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Cash Cow

What is Cash Cow?

  • Cash cow refers to a part of the growth matrix of the Boston Consulting Group (BCG) wherein the cash cow group is an asset representing a larger market share but with a low-growth rate which would lead to a consistent stream of cash flows through the entire lifespan of the Company brand, business unit, product, or the entire firm.
  • Like the dairy cow provides daily milk over the lifespan of the cow and with little care. Similarly, if a business, asset, or product is acquired for once, it will provide a consistent cash flow.
  • The subsequent investment in such a business is lower as compared to the initial outlay. Once the initial investment is recovered, the cash cow’s cash is utilized for further investments, if any.
  • There are 4 stages in BCG Matrix, viz., stars, question marks, cash cow, and dogs. The Cash cow business is a market leader in the industry with a higher relative market share but a lower growth rate. This is the reason why cash cow companies are in the maturity stage of the business life cycle:

4 stages in BCG Matrix

Source: https://www.business-to-you.com/bcg-matrix/

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Example of Cash Cow

  • As explained above, it is relevant only in the case of mature industries which are steadily growing. Hence, we can consider the example of Marks & Spencer for the BCG matrix. The Company is into the retail segment and offers a wide range of products with different lines of supply.
  • Another example is Microsoft. The Company can provide consistent returns. Every year, the sales grow steadily due to the occupied market share and consistent sales. Microsoft is a mature company, and it does not need funds to grow. The earned cash flows normally suffice the capital spending of the Company.
  • More examples of cash cow can be Coca-Cola classic, Procter & Gamble, Apple iPods, etc.

Cash Cow Matrix

Please observe the timeline graph presented under the heading “what is cash cow” together with this heading. The cash cow matrix is divided into four parts, namely Question marks, Stars, Dogs, and Cash cows.

cash cow matrix

Source: https://www.scienceabc.com/social-science/what-is-a-cash-cow-bcg-matrix.html

Differentiating features of each category under the BCG Matrix

Category

Explanation
Question Marks
  • These companies or business units have high growth potentials but with a lower market share. The lower market share is also uncertain.
  • This segment requires high investment outlays. As a result, it has a lower quantum of cash generation.
  • As the sign suggests, these segments leave us with the question mark of what’s next! It may happen that the product line would convert into stars or directly into dogs.
  • The success rates of product lines in such a category are questionable. Hence, start-up entities would generally be categorized here.
  • Apple TV can come under this category.
Stars
  • These companies or business units have high growth and high market share. However, during the higher market shares, these units face a lot of competition.
  • They would, however, require a huge outlay of investments to retain or further increase their market share.
  • As the sign suggests, everything is best in this segment and hence called the star category.
  • Apple’s iPhone can come under this category.
  • Also, the Kinley product of Coca-Cola is categorized here. Due to rising population levels, this product would provide consistent returns on an international level.
Cash Cows
  • These are low-growth business units with higher market shares. The growth rate is steady, but such business units ensure the highest profitability.
  • These are market leaders and provide a higher return on assets which is greater than even the market growth rate. The required investment is low other than the initial outlay.
  • The cash flows milked out from the cash cow units can be used to covert the question mark business units into stars.
  • Apple’s MacBook can be treated as a cash cow.
Dogs
  • These are low profitable business units with lower growth and lower market share.
  • As the symbol suggests, it is a sleeping dog with lower concerns about market demand and expectations.
  • These are called cash traps with no future ahead.

How to Calculate BCG Matrix?

Step 1: Define the product or business unit or firm or brand

Step 2: Identify the applicable market to the said product or single business unit, or entire firm

Step 3: Calculate the relative market share using the formula market share of the target product divided by the market share of the rival entity in the same market. The answer would be in percentages here. Also, find the growth rate of each category of the market share.

Step 4: Find out the estimated growth rate of the overall market.

Step 5: On the X-axis, plot the figures for the overall market rate. On the Y-axis plot is the relative market share.

Advantages

  • The Company or business unit under the cash cow category grows steadily, providing consistent cash flows to the Company.
  • The cash reserves of the Company are increasing. As a result, it provides the Company with an extra cushion for capital spending in the future.
  • An Increase in market share represents an increase in the confidence of the customers.
  • Subsequent investments are lower.
  • The Competition is already reduced when the business unit converts from star category to a cash cow.

Disadvantages

  • The profits will grow at a slower rate as compared to companies in the star category.
  • In case the product of the cash cow unit becomes outdated or off-market, the business unit will start its shake-out phase and thereby moving to the dog category.
  • The Company has to strive hard to maintain the quality and delivery so that consistent market share is retained every year.
  • A higher rate of growth in sales is not expected.

Key Takeaway

  • A Cash cow is an asset representing a larger market share. It has a low-growth rate with a consistent stream of cashflows.
  • A Cash cow may be the Company’s brand, a business unit, a product, or the entire firm itself.
  • Similar to a dairy cow, if a business, asset, or product is acquired for once, it will provide consistent cash flows.
  • The subsequent investment in the cash cow is lower as compared to the initial outlay.
  • There are 4 stages in BCG Matrix, viz., stars, question marks, cash cow, and dogs.

Conclusion

Cash cows are essential to ensure consistent cash flows in a business. Downfall in one business segment can be accommodated by using the cash generated from cash cows. However, Company should create enter into different ventures, which would be under the question mark category by using the cash from cash cows.

Recommended Articles

This is a guide to Cash Cow. Here we also discuss the definition, examples, and matrix along with the advantages and disadvantages. You may also have a look at the following articles to learn more –

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