Crotty (2002) attributed this to the rise in power of financial markets as a result of “deterioration in real economic performance” (p. 13) in firms. . .In reaction to the low profits and high cost of capital in the 1980s and 1990s, several firms embarked on a wave of financialisation – creating, buying, or expanding financial subsidiaries to acquire financial assets – for the purpose of giving management greater flexibility in managing earnings, creating shareholder value, and satisfying the capital markets (p. 34).
Most publicly listed firms, therefore, were "pressured" to show good results on a regular basis using the basic language familiar to capital markets: stock price reflects shareholder value that is a function of operating efficiency, lower expenditures, growth in turnover and earnings, and a steady flow of dividends. The more consistent the numbers, the better, as Froud et al., (2005) pointed out in their study of the American company GE.
In a world obsessed with financial performance, management searched for suitable analysis and planning tools. The production chain and the sector matrix were two of the many that, in this age of globalisation and management fads, were developed to help firms map out value-creation strategies. We explain each briefly, then compare and differentiate them with examples.
A matrix is a strategic tool that presents in a grid or table the strategic factors affecting the firm. The coordinates of the grid can vary, as shown in examples of two well-known models. The first is H. Igor Ansoff’s product/market expansion grid or matrix (Ansoff, 1957) that recommends four strategies (market penetration, market development, product development, and diversification) a firm can adapt to grow or increase its turnover depending on the life cycle of the firm’s new or current products and markets.
The other is the Boston Consulting Group’s Market Growth-Share matrix (Henderson, 1970, 1976a, 1976b) designed to help the firm identify businesses/product types by market share (an indicator of the firm’s ability to compete) and market growth (an indicator of market attractiveness). Firms, in effect, can manage their businesses as a portfolio of investments, much like a bank or an investor would hold, buy, or sell financial instruments. Firms that want to grow should hold or buy stars (high growth and high share businesses) or cows (low growth, high share, cash-generating businesses), sell dogs (low growth and share), and think of what to do with question marks (high growth, low share, needs cash injections, but risky).
Example of Matrix Use
A prime example of how the matrix was used for strategic management is recounted in the study (Froud, et al., 2005, pp. 8 and 38) of General Electric (GE) that, with the help of consulting firm McKinsey and Co., adapted the BCG matrix and developed its own Nine-Cell Industry Attractiveness-Competitive Strength Matrix (Thompson and Strickland, 2001, 327-330), a three-by-three grid that mapped out alternative business positions and attractiveness of markets, on which are superimposed several scaled circles representing different markets and their sizes and showing the firm’s market share within each market (See Figure 1).
GE claimed that the matrix provided at a glance .the position of the firm’s diversified portfolio of businesses and that its design is flexible enough to take into account the broader issues facing the firm (Sutherland &. Canwell, 2004, 97).