1, model introduction
BCG matrix is one of the most popular methods to formulate company-level strategy. This method was developed by Boston Consulting Group (BCG) in the early 1970s. BCG matrix marks every strategic organization (sbu) on the two-dimensional matrix diagram, thus showing which sbu provides high potential benefits and which sbu is the funnel of organizational resources. Bruce, the inventor of BCG matrix and the founder of Boston Company, believes that "if a company wants to succeed, it must have a product portfolio with different growth rates and market share. The composition of the portfolio depends on the balance of cash flow. " From this point of view, the essence of BCG is to realize the cash flow balance of enterprises through the optimal combination of business.
Boston Matrix distinguishes four business combinations.
(1) question mark (high growth and low market share)
There are some risky speculative products in this field. These products may have a high profit margin, but they occupy a small market share. This is often a new business of a company. In order to develop the problem business, the company must set up factories and increase equipment and personnel in order to keep up with the rapidly developing market and surpass its competitors, which means a lot of capital investment.
The "question" describes the company's attitude towards this kind of business very aptly, because at this time, the company must carefully answer "whether to continue to invest and develop this business?" This question. Only those businesses that meet the long-term development goals of enterprises, have resource advantages and can enhance the core competitiveness of enterprises can get a positive answer. The problem-based business that gets a positive answer is suitable to adopt the growth strategy mentioned in my previous strategic framework, with the purpose of expanding SBUs' market share, even at the expense of recent income to achieve this goal, because if the problem-based business is to develop into a star-based business, its market share must increase substantially. The problem-based business with negative answer is suitable for contraction strategy.
How to choose problem-based business is the key and difficult point of making strategy with BCG matrix, which is related to the future development of enterprises. BCG also provides a simple method to determine the priority of various business growth schemes in the growth strategy. Weigh the following figure and choose a scheme with relatively high return on investment and small width of input resources.
(2) Star business (star refers to high growth and high market share)
Products in this field are in a fast-growing market and occupy a dominant market share, but they may or may not generate positive cash flow, depending on the investment requirements of new factories, equipment and product development. Star business is developed through continuous investment in problem-based business, which can be regarded as a leader in the fast-growing market and will become the company's future cash cow business. However, this does not mean that the star business will certainly bring a steady stream of cash flow to enterprises, because the market is still growing at a high speed, and enterprises must continue to invest to keep up with the pace of market growth and repel competitors. If there is no star business, enterprises will lose hope, but the flicker of stars may also flash across the eyes of senior managers of enterprises, leading to wrong decisions. At this time, it is necessary to have the ability to identify planets and stars, and put the limited resources of enterprises into stars that can develop into cash cows. Similarly, it is suitable to adopt the growth strategy to develop the star business into a cash cow business.
(3) Cash cow (low growth and high market share)
Products in this field generate a lot of cash, but the future growth prospects are limited. This is a leader in a mature market and a source of cash for enterprises. Because the market is mature, enterprises don't need a lot of investment to expand the market scale. At the same time, as a market leader, this business enjoys the advantages of economies of scale and high marginal profits, thus bringing a lot of cash flow to enterprises. Enterprises often use cash cow business to pay accounts and support three other businesses that need a lot of cash. The cash cow business is suitable to adopt the above-mentioned stable strategy, with the aim of maintaining SBUs' market share.
(4) thin dog business (dog, refers to low growth and low market share)
Products in this remaining field can neither generate a lot of cash nor need to invest a lot of cash, and these products have no hope of improving their performance. Under normal circumstances, this kind of business is often meager profit or even loss. The reason why the thin dog business exists is more because of emotional factors. Although it has been operating at a low profit, it is like a dog that people have kept for many years. In fact, the thin dog business usually takes up a lot of resources, such as funds and management time. And in many cases, it is not worth the loss. The thin dog business is suitable for the contraction strategy mentioned above, with the purpose of selling or liquidating the business, so as to transfer resources to more favorable areas.
Why choose BCG matrix? The essence of BCG matrix lies in the close combination of strategic planning and capital budget, which divides a complex enterprise behavior into four types with two important measurement indicators and deals with complex strategic problems with four relatively simple analyses. This matrix helps diversified companies to determine which products are suitable for investment, which products are suitable for manipulation to gain profits, and which products are suitable for removal from the business portfolio, so as to achieve the best business results.
2. Important assumptions of the model
Long before 1966 and BCG were put forward, Boston Company obtained an important discovery-experience curve through empirical research. The basic conclusion of the empirical curve is: "The empirical curve consists of the comprehensive effects of learning, division of labor, investment and scale." "Every time you double your experience, the value-added cost will drop by about 20% to 30%." "Empirical curve is essentially a cash flow model." Because scale is a function of learning and division of labor, scale can be used to represent the learning and division of labor components in empirical curve. The higher the market share of a business, the higher the experience curve effect of the business, the more cost advantage the enterprise has, and the stronger the corresponding profitability. According to the experience of Boston Company, if the market share of a business of an enterprise is twice that of its competitors, then the enterprise has a cost advantage of 20-30% compared with its competitors in this business. This is why BCG chooses market share as an important evaluation index.
BCG believes that market share can bring profits, which is actually a "cost-leading strategy". BCG has always believed that scale advantage is very important. BCG's own explanation is that companies with large market share can not only get more income, but also achieve higher unit operating profit. Advantages are higher price (marginal profit) and lower advertising and distribution unit expenditure.
3. How to use the model for analysis?
(1) Evaluate the business prospects. BCG uses the index of "market growth rate" to express its development prospect. The data of this step can be extracted from the business analysis system of the enterprise.
(2) Evaluate the competitive position of various businesses. BCG uses the index of "relative market share" to express its competitiveness. This step requires market research to obtain relatively accurate data. The formula is to divide the income of a unit by the income of its biggest competitor.
(3) Indicate the positions of various businesses on the BCG matrix diagram. The specific method is to draw a circle with the coordinate point of the business on the two-dimensional coordinate as the center, and the size of the circle represents the sales volume of each business of the enterprise.
In this step, the company can diagnose whether its business portfolio is healthy. An unbalanced business combination is that there are too many dog or problem businesses, or too few star and Taurus businesses. For example, it is impossible to invest all three problematic businesses, and only one or two of them can be selected to concentrate on investment and development; There is only one cash cow business, which shows that the financial situation is very fragile, and there are two thin dog businesses, which have a heavy burden.
(4) Determine a standard line of "market growth rate" on the vertical axis, thus dividing "market growth rate" into two regions: high and low.
There are two scientific methods:
A the dividing point is the average growth rate of the industry market.
B The dividing point is the (weighted) average market growth rate of various products.
It should be noted that the definition of high market growth is that the annual sales growth rate is at least 10% (excluding inflation).
(5) Determine a standard line of "relative market share" on the abscissa, so as to divide "relative market share" into high and low areas.
Bruce of BCG thinks this threshold should be 2. He believes that "between any two competitors, the market share of 2 pairs 1 seems to be an equilibrium point. At this equilibrium point, no matter which competitor wants to increase or decrease the market share, it is unrealistic and not worth the candle. This is an empirical conclusion drawn through observation. " In another article in the same year, Bruce said more clearly: "A star's market share must be twice that of its next competitor, otherwise its superficial performance is just an illusion." According to Bruce's point of view, if the market share ratio is less than 2, the competitive position will be unstable, and enterprises will not be able to recover cash, otherwise their position will be difficult to maintain. However, in the actual commercial market, it is extremely rare that the market share of a market leader is twice that of its competitors. Therefore, just like the standard line determination of market growth rate above, because the rating level is too broad, two or more different businesses may be located in a quadrant or middle area of the matrix, and it is difficult to determine which strategy to use. Therefore, when dividing the standard line, we should take as much information as possible, analyze it carefully, and modify these numerical ranges according to the actual situation in application. Moreover, we should not only pay attention to the existing position of the service in the BCG matrix diagram, but also pay attention to the historical movement trajectory within a period of time. Every enterprise should review the situation of last year, the year before last or even the year before last to refer to the determination of the standard line.
A relatively simple method is that a high market share means that the business is the leading market share in the industry; It should be noted that when this enterprise is the market leader, the "biggest competitor" here is the second-ranked enterprise in the industry.
4. Limitations of 4.BCG matrix
Kearney Consulting's evaluation of the limitations of BCG matrix only assumes that the company's business development depends on internal financing, without considering external financing. BCG does not consider raising funds by borrowing.
On the other hand, BCG also assumes that these businesses are independent, but the businesses of many companies are closely related. For example, Taurus business and thin dog business are complementary business combinations. If thin dog business is abandoned, Taurus business will also be affected.
In fact, many articles have made a lot of comments on BCG matrix. I can list some of them: the premise of selling the "thin dog" business is that the thin dog division can be sold, but who will take over when the whole industry loses money; BCG is not the way to maximize profits; The relationship between market share and profit rate is not very fixed; BCG does not attach importance to the comprehensive effect, and many organizations will resist the reorganization of SBU (Strategic Division) when BCG is implemented. Manufacturers are not told how to find new investment opportunities. ...
In order to overcome the shortcomings of BCG matrix, Wang Cheng, a teacher of Kearney, put forward in two articles that replacing market share with customer share, pursuing customer share and making customers make more contributions can effectively solve the problem of linking all services in BCG matrix method. For example, when businesses belong to the same customer, the relationships between hotels and parks, current deposits and time deposits, credit, mortgage loans and other businesses are often related. This may be a good method, but it seems difficult to count the number of customers without counting the sales of manufacturers in the industry.
Finally, regarding market share, Porter's works have already said that scale is not a sufficient condition to form a competitive advantage, but differentiation is. The assumption behind BCG is "cost leadership strategy". When an enterprise is ready to adopt (or is implementing) the cost leadership strategy in various businesses, it can consider adopting BCG, but if an enterprise is ready to adopt the differentiation strategy in some businesses, it cannot adopt BCG. Scale can indeed reduce certain costs, but it is based on a mature market operation environment. In the case that the logistics and marketing modes in China are underdeveloped and immature, the innovation of logistics and marketing modes can often reduce more costs than production.