Cash cow

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iPods for sale in a Japanese 7-Eleven. 48% of Apple's revenue for the first quarter of 2007 was from iPod sales.

Cash cow, in business jargon, is a venture that generates a steady return of profits that far exceed the outlay of cash required to acquire or start it. Many businesses attempt to create or acquire such ventures, since they can be used to boost a company's overall income and to support less profitable endeavors.

Jargon is the specialized terminology associated with a particular area of activity. Jargon is normally employed in a particular communicative context and may not be well understood outside that context. The context is usually a particular occupation, but any ingroup can have jargon. The main trait that distinguishes jargon from the rest of a language is special vocabulary—including some words specific to it, and often different senses or meanings of words, that outgroups would tend to take in another sense—therefore misunderstanding that communication attempt. Jargon is sometimes understood as a form of technical slang and then distinguished from the official terminology used in a particular field of activity.

Contents

The term cash cow is a metaphor for a "dairy cow" used on farms to produce milk, offering a steady stream of income with little maintenance. [2]

Cash cows are products or services that have achieved market leader status, provide positive cash flows and a return on assets (ROA) that exceeds the market growth rate. The idea is that such products produce profits long after the initial investment has been recouped. By generating steady streams of income, cash cows help fund the overall growth of a company, their positive effects spilling over to other business units. Furthermore, companies can use them as leverage for future expansions, as lenders are more willing to lend money knowing that the debt will be serviced.

The return on assets (ROA) shows the percentage of how profitable a company's assets are in generating revenue.

Cash cows can be also used to buy back shares already on the market or increase the dividends paid to shareholders. They usually bring in cash for years, until new technology or shifting market preferences renders them obsolete.

Dividend payment made by a corporation to its shareholders, usually as a distribution of profits

A dividend is a payment made by a corporation to its shareholders, usually as a distribution of profits. When a corporation earns a profit or surplus, the corporation is able to re-invest the profit in the business and pay a proportion of the profit as a dividend to shareholders. Distribution to shareholders may be in cash or, if the corporation has a dividend reinvestment plan, the amount can be paid by the issue of further shares or share repurchase. When dividends are paid, shareholders typically must pay income taxes, and the corporation does not receive a corporate income tax deduction for the dividend payments.

Disadvantages

Cash cows can act as barriers to entry to the market for new products, as entrants need to invest heavily in order to achieve the brand awareness required to capture a significant share of the market away from the dominant players. [3] A higher pay out rate of earning in the form of share repurchase or cash/share dividend might also increase the risk of future dividend cut and is an indication of lack of growth opportunity.

In theories of competition in economics, a barrier to entry, or an economic barrier to entry, is a fixed cost that must be incurred by a new entrant, regardless of production or sales activities, into a market that incumbents do not have or have not had to incur.

Brand awareness refers to the extent to which customers are able to recall or recognise a brand. Brand awareness is a key consideration in consumer behavior, advertising management, brand management and strategy development. The consumer's ability to recognise or recall a brand is central to purchasing decision-making. Purchasing cannot proceed unless a consumer is first aware of a product category and a brand within that category. Awareness does not necessarily mean that the consumer must be able to recall a specific brand name, but he or she must be able to recall sufficient distinguishing features for purchasing to proceed. For instance, if a consumer asks her friend to buy her some gum in a "blue pack", the friend would be expected to know which gum to buy, even though neither friend can recall the precise brand name at the time.

Share repurchase is the re-acquisition by a company of its own stock. It represents a more flexible way of returning money to shareholders.

Since the business unit can maintain profits with little maintenance or investment, a cash cow can also be used to describe a profitable but complacent company or business unit.

In his book The Innovator's Dilemma , Clayton M. Christensen argues that listening to existing customers' concerns can prevent a highly successful business from innovating, resulting in smaller competitors eventually producing disruptive innovations. This sentiment is expressed in the business aphorism "If I had asked people what they wanted, they would have said faster horses", which is misattributed to Henry Ford, a pioneering manufacturer of the automobile. [4]

<i>The Innovators Dilemma</i> book by Clayton M. Christensen

The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail, generally referred to as The Innovator's Dilemma, first published in 1997, is the best-known work of the Harvard professor and businessman Clayton Christensen. It expands on the concept of disruptive technologies, a term he coined in a 1995 article Disruptive Technologies: Catching the Wave.

Clayton M. Christensen Mormon academic

Clayton Magleby Christensen is an American academic, business consultant, and religious leader who currently serves as the Kim B. Clark Professor of Business Administration at the Harvard Business School of Harvard University. He is best known for his theory of "disruptive innovation"—first introduced in his first book, The Innovator's Dilemma—which has been called the most influential business idea of the early 21st century.

In business theory, a disruptive innovation is an innovation that creates a new market and value network and eventually disrupts an existing market and value network, displacing established market-leading firms, products, and alliances. The term was defined and first analyzed by the American scholar Clayton M. Christensen and his collaborators beginning in 1995, and has been called the most influential business idea of the early 21st century.

Examples

Successful products that satisfy the criteria for cash cows include: the Ford Transit and Pickup Trucks, Kellogg's Corn Flakes, Coca-Cola, the iPod and iPhone lines. Airport hangars that have reverted to airport ownership are often referred to as cash cows. [5]

See also

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William Lazonick is an economist who studies innovation and competition in the global economy.

References

  1. Apple Reports First Quarter Results Archived 2011-05-21 at the Wayback Machine , Apple Inc. , 2007-01-17. Retrieved on 2007-02-17.
  2. Merriam Webster (http://www.merriam-webster.com/dictionary/milch%20cow)
  3. "Cash Cow in Marketing: Definition, Matrix & Examples". Study.com. Retrieved 19 August 2015.
  4. Henry Ford, Innovation, and That “Faster Horse” Quote
  5. "Boston Matrix - Cash Cows" . Retrieved 19 August 2015.