Sector Matrix

8 August 2016

Sector matrix analysis is a relative new concept which provides a different insight into the traditional production value chain system. It looks into the two demand and supply side relationship by building the consumers’ demand in terms of complementary and competing needs, and consolidating the supply through corporate surplus from different activities in a demand matrix.

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While Gereffi’s theory on global commodity chain concept (1996) has constructed supply in simple linear ways and demand as a form of reverse relations within the production/distribution chain, this may not be sufficient to engage the increasing complex production cycles in today’s modern world. Sector matrix analysis approach looks into de-link the production process and divides the demand and supply relationship into two areas, but share the same product and service consumption. By using the automobile industry as an example, sector matrix analysis is able to better demonstrate the advantages over the traditional value chain analysis.

Product or Commodity chains concepts In many countries, Gross domestic product (GDP) is an indicator commonly used to measure the market value of all officially recognized final goods and services produced within a country in a given period of time. And often, GDP per capita is often considered an indicator of a country’s standard of living. The old economical production has always been closely linked to the traditional concept of an economic activity as a ‘product’ or ‘commodity’ chain which leads to a finished product.

Michael Porter (1985) stated that “a value chain is a chain of activities that a firm operating in a specific industry performs in order to deliver a valuable product or service for the market. ” An industry value-chain is a physical representation of the various processes involved in producing goods (and services), starting with raw materials and ending with the delivered product. Products pass through the various activities of a chain in an orderly manner, and at each activity the product gains some value.

Chain of activities gives the product more added value than sum of the individual activities’ values. This can be illustrated by using the activity of a diamond cutter as an example. The cutting and polishing activities may have no significant values on their own, yet it adds much of the value to the end product of a polished well cut diamond. The whole value chain processes with the addition of documentation, assessment and certification to the production make up the different grades of a diamond, which in turn, can command different prices in the consumers markets.

Over the past few decades, the value chain framework is often used as a powerful management analysis tool for strategic planning. This value-chain concept has been widened beyond individual companies to whole supply chains and distribution networks. The delivery of a mix of products and services to the end users will require different economic factors managing its own value chain. This industry wide synchronized interactions of the local value chains create an extended value chain, in a global scale. Porter terms this larger interconnected system of value chains the “value system”.

A value system includes the value chains of a firm’s supplier (and their suppliers all the way back), the firm itself, the firm distribution channels, and the firm’s buyers (and presumably extended to the buyers of their products, and so on). For example, an automobile factory might require its parts suppliers to be located near its assembly plant to minimize the cost of transportation. This allows it to bypass the intermediaries creating new business models, or create improvements in its value system. From Chain to Sector Matrix

Chain analysis concept has generally works well in the past due to a much “simpler” world of commodities. This has not kept pace due to the limits of its application in the modern market whereby complicated production processes and complementary services are constantly evolving. In a way, as simple commodities are increasing bundled with services like tax and fuel, sector matrix analysis has seen a much broader application usage. One of the world’s most important economic sectors by revenue is the automobile industry. Around the world, there were about 806 million cars and light trucks on the road in 2007, consuming over 260 billion US gallons (980,000,000 m3) of gasoline and diesel fuel yearly. The automobile is a primary mode of transportation in most developed countries and its history have seen much value chain evolutions and development since the 20th century. The first Ford Model T was the most widely produced and available 4-seater car of the era and it was produced through a production chain organization. Toyota introduced “The Toyota Way” to the world with its lean manufacturing Toyota Production System (TPS).

Over the 1960s to 1990s, the automobile industry has become highly competitive whereby cost and design features are usually the main competitive advantages in gaining the global market share. As the industry evolved, major car makers are aggressively pushing their smaller, high efficiency vehicles due to both high gasoline prices and government environment regulations. At the same time, engineers are pushing technological changes in their larger cars and light trucks in order to enhance their fuel efficiency.

Lowest production costs and delivery speed are no longer the only competitive factors that differentiate one car maker from the other. As incomes rise with better educations, consumers now are more interested in the quality and serviceability in the cars that they acquire. Car ownership is no longer seen as a luxury item, due to a higher level of income and improvement in transport infrastructure. It is now considered a motoring experience which may form part of the buyer’s essential consumption, and therefore takes up a much broader range of services as well as product accessories.

Automobile industry With the maturing of the automobile industry in many developed countries, the rise of the used car market has become an important consideration for major car manufacturers. This can be due to several reasons. Firstly, the low car prices offered by car companies in their attempt to gain market shares over the past 2 decades have seen a sharp increase in car population in urban cities. These have put a strain in the countries’ road infrastructure and cause traffic congestions in many cities.

In the city of Sao Paulo, Brazil’s traffic jams can stretch for up to 120 miles during peak hours. [3] Many governments have resorted to increase taxes on car ownership to control car population. In addition, new environment regulations have also been introduced to reduce the amount of car pollutions on the road. Since 1992, European emission standards have been introduced and constantly revised for both petrol and diesel cars. This has pushed up the research, development and production costs for new cars.

Some car companies like BMW and Toyota have also launched hybrid-electric cars to cater to the needs of existing markets. The first Toyota Prius was released in Japan in 1997 and since then, it has becomes the world’s bestselling hybrid car with cumulative global sales of 3 million in 2013. [4] In addition, due to the steep depreciation of new cars in their first year, most motorists may prefer to trade-ins their existing cars to buy a more prestigious used car. As cars become safer and more durable, these have increased the quality of the second hands cars and consumers are more receptive of buying them.

As a result, some car companies have set up a separate division to handle used and rental cars. Car assembly Supply interaction DemandDemand complementarity Demandcomplementarity substitution Finance Fuel Service &Tax & RepairsInsurance Figure 1: Sector Matrix of motor demand New and used cars are alike in that both will incur the same maintenance and running expenditure after the point of purchases. The close relationship between car usages and service consumption has an important effect on the amount of activities in the field of the visible from a chain to matrix analysis.

The content of the supply side matrix relations may not match the demand side as companies are always seeking to make as much profit per car as possible. The field of the visible has also expanded to include new service activities like technologies and structure improvements. The introduction of financial analysis as a modern strategic management tool helps to address the balance sheet and operating matters. These additional forms of services like car finance and insurance are being provided by the car companies to capture larger profit margins from both within and outside their sectors.

Conclusion Chain analysis is limited in revealing the area of the visible sectors as it is concentrated in its traditional fields of production focus. Sector matrix attempts to complement the production chain analysis by looking into the automobile industry which combines both competing and complementary goods and services. By using a wider range of supply side activities and identifying complex demand/supply interactions and disconnections, sector matrix analysis extends the field of the visible and intangibles. The earlier work on the macro (Froud et al., 1997) had highlighted the distinctive quality of macro and micro relations under late capitalist conditions. Under the chain concept, the industry is defined as a homogeneous stable sector consisting of the demand product and the suppliers with similar barrier of entry and technology. With a matrix concept, the industry is no longer homogeneous and even at times unstable with constant interactions of both its demand and supply sides. This is increasing true in a modern complex world where the automobile industry has underwent severe restructuring

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