What is a cash cow?
There are four quadrants in the growth-share in the BGC matrix. A cash cow is one of them, and it represents a product, product line, or even a company with a massive market share inside a mature industry. We can use cash cows as a reference to businesses, products, assets, and the likes. As soon as we acquire and pay, there will be consistent cash flow over the life span of anything that we just enumerated earlier.
Why was it called cash cow?
Yes, it sounds interesting but do you want to know why it was named as such? We know that dairy cows produce milk. We benefit a lot from them, and that is not all. The best thing about these cows is they do not require a lot of our attention and maintenance. So, are you getting an idea why the name is as such? Cash cows refer to businesses that are low maintenance. While the ones we have today require only a minimal investment capital, they generate positive cash flows. They can be allocated to various divisions within the corporation. These investments only pose minimal risks, and they provide high rewards.
BCG matrix and their quadrants
As we mentioned earlier, there are four quadrants in this BGC matrix. BGC stands for Boston Consulting Group, and a cash cow is a business unit organization made in the 70s. We can also hear other people referring to BGC matrix as Boston box or Boston grid. It puts an organization’s business or products into any of the four categories. We have the star, dog, question, mark, and cash cow. The names might sound unusual and irrelevant to businesses, but they help firms understand their status in terms of market shares and industry growth rate. In a sense, it is a comparative analysis of a business’s potential. It also evaluates the market and industry.
We said that the BGC matrix places a business or its products in any of the four categories. But some companies, especially the massive corporations, understand that they fall under two categories. We know that product lines come at different points in the product life cycle. Most of the time, cash cows and stars are the ones that complement each other. On the other hand, dogs and question marks do not use their resources well.
Let us cite an example.
Businesses in a mature and slow-growing industry are said to be cash cows. Their market shares are massive, but they only need minimal investment. While we think that it’s too good to be true, there are existing examples. For example, everybody knows Apple’s iPhones. Their returns are considerably more significant than the market growth rate. Hence, Apple is more than capable of investing that excess money to make more products. Cash cow companies give dividends, and they can even increase these because they have massive free cash flows. We can calculate these if we deduct capital expenditures from high-profit margins. Cash cow companies do not really need more capital to grow. They are mature, and their marking is high-profit margin and strong cash flow.