Contracts Figure 5 Firms that deal with “products that require a complex support infrastructure and complementary services,” (ibid), like our case example Orange, are the kind of businesses that fit the bill for sector matrix analysis.
The framework embraces more intricate company structures and is able to examine deeper aspects of production. Value chain cannot delve into complementary services as a matrix can- there would be no place for the evaluation of helplines, online services, insurance or contract upgrades. Because of their broadband and landline rental options we can discover how ‘household expenditure’ come into place; this is a product extended to multiple persons and from which these said persons can benefit. Summary
Contrasting from industry chain analysis, matrices can establish a significantly more complex series of potential involving the production processes, marketing and financial interaction (Haslam et al, 2000) inter and intra-related with different industries or sectors. From comparing Kingsmill against Orange we evaluated the necessity and effectiveness of sector matrix for a complex infrastructure. Sector matrix breaks through the barriers that come with being involved in a single industry and allows a firm to benefit from branching out through multiple efforts, such as financing.
Although, as we have seen from our first case example, companies that only require simple processes and do not require standard post-sale services like Kingsmill, sector matrix would be a superfluous analysis system. Simply, intricate networks require a broader agenda than a linear industry supply chain but the detail is not necessary for every firm- the duality of the two analysis systems is that ‘where one fails, the other can make up,’ and this is where the firm must choose what system is best suited for their company. Bibliography Allied Bakeries. (2012). Kingsmill and the environment.