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The Cash Cow is a division of the Boston Consulting Group’s growth matrix that represents a division with a large market share in a low-growth industry. It is often referred to as an asset or a business. As it will continue to generate consistent cash flow once it is paid off.
Description: A Cash Cow is a business or product that generates a lot of revenue with little growth. It usually has a higher return than the market growth rate. A company’s initial investment is all that is needed to get the business up and running. Once the company has recovered this investment, no additional funds are required to keep the business growing.
The term “cash cow” is used in the Boston Consulting Group (BCG) matrix. The growth-share matrix model dictates that a business can either become a cash cow or a dog depending on its performance in the growth stage. A cash cow is a market leader with a high growth rate. While a dog represents a low market share and a low growth rate.
The cash generated from cash cows can be used to fund other product portfolios of the business. Such as research and development, market share growth, or servicing corporate debt. Which can reduce the overall debt burden on the company.
The company can also use the cash to pay dividends to shareholders as well as buy back shares. Cash cows tend to have a slow growth rate, but they are typically market leaders in the industry where there are a lot of entry barriers. This means that there will be less competition.
- A cash cow is a business or unit that will generate reliable cash flow once it has been purchased.
- A cash cow is one of the four quadrants in the BCG matrix, which looks at the value of different units within a corporation.
- Cash cows provide stability for mature, slow-growing industries, have a large share of the market, and require little investment to stay afloat.
Understanding Cash Cows
A cash cow is a business that requires little to no maintenance and produces income steadily over time. Modern-day cash cows require little investment capital and provide positive cash flows year after year. Which can be allocated to other divisions within a corporation. They are low-risk, high-reward investments.
The BCG matrix is a business unit organization method that was introduced by the Boston Consulting Group in the early 1970s. It is made up of four quadrants, one of which is cash cows. The BCG matrix is a tool used by businesses to assess which products or services are most profitable. It places them into one of four categories: star, question mark, dog, and cash cow. The matrix is a valuable tool for businesses to gauge their market share and industry growth rate. It provides a comparative analysis of a business’s potential and assesses the industry and market.
Some businesses, especially large corporations, have products that don’t fit neatly into one category. This is especially true for product lines that are at different stages in the product life-cycle. While cash cows and stars tend to work well together, dogs and question marks are not as efficient with resources.
A cash cow is a business, product, or asset that generates reliable cash flow over its lifespan. It can also refer to one of the four quadrants in the BCG Matrix, a business unit organization strategy.
Cash Cow Example
A company or business unit that is a cash cow is one that is in a mature, slow-growth industry with a large share of the market. These companies require little investment to maintain their dominance in the market. The iPhone is a perfect example of 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.
Microsoft (MSFT) and Intel (INTL) are cash cows that provide dividends and have the capacity to increase their dividend due to their ample free cash flows. Which are calculated as cash flows from operations minus capital expenditures. Companies that are mature and have strong cash flows typically don’t need as much capital to grow. These companies tend to have high profit margins and be well-established in their industry.
In the BCG matrix, a star is a company or business unit that has a high market share in a high-growth market. Stars require large capital outlays but can generate significant cash. With the right strategy, stars can turn into cash cows.
Question marks represent 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 transition into any of the other quadrants.
Finally, 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 to salvage the organization.