Overview
Cash cows are companies that have an established position within their markets, and are seeking to reap the rewards of that position. While they are in a sense in contrast to the play to win organization, being a cash cow does not mean the company is not playing to win. It means that they are playing to win within their current position. That is, they have staked out fertile ground and are not trying to expand into new positions.
As such cash cows are defensive in nature, aggressively fending off all competitors. They seek to keep expenses low, and try to return as much as possible in dividends (or share buybacks) to their shareholders.
Strategy
- Go After Competitors - because cash cows are not looking to move into new positions, it is imperative that they keep an eye out for competitors who may creep into their competitive space. When new entrants are identified, the company should take the steps necessary to protect position.
- Hedge out any Unnecessary Risks - the cash that the cash cow produces should not be endangered by an unnecessary risks. Any risks that are identified which are not core to the business should be hedged.
- Return Cash to Shareholders
- the company should aggressively create returns for shareholders through dividends or stock buybacks,
while still protecting itself from unnecessary risks. (see above) The company should not return more than it can
consistently return (that is, reducing dividends can be a negative signal to markets that can
create a large downward move in the stock price)
The company should maintain enough assets to weather any downturns or liquidity risks, and then return the excess to shareholders. (see working capital management)