A senior exec taking my course points out a common blind-spot – the strong cash-flow possible in mature/declining sectors. This firm, part of a global business, makes large-volume manufactured products, sold through distributors to numerous installers.
Management diverts resources away from any sector where growth slows, but as in other cases, there is easy money to be made. Everyone else avoids the sector too, so little effort is needed to steal business, and lack of interest keeps margins OK too. Profitability ratios may not be high (which can drive still faster decline as firms keep cutting costs essential to business maintenance) but quantities of cash-flow can be huge.
It’s worth revisiting the principles of the Boston Matrix [whose damaging impact resulted from mis-understanding and mis-application, rather than flaws in the basic logic] – that over an industry life-cycle, free cash-flow goes from strongly negative, while heavy investments and spending are needed to capture growth, to strongly positive, when most of that spending has been done and large volumes of business drive large revenues. A key piece to remember, though, is that competition has to be driven out, to avoid those late-life cash-flows being competed away.