What Is a Cash Cow?
- A cash cow is a business or unit that, once it has been paid for, will produce steady cash flow over its lifespan.
- A cash cow is also one of four quadrants in the BCG matrix, which looks at the value of different units within a corporation.
- Cash cows are part of mature, slow-growing industries, have a large chunk of the market share and require minimal investment to thrive.
Understanding Cash Cows
A cash cow is a metaphor for a dairy cow that produces milk over the course of its life and requires little to no maintenance. The phrase is applied to a business that is also similarly low-maintenance. Modern-day cash cows require little investment capital and perennially provide positive cash flows, which can be allocated to other divisions within a corporation. They are low risk, high reward investments.
Cash cows are one of four quadrants in the BCG matrix, a business unit organization method introduced by the Boston Consulting Group in the early 1970s. The BCG matrix, also known as the Boston Box or Grid, places an organization's businesses or products into one of four categories: star, question mark, dog, and cash cow. The matrix helps firms understand where their business stands in terms of market share and industry growth rate. It serves as a comparative analysis of a business's potential and an evaluation of the industry and market.
However, some firms, especially large corporations, realize that businesses/products within their portfolio lie between two categories. This is especially true with product lines at different points in the product life-cycle. Cash cows and stars tend to complement each other, whereas dogs and question marks use resources less efficiently.
Cash Cow Example
A cash cow is a company or business unit in a mature slow-growth industry. Cash cows have a large share of the market and require little investment. For example, the iPhone is Apple's (AAPL) cash cow. Its return on assets is far greater than its market growth rate; as a result, Apple can invest the excess cash generated by the iPhone into other projects or products.
Cash cows, such as Microsoft (MSFT) and Intel (INTL), provide dividends and have the capacity to increase their dividend due to their ample free cash flows calculated as cash flows from operations minus capital expenditures. These companies are mature and do not need as much capital to grow. They are marked by high-profit margins and strong cash flows. Cash cows can also be slow-growth companies or business units with well-established brands in the industry.
In contrast to a cash cow, a star, in the BCG matrix, is a company or business unit that realizes a high market share in high-growth markets. Stars require large capital outlays but can generate significant cash. If a successful strategy is adopted, stars can morph into cash cows.
Question marks are the business units experiencing low market share in a high-growth industry. They require large amounts of cash to capture more of or sustain their position within the market. Depending on the strategy adopted by the firm, question marks can land in any of the other quadrants.
Lastly, dogs are the business units with low market shares in low-growth markets. There is no large investment requirement, and they don't generate large cash flows. Often, dogs are phased out in an effort to salvage the organization.
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