Whereas, the commodity chain is “a network of labour and production process whose end result is a finished commodity”( Hopkins and Wallerstein 1986:159). The commodity chain is divided into two, producer-driven and buyer-driven commodity chains. Producer-driven commodity chain is where large firms,especially transnational manufactures exercise a great degree of control on the production networks and their backward and forward linkages. They´re capital and technological intensive, and have high barriers of entry. Some good examples are automobiles, computers and heavy machinery industries.
On the other hand, buyer-driven commodity chain is where large retailers,marketers and branded manufactures based in mainly developing countries, exercise decentralized production networks. Examples include footwear and toys.
Gereffi looks at how industries are differentiated “in terms of technology, competitive structures, and labour intensity”.( Gereffi 1996 : 434). Fig. 1 below gives an overview of commodity chains. However, this type of analysis tends to overlook some of the key processes.
Fig. 1
Source :
One good example to illustrate these analysis is motoring, especially for sector matrix.
“ Motoring represents a large part of consumer and household expenditure in all the major advanced economies” (Froud et al. 1999) Ford is the 3rd largest corporation in the automotive industry. Henry Ford, the founder of Ford Motor Company, improved the mass production by inventing an assembly line and sold its cars worldwide.
Ford adopted the sector matrix approach, as it helped increase the field of vision for the firm, unlike value chains which mainly emphasizes on the supply side. It helped it to integrate in order to gain higher revenue and solve problems which product/commodity chains couldn´t. One of the problems Ford faced was the depreciation of new cars. In mid 1920s, the model T demand decreased as its demand was substitued by second hand Chevrolets.
Therefore, the sector matrix framework made things more visible for Ford, by encouraging it to look into the second hand car market and look into the demand side which is the household expenditure of consumers. People prefer buying second hand cars, especially new drivers in order to gain more practice and its reasonably affordable according to their income. Once their income increases, so will the choice of cars and they may opt for a first hand car. However, buying a car is not the only investment. The car use includes various complementary goods and services, such as petrol, insurance, revision/service etc making it really expensive to have a car. To help improve upon and create long term relationships with customers, Ford began implementing financial services to aid and cement these relationhsips. This is known as Matrix fusion. Also,
in order to attract/ encourage consumers to buy new cars rather than second hand cars and increase sales, Ford offered them their financial services via loans, “buy now pay later schemes” and insurance through Ford options. (These are complementary services).
The Automobile Market one that has been around since the 1800 is one that has experienced constant growth and therefore has become saturated from the increased amounts of competition making it a mature market where sales revenues are created from replacement sales.
The sector matrix framework is very useful, as apart from increasing visibility to maximise sales and profit, it also highlights the general importance of non-manufacturing activities. However, this type of framework cannot be applied to all the firms mainly because of its complex infrastructure. In order to take decisions about the product or problem, the activities have to go through many processes, leading to a delayed and lengthen decision making process.(Some firms need prompt decision making such as hospitals and ) It´s even more costly, as firms which apply the sector matrix framework are more labour intensified, thus running costs increase. Not all industries can support these costs. Therefore some firms adopt the commodity chians, as the process is simpler and thus decision making process is quicker and response timings to economic changes are more effective.
The diagram below illustrates the concept of sector matrix by using a motoring matrix and demonstrates how sector matrix considers the whole spend from purchase to operations. This diagram can be applied to any complex product that requires supporting infrastructure as it expands the field of visibility.
(Diagram)
Furthermore, though Ford seems to be strong on the financial side, generating high amounts of profit and improving financial performances, it is also falling weak in car rental services, thus putting in stake its ownership in big car rental companies such as Hertz. Also,though the matrix framework has appeared to be successful for Ford, it can also be disappointing, and not very useful for another businesses. Thus, “the matrix diagram doesn´t necessarily depict an operable strategy for competitive advantage even though it´s possible to find examples where a sector matrix approach to corporate development has been successfully employed”. (Financialization and Strategy : J.Froud, S. Johal, A. Leaver and K. William: pp.108)
Up till now we have seen the pros and cons of sector matrix and how it has been successful for the automobile industry, such as Ford. However, in the following example we shall see how sector matrix hasn´t been sucessful for some companies such as the Shell group. Shell is currently the second largest oil company in the world, after its competitor BP. It created its own sector matrix framework in the early 1960s and was viewed as a “critical ingredient of Shell´s ability to reconcile the independence of its operating companies with effective coordination of business, regional and functional commonalities”.( Economies in a business context).
This was an effective structure for almost thirty five years and helped them analyse future trends, set targets and coordinate the operating plan of the company. However, due to various factors such as entry of more competitors due to volatile oil prices and changes in the system caused Shell to swap from using a sector matrix framework to a simpler analysis such as commodity chains as the sector matrix framework was portraid as “an over-complex, inward looking organisational structure.” This therefore led to the failure of the sector matrix framework and the success of the commodity chain framework for Shell.It now had a simpler and clearer structure with low running costs, which created the ease of integrating into businesses worldwide, rather than different businesses within a country. “For example, in downstream, the critical issues related to the rationalisation of capacity, the pursuit of operational efficiency, and the promotion of the Shell brand. In exploration and production, the critical issues related to the application of new technologies and sharing best practices”. (Economies in a business context).
To conclude, to a certain extent sector matrix is more effective than Gereffi´s production chain, as it provides a broader view enabling it to remain in the competitve market. The automobile industry, such as ford, has been successful in both types of analysis, sector matrix and commodity chains, and thus the combination of both analysis would provide a better result and visibility of the operations in the firm. The commodity chain would focus on the production process such as the spend to produce a new product, followed by a a detailed analysis of the whole spend, from purchase to operations and services. However, as mentioned above, sector matrix can only be applied to complex products and its not necessary that if it has resulted to be successful for Ford, it should result to be the same for all products. Every technique has its advantages and disadvantages.
In my point of view, sector matrix, an extention to Porter´s value chain and Gereffi´s “product” or “commodity” chains is a useful tool to measure the supply and demand side of a product and a good way of analysing, as it may look into areas which when using commodity chains have been overlooked and uderstand the shifts in corporate strategy.
BIBLIOGRAPHY
Books
- Financialization and Strategy : Julie Froud, Sukhdev Johal, Adam Leaver and Karel William : pg 100 – 108
-
Porter, M. E. Competitive Advantage (1985), chap 2 “the value chain and competitive advantage” New York: Free Press, pp. 13-61
- Economics in the Business Context – C Haslam, A. Neale and S. Johal. Chapter 4
Journals
- A commodity chains framework for analyzing global industries : Gary Gereffi
- Breaking the Chains? A sector Matrix for Motoring : Julie Froud, Colin Haslam, Sukhdev Johal, Karel Williams.
Lecture Notes
- Lecture 16 : Sector Matrix slides – Sukhdev Johal
Internet Sites
-
www.fao.org/docs/up/easypol/333/CCA_046EN.pdf
