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:
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.
Differentiating features of each category under the BCG Matrix
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.
- 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.
- 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.
- 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.
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.
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 –