Sector Matrix Vs. Value Chain And Commodity Chain

Using an extended example critically discuss the view that a �sector matrix’ gives a better strategic understanding of product markets than the concepts of �product’ or �commodity’ chains.

Abstract

This paper will investigate the relevance of three tools for analysing and prescribing remedies for improving company performance; Porter’s Value Chain, Gereffi and Korzeniewicz’s Global Commodities Chain framework and finally the Sector Matrix approach as described by Froud, et. al. Values and limitations of these approaches will be recognised and discussed via specific references to Ford Motor Company (hereafter to be referred to as Ford), the third largest corporation in the automotive industry.

The Value Chain

“Every firm is a collection of activities that are performed to design, produce, market, deliver and support its product. All these activities can be described using a value chainвЂ¦Ð²Ð‚Ñœ

(Porter, 1985: pp. 36)

Porter (1985) argues that firms achieve competitive advantage via implementation of successful generic strategy (i.e. differentiation, cost leadership, focus) in the chain of a particular firm’s business unit activities. Porter classifies these as either primary (inbound logistics, operations, outbound logistics, marketing & sales, and service) or support activities (procurement, technology development, human resource management, and firm infrastructure). Porter defines primary activities as those �involved in the physical creation of the product and its sale and transfer to the buyer as well as after-sale assistance’ and support activities as those which �support the primary activities and each other by providing inputs, technology, human resources, and various firmwide functions’. Moreover, he argues that three support activities; human resource management, technology development and procurement �can be associated with specific primary activities as well as support the entire chain’ whereas the fourth support activity, firm infrastructure �is not associated with particular primary activities but supports the entire chain’.

“Competitive advantage cannot be understood by looking at a firm as a whole. It stems from the many discrete activities a firm performs in designing, producing, marketing, delivery and supporting its product. Each of these activities can contribute to a firm’s relative cost position and create a basis for differentiation”.

(Porter 1985: p.33)

Evaluation

A general objection towards the applicability of the value chain is that many value-adding activities in the value chain often overlap. Nonetheless, Porter would probably argue that chain analysis on Ford would spawn the understanding that the company suffers from �below-average performance’ and lack of competitive advantage as a result of engaging in more than one generic strategy (i.e. being �stuck in the middle’), specifically during the period 1998-2001 (see Figure 2).

There may be some substance to the �stuck in the middle’ argument since under former-CEO Jacques Nasser’s tenure (1999-2001), Ford cost-optimised their inbound logistics activities using SynQuest Supply Chain Planning software, simultaneously pursuing differentiation in operative activities. Nasser in fact �promised a services-led company… and also [bought] car companies like Volvo which took… [Ford] further into car assembly’. It is important to note that since then however; Ford continues to drastically cut operative costs ($5 billion as of 15/09/2006) under the current �Way Forward’ restructuring plan, perhaps an indicator of improved financial performance to come.

Whilst this data suggests that the value chain framework can indeed be applied to Ford’s core product; automobiles, Porter acknowledges that a different value chain analysis would have to be constructed for the firm’s other business units; automotive services and financing.

“A firm’s value chain in an industry may vary somewhat for different items in its product line… The value chains for such subsets of a firm are closely related, however, and can only be understood in the context of the business unit chain.”

(Porter, 1985: pp. 36)

Therefore, it may seem necessary to вЂ?expand the field of the visible by including motoring services and second hand cars,’ specifically in light of the data presented in Figure 3, which shows that financing is an increasingly important function vis-Ð" -vis new cars; in the motoring sector. Applying the value chain вЂ?as a basic tool for diagnosing [Ford’s] competitive advantage [or lack thereof]’ is thus an ineffective exercise as it restricts analysis to a single type of business; in this particular case: new cars, obscuring the strategic importance of other in-demand products/services relevant to the motoring sector.

Figure 3: Household expenditure on motoring, by major category (%)

New Cars Second Hand Cars Spares and Parts Repairs and Servicing Tax and Insurance Fuel Other Total

1982 12.6 21.7 6.1 8.4 12.6 33.3 5.2 100

1992 13.8 30.1 3.4 7.7 14.6 24.8 5.6 100

1995 9.7 27.1 4.3 8.9 16.2 29.0 4.7 100

In order to overcome this dilemma, independent value chain analyses could be carried out for Ford’s other business units. Chain analysis is, however, arguably limited to productionist firm and hence not appropriate to Ford’s financial services subsidiary. Stabell and Fjelstad (1998) raise the question; “What is received, what is produced, and what is shipped?” when considering insurance companies, further undermining the applicability of Porter’s framework to diversified companies such