Essay 3) Use an extended example to discuss how ‘the sector matrix’ framework is useful for analysing demand and supply linkages in an industry.

The end of the 20th century has experienced rapid changes in the way of trading, due to the expansion of capitalism. The Oxford dictionary defines capitalism as “an economic and political system in which a country’s trade and industry are controlled by private owners for profit, rather than by the state”. Due to high competition, firms have desperately been trying to reduce costs of production in order to maximise profits. Published in “Competitive Advantage” in 1985, Porter’s value chain is a great example to show how much importance firms gave to the supply side of the market in this period. Porter described the value chain as “a set of products and services linked together in a sequence of value adding economic activities”. In other words, it analyses the stages in which a product is created from raw material until it’s finished, each stage adding value to the product. Gereffi’s ‘Global Commodity chains’ uses the old strategy chains and links them with their political and geographical context, adding a spatial and territorial dimension to the demand and supply in a market.________________________________________
In 1998 in their article “Breaking the Chains? A sector Matrix for Motoring”, Julie Froud, Colin Haslam, Sukhdev Johal and Karel Williams tackled the settled chain concepts by showing its limits regarding complex industries such as motoring or healthcare. They then came out with an alternative approach which focused on “the two webs of demand and supply relations” (Froud, 1998). The sector matrix looks at the firm not as a business operating in an industry but more widely looks at it in a sector perspective.
This essay will attempt to discuss critically how the ‘sector matrix’ is useful for analysing demand and supply linkages in an industry and to back this up my example will be the communication industry. To be more precise we will focus on the iPhone and the telecommunication market.______________________________________________________________________
Primarily one will explain the Value Chain concept and the Commodity chain concept using the iPhone as an example. Seconly we will attempt to recreate a telecommunication sector matrix in order to show the complex linkages between demand and supply in this sector of activity.

In a microeconomic point of view, “production means the combination of inputs to produce output in the form of a finished product” (J. Froud et al, 1998). Similarly, Porter’s Value Chain focuses on the supply side of the market by analysing how input, after several transformations, is converted into output. Porter describes this process as a flow of linear activities such as designing/development, purchase, assembly/ manufacture, marketing or distribution. Each activity provides a service or a transformation of the product in order for it to be sold, thus the product gains in value towards this ‘Chain’. We can then describe this chain as a chain of “exchanges where money moves back as the input moves forward”(J.Froud et al, 1998). However “an industry within the framework of a perfectly competitive market structure can be defined as a large number of firms competing with each other” (Pearce, 1992). Thus, in order to increase demand for the product and so to gain competitive advantage, firms have to perform these activities at a lower price level if they want to avoid a loss.
Porter’s value chain is divided into two activities: the primary activities and the support activities. Porter describes the primary activities as “involved in the physical creation of the product and its sale and transfer to the buyer as well as after-sale assistance.”
The support activities ‘support’ the primary: from firm infrastructure to technology development.

Figure 1: (Porter, Competitive Advantage, 1985) :

If we take an example of a business we can use the phone industry. It has huge brands like Apple and a primary activity of producing an iPhone could be the marketing of the product, and a support activity could be technological research. We will later in this essay have a closer look at how Porter’s Value Chain can be applied to this company in order to analyse the demand and supply linkages of these products; but first let’s have a look at Gereffi’s Commodity chain.
In their article “Commodity chains and global capitalism”, Gary Gerrefi and Miguel Korzeniewicz argue that “the Current restructuring of the world-economy under global capitalism has further integrated international trade and production.” Indeed, the end of last-century’s globalisation incited firms to extend their manufactures to other countries in order to lower costs of production. As for Apple they have factories in Shenzhen and Chengdu in China, and there the workers are paid only $1.78 an hour! (Connie Guglielmo, Forbes Magazine). As seen earlier this reduction in cost of production is a great way for Apple to increase profit.

Figure 2: Share of production cost of an Apple 4G iPhone assembled in China (Apple Business Model Financialization across the Pacific):

The ‘Global Commodity Chain’ allows us to have a deeper look at global activities within the previous value chain framework. (Kaplinsky, 2000). In other terms it visualises a wider picture of an industry’s demand and supply relation by taking into account geographical or even economical factors. Thus it looks not only at the repartition of wealth around the globe but also at the spatial distribution of production and distribution, which helps us understand the difference between demands for a same product from one country to the other. Indeed, and according to the United States’ Sencus Bureau, the average income in the United States was $50,502 per year in 2012. As a comparison the average income in India is only Rs 53,331 (±$1000) (The Times of India, 2012).______________________________________________________________________________________
This visualisation of the market led to two key distinctions between global chains, both “driven” by two kinds of lead firms: producers and buyers. The chapter from Commodity Chain and the Global Capitalism entitled “The organization of buyer-driven global commodity chains: How U.S retailers shape overseas production network” explains how on the one hand “producer-driven” applies for large industries, such as Apple, concentrated in technology, which products need to be developed in captive suppliers in order to preserve production expertise from competitors. Thus these firms present high barriers to entry in production. On the other hand “buyer-driven” chains refers to simpler products (such as toys), which innovation relies more, in this case, to design or marketing rather than the actual technological knowledge.
Relating this to our Apple example, we have seen that Porter’s Value Chain as well as Gereffi’s Commodity Chain are a great way to understand how Apple supply their iPhone to the different markets. Indeed and looking only at a straight chain, Apple builds its iPhone similarly to how cars are made: from raw material (steel, components) to the finished product through a series of stages, each stage adding value to the product. Moreover and like cars, this supply side perspective is producer centred and follows a straight line supply chain where the product moves vertically from manufacturer to supplier and finally to distributors who sell the product. (J. Froud et al., 1998)
However and as seen earlier these ‘production chains’ mainly look at the supply side of the business, leaving the demand side unexploited and thus increasing the opportunity cost of not exploiting every single sector of activity possible.______________________________
Nowadays looking at the phone industry using apple’s Iphone as an example we can now ask ourselves: can we actually think of the phone industry as an industry selling only phones? A negative answer to this question might seem obvious: nowadays when buying an Iphone, the consumer is very likely to purchase a variety of services such as insurance or contracts. However the production chain analysis does not allow us to have a critical look at the demand side as it “limits the field of the visible by concentrating attention on the part not the whole” (Froud et al., 1998). Thus a new tool is needed: the sector matrix.
Froud et al. in their article “Breaking the chains? A Sector Matrix for motoring” expanded “the field of the visible and the intelligible” by presenting the sector matrix as a tool, which provides a demand side analysis to a business. Thus “everything which represents a substantial, sustained [motoring]-related object of expenditure falls inside the relevant matrix”. Back to our iPhone/cell phone example, we can now have a much wider view of the mobile-phone industry using a ‘matrix’. Indeed the use of a matrix enables us to incorporate services so far ignored inside the business. Contracts are a great example of consumer demand’s extension when purchasing an Iphone in the mobile phone industry. This industry is defined as “a large number of firms competing with each other in production of a homogeneous commodity” (Pearce, 1992).
We can now see that, by linking the purchase of a phone with the purchase of a contract, our sector matrix, initially composed of phone suppliers only, such as Apple or Samsung, now encircles worldwide mobile phone operators like Orange and Vodafone, with an annual turnover of 43,515 billion Euros just for Orange (Orange annual report, 2012).
Another service that we can link to the purchase of an iPhone is insurance. Indeed the iPhone 5 is sold for almost £700 in the U.K (apple official website), increasing demand for insurance of that product due to its very high price. Moreover, due to incredible technological progress and the improvement of the mobile Internet, mobile phones become multitask devices that you can use for almost everything. Thus a constantly growing number of services are provided within the phone through the development of applications: Tim Cook, CEO of Apple, announced last year that over 30 billion apps have been downloaded since the ‘apple store’ was launched in 2008. Everyday living services can now be implemented in our matrix thanks to these ‘apps’. Services provided by the iPhone go even further as even the music industry is now directly dependent to this device: “The net sales of music related products and services were $8,5 billion in 2012” (Apple annual report, 2012).__________________________________________________________________
However, according to Gereffi’s Commodity Chain, the uneven distribution of wealth around the globe affects considerably the demand for Iphone from one country to the other. Thus “The form of demand side relations and the values of the linkages will obviously vary according to levels and distribution of income as well as patterns of demand” (Froud et al. 1998). Nevertheless more than 125 million Iphones have been sold in 2012 (Apple annual report, 2012). Moreover the AppleStore is available in 152 countries which, when looking at our cell phone sector matrix shows how much money this one and only product generates.
Conclusion:
This essay has focused on concepts such as Porter’s Value Chain or Gereffi’s Commodity Chain in order to explain the linkage between demand and supply using Apple’s iPhone as an example. Thus we have seen how the Value chain is useful in order to describe how Apple supply their products in a linear way or chain, with different stages, each of them adding value to the product. The competitive market describing an industry as, on the supply side, “ a group of firms using common technologies whose output appears on the demand side as competing products” (J. Froud et al. 1885). Secondly we discussed how the Commodity Chain integrates geographical and political elements to explain how demand and supply vary depending on the area, mainly because of the unequal distribution of wealth. Finally we saw that by using a sector matrix, Apple’s iPhone are no longer seen as purely operating within linear production activities, but instead are seen as incorporating an incredibly wide range of activities and sectors. Thus “previously segregated demands increasingly interfere with each other” (J. Froud et al.).
Sector Matrix is more like a complement to chain analysis rather than an alternative, but this essay shows how useful it is in order to understand the linkage between demand and supply in a complex sector such as telecommunication.

(1970 words)

Bibliography:
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