EFFECTS OF SINGLE PRODUCT

DOMINATION IN FIRMS

An analytical study of negative possibilities

Alexis Foundation

NiteshDubey, Nikhil Yadav

ABSTRACT

This study examines the effect of single

product dominationin firms. In this

paper, we analyze the possible, negative

effects of having an over-performing

product. In other words, a product that

dominates its sister products when

compared in terms of revenue, unit

production, market share and brand

identity.Colloquially, such over-

performing products have come to be

known as ‘cash cows’. Throughout this

paper, we have used this term

interchangeably. A detailed case study on

Dell Inc. has been conducted.

Furthermore, phenomena including

consumer satisfaction, ‘cash cow

diseases’, stifling of innovation, cash

mismanagements, increased risk and

malpractices in cash cow sustenance have

been briefly explored across various

business sectors. This study is an

analytical exercise which enumerates and

explores different ill possibilities of above

characteristics. Reserving personal

opinion, we would humbly like to declare

that we do not establish any certainties to

these possibilities.

Terms R&D – Research and Development

I. INTRODUCTION

A cash cow refers to a business, product or

an asset that once acquired and paid off,

produces consistent cash flow over its

lifespan. This term is a metaphor for a dairy

cow that produces milk over the course of its

life and requires little maintenance. A dairy

cow is an example of a cash cow, as after

the initial capital outlay has been paid off,

the animal continues to produce milk for

many years to come.

Any organization wants its products to

dominate from the similar products of other

organizations but when this need for

dominating products faces competition then

in most of the cases the organization starts

focusing on the product which produces the

maximum profit, being the organization’s

cash cow. This has significant advantages

like the improvement in the quality of the

product, development of better version of

the product etc. This provides a vast set of

options to the customers. At the same time it

has some serious disadvantages also. The

organization starts facing problems like

single product dependence and any change

in market might result in huge drops in

revenue. Focusing on a single product has

made a few companies just a talk of history.

Dell Inc. is one such company which has a

cash-cow, its laptops and desktops, which

made it the leading PC and laptop vendor on

the globe. Dell was atop the technology

industry for years. Dell showed the world

how computing was done and what

customers really wanted. Instead of

innovation in lab, Dell did innovations in the

supply chain. Dell fell quickly to a problem

common to those on top, the industry

changed and Dell failed to change quickly

enough to meet the expectations of

consumers. Dell has lost its market share

and title as “Most Favoured Hardware”

company to HP and the company's profits

plunged 54 percent between 2008 and 2009.

With time and with rapid decrease in laptop

sales due to advancement in tablets and

smartphones the usage of PCs have fallen

down exponentially and this provoked

leading PCs makers to switch to tablets and

smartphones.

II. COMPANY TYPE

A typical growth company will have

negative free cash flows or free cash flows

that show temporary high growth. Reason

for this first indicator is usually that

investments have been made to expand the

capacity in a firm, resulting in less available

cash. Growth in the available free cash flow

occurs because the growth in the company is

a success and thus more cash is drawn to the

company.

The earnings in a growth company also will

have a high growth rate and long term

earnings expectations are high. Even though

the free cash flows are negative, the return

on invested capital should still be positive

and strong. This can be explained very

easily; the company will have to invest a

certain amount of money (resulting in a

negative free cash flow) to expand or

facilitate the growth, which will only after

time pay off since results will never be

achieved in a short amount of time. Another

feature of a growth company is the fact that

EVA (economic value added) should be

positive and strong. Hax (1983) shows the

different cycles that a business goes through

during its existence. This is called business

life-cycle, which shows that a business

typically evolves through four stages:

Source :Hax, A., C. and Majluf, N., S.

(1983)

Legend

1. Embryonic

2. Growth

3. Maturity

4. Ageing

Cash cow companies on the other hand are a

totally different type of company. As

indicated in, cash cow companies are in their

maturity phase and are typically

characterized by a stable market share and

institutionalized routines and rules. Of

course, growth will also be facilitated in this

type of company, but the amount of change

and growth will be much less than in a

growth company.

Goals of the cash cow company are more

clearly set and the internal environment is

much more stable and clearer to understand.

To explain what is meant with a ‘cash cow’,

the BCG-matrix is used to indicate clearly

what its typical characteristics are.

Source :Hax, A., C. and Majluf, N., S.

(1983)

The BCG Matrix is an early (1970) strategic

portfolio management tool created by the

Boston Consulting Group. The idea behind

it is that to ensure long-term value creation,

a company should have a portfolio of

products that contains both high-growth

products in need of cash inputs and low-

growth products that generate a lot of cash.

Placing the products of a strategic business

unit in 2 dimensions (market growth and

market share) creates 4 quadrants and

corresponding investment strategies:

1. Cash Cows (low market growth, high

market share)

2. Stars (high market growth, high

market share)

3. Question Marks (high market

growth, low market share)

4. Dogs (low market growth, low

market share)

Every business wants to have a cash cow, or

a product or service that brings in plenty of

money with a minimum of outlay. Having a

successful cash cow allows businesses to

finance experimentation and innovation, and

to maintain healthy margins. The most

effective strategy for your company's cash

cow depends on the nature of the product or

service, as well as your overall goals.

III. CASE STUDY ON DELL INC.

Source: Bloomberg

The objective of this case study is to analyze

Dell Inc. and study the downfall of the most

powerful company of Silicon Valley, due to

its dependence on its single profit making

products, from soaring shares to a

unexpectedly low value of shares (In Dell’s

case, its outstanding shares, once worth

nearly $60, are being purchased by its

founder and Silver Lake for $1 3.65 apiece).

Dell’s Cash-Cow

A visit to Dell’s website would show that

the only items present there are desktops,

laptops and few other supplies. Dell

generates maximum profit from shipping

PCs. Having a cash-cow has made Dell

made a multi-billion company but has also

made it vulnerable to changes in market and

has made it over-dependent on the sales of

PCs only. At its height in late 1999, Dell

was the world's largest PC maker. The

Round Rock, TX-based Company had a

market cap of $122 billion and the stock

traded at $50 a share. But as PC sales have

fallen in the wake of Apple Inc.'s iPhone in

2007 and iPad in 2010, Dell has suffered. By

last November, DELL was trading in the $9

range and its market cap was about $17

billion. Thus, dell could not adapt the

changes in the market and it profit slid

significantly. Dell’s cash-cow was affected

by the following factors:

Rise of Apple

Dell’s business was operating a

manufacturing and supply network like

clockwork—until Apple came along and

forced the industry to think about design too.

Steve Jobs and his team innovated iPad and

the world saw a revolution. Unlike others,

Steve Jobs believed on iPad and so did the

15 million customers of the first generation

of iPad. Since then tablets from Apple,

Samsung, Amazon, Acer and others have

simply exploded. Analyst firm Gartner

recently confirmed what we all knew

already: that tablets are eating into PC sales.

The firm said in the fourth quarter of last

year, global PC shipments declined 4.9 per

cent.

Source: Student Monitor

Dramatic Rise of the Tablet

With time and with rapid decrease in laptop

sales due to advancement in tablets and

smart phones the usage of PCs have fallen

down exponentially and this provoked

leading PCs makers to switch to tablets and

smart phones. The sales of tablets increased

exponentially in recent years.In the fourth

quarter of 2012, tablets sales reached 52.5

million units, double the number from the

same period a year earlier. Meanwhile, PC

sales fell 6.4% year over year to 89.8 million

units. As per a research by NPD, more than

240 million tablets would be shipped

worldwide in 2013, clearly surpassing the

PC notebook sales which are projected to be

204 million. This will happen for the first

time.

Source: NPD

Competition in the PC World

With the decrease in worldwide sales of PC,

Dell also faced competition from HP and

Lenovo who became the number one and

number two PC suppliers on the globe.Since

the inception, Dell worked on its sole

innovation which was its highly efficient

supply chain but as Lenovo and Acer also

started same supply chain, Dell’s profit

suffered badly resulting in profit falling to

47%. Meanwhile, HP grew sales by

23.8%.In 2006, Dell relinquished the title of

world’s biggest computer maker to HP in

2006 and has since fallen behind China’s

Lenovo Group Ltd. and this was a

competitive advantage as Dell’s 66%

revenue came from selling personal

computers.

Source: IDC worldwide quarterly PC tracker

Negative Impact on Other Products

Dell continued making high profit margins

in PC market and failed repeatedly in other

emerging markets. Dell’s products like Dell

Adamo XPS-2010, Dell DJ Ditty-2005, Dell

DJ-2003 and Dell Adamo-2009 failed to

create any mark in market. Reluctant to

develop its R&D, Dell could not provide the

next big thing to customers. Dell’s other

products had poor design,

unfriendlyinterface, and nothing new to

offer. When other companies provided smart

phones of Android 2.2 and Android 2.1, Dell

launched its Smartphone Aero with Android

1.5 and tablet Streak with Android 1.6.

Dell’s streak has a pad of 5 inches whereas

iPad offered a screen of 9.7. Thus, these

outdated products were not welcomed by the

market for obvious reasons. Dell Venue Pro

– 2010, a 4.1-inch Windows Phone 7 device,

had a sloppy launch with several delays and

it received a bad response from customers.

Dell’s continued failure drew attention of

analysts and they said, “Dell is a hardware

manufacturer, not a software firm”.

R&D

Dell spends less on R&D. Dell believes that

it’s a misconception that the company who

spent heavily on R&D are successful. Dell

did innovations in supply chain and

logistics, manufacturing and distribution,

and sales and services. Instead of creating

new products Dell developed a new and

efficient supply chain which ultimately

made it the best PC vendor. When the

emerging companies like Lenovo and Acer

also provided the same supply chain then

Dell was no longer unique and its profits

were flattened. Dell could not see where the

market was heading and so did its suppliers,

Microsoft and Intel. So with less efficient

R&D, Dell failed to think beyond PCs and

even when it tried its non PC ventures then

also it produced devices which were a

complete bizarre. Instead of giving the much

needed change from the Dell, its R&D made

products like Della, this was a laptop which

was exclusively for ladies and its marketing

and publicity presented as of Dell was

selling a purse. Dell made an entire section

for ladies on its website but after poor critic

and customer response, it pulled back this

concept in eleven days after Della’s release.

Over-Dependency

Dell solely depended on desktops and PCs

and kept on working on improving the

supply chain. In 1990s and early 2000s, this

helped it as everyone wanted a PC. Later the

interest shifted to tablets and smart-phones.

Dell reluctantly shifted to tablets and smart-

phones but it was not persistent in the

emerging markets and with the initial

failures, it left the tablets and smart-phones

market in order to focus on its core product,

the laptops and desktops. As people were

not purchasing PCs so even being the best

PC maker did not give an edge to Dell.

IV. EFFECT ON CONSUMER

SATISFACTION

Entertainment publishers release sequels and

franchise additions of sub-par quality just to

cash in on the franchise. Significant

stagnation in popular titles shows signs that

the market is being milked for cash, which

leaves consumers highly

disconsolate.Another problem with relying

on cash-cow franchising is that the

investors/backers will, over time, consent

less and less to backing different/original

projects, leading to the stagnation and death

of other markets despite that dominant

market remaining, on paper, successful. This

is based on the age old adage "Don't fix

what isn't broken". Without risk, there is

little or no innovation, and the market

eventually shrinks as demand is satisfied, so

to speak.

Most cash-cows tend to be heavily reliant on

their name to sell the product. Such

products, especially in the gaming industry,

usually portray these few common signs:

1. Annual releases (particularly of

spontaneous franchises); if a new

version of the game comes out every

year; chances are it's a cash cow.

2. Constant minor improvements, but

almost never anything ground

breaking. In line with safe bets, this

is usually a reason of why cash cows

are pursued.

3. Sequels to surprise product

performances. This can also apply to

creating sequels to pre-planned

trilogies which have already ended.

V. ‘CASH COW DISEASE’ – A

PERSPECTIVE

Cash cow disease arises when a public

company has a small number of products

that generate the lion's share of profits, but

lacks the discipline to return those profits to

the shareholders. The disease can progress

for years or even decades, simply because

the cash cow products produce enough

massive revenues to distract shareholders

from the smaller (but still massive) amounts

of waste.For example, with Microsoft,

Windows and Office carry the company,

roughly speaking, allows the company to

lose funds on failed projects without

incurring any serious backlash from

stockholders. Without cash cows, Microsoft

would not have launched such new

products.Cash cow disease costs

stockholders untold funds.

In a lucid article by Ron Burk, upon the

recent product retraction of Google Wave,

he states how Google has become fully

infected with the same protracted, end-stage

wasting disease that has consumed

Microsoft for years.Meanwhile, at Google,

the cash cow is search-driven advertising.

That allows the company to encourage

engineers’to spend a sizable quota of their

time on "projects" like Google Wave. Just

like Microsoft stockholders, Google

stockholders are expected to feel happy

about the overall company profit margin and

not inquire too closely into the massive

amount of wastage.

The problem with Microsoft's and Google’s

forays into areas disparate from their core

competencies is the lack of discipline. When

you have a cash cow, you lose the discipline

of having to make a good product and pay

attention to your customers. Despite having

the smartest minds in the business; cash cow

disease keeps that brainpower derailed into

projects that don't have to stand the test of

the marketplace.Google offer their own

unique twist on cash cow disease. Since

their core competency is turning data mining

into advertising, they can actually claim that

negative profits are the route to success.

Thus, they can pay cell makers to adopt

Android, and pay customers to use their

analytic purchase options. Potential future

advertising revenues can be used on any

revenue-negative scheme to make it look

brilliant.

VI. STIFLING INNOVATION AND

BRAIN DRAIN

The net result of cash cow disease is under-

utilisation of brainpower, and a decrease in

useful innovation. A mere expression of

interest by one of these giants in some

particular burgeoning market is enough to

dry up investment funds for any small

company interested in the same market. For

every failed Kin, there are multiple Dangers

that could have thrived. For every

magnificent Google Wave flop, there are

multiple innovative new apps that could

have been created (by the same people

working in smaller companies).

The brain drain is also significant. Both

Microsoft and Google would be

significantly more profitable if they reduce

staff levels currently assigned to non-cash

cow projects; but there would also be

significantly more developers in the small-

company milieu of software. Small

companies are actually discriminated against

in important ways. Big firms can afford

lobbyists, patent suites as weapons,tax

breaks with local governments, demands of

infrastructure changes etc., which are

impossible for small companies. The

smallest companies (sole proprietors, where

much of true innovation begins) are left at a

disadvantage.

The cash cow disease even significantly

warps the ability of the rest of the market to

innovate. Thus, the dream of many small

software companies is completely divorced

from any thought of actually staying in

business and providing a good product at a

good price to customers for years. Instead,

the dream is to build something as quickly

as possible that one of the cash cow

companies will be interested in buying,

leaving yet another half-baked product

bringing down the intrinsic commodity

values.

VII. TRADE OFF IN

CONGLOMERATES

Conglomerates are companies that either

partially or fully own a number of other

companies. Vast empires, such as General

Electric (NYSE:GE) and Berkshire

Hathaway (NYSE:BRK.A), were built up

over many years with interests ranging from

jet engine technology to jewelry. Such

companies diversify into areas beyond their

core competencies. A conglomerate can

often be an inefficient affair. No matter the

management expertise, its energies and

resources will be split over numerous

businesses, which may or may not be

synergistic. While the counter-cyclical

argument holds, there is also the risk that

management will keep hold of businesses

with poor performance, hoping to ride the

cycle. Ultimately, lower-valued businesses

prevent the value of higher-valued

businesses from being fully realized in the

share price.

VIII. CASH MISMANAGEMENT

Over the past few years, many companies

have turned ultra-conservative and, instead

of diverting majority funds in areas like

M&A and R&D, are structuringlarge cash

funds. This is happening because many

firms saw less liquid and highly leveraged

(operating and financial leverage)

competitors go bankrupt during the tech

implosion and financial crash. By hoarding

cash, firmshave made themselves more

resilient to short-term funding crises and

revenue shocks.

However, cash stored beyond the needs of a

potential funding crisis translates into

inefficient use of capital.Inefficient capital

allocation effectively means that these

companies are potentially suppressing stock

returns by 'investing' in assets that don't

cover the firm's cost of capital [i.e. negative

net present value (NPV) investments], like

short-term deposits and money market

securities. Often, firms hoard cash rather

than redistribute it to shareholders, so they

can build corporate empires through

unnecessary diversification, expansion or

M&A. Unfortunately, these imperialistic

endeavors frequently end up eroding

shareholder value.

IX. OCCURRENCE OF

MALPRACTICES IN SUSTENANCE

The definition of cash cows has expanded

into many sensitive areas. For instance,

many argue the relatively relaxed norms in

case of international students, as they are

claimed to be seen as cash cows by

institutions. Another example is that of

Orinase. Sales of Orinase took off on the

back of a marketing of raised blood sugar

levels as renamed Type 2 Diabetes.

Notwithstanding the graveness of the

disorder, such marketing campaigns carry a

distinctly opportune favour.

In order to maintain the illusion of their

product efficiency, Big Pharmas continues

to ignore alternative medicine andderived

proven cures. The world’s major drug

manufacturers are spending more on

promoting their drugs than they are on

researching them, a report by the Consumers

International (CI), the international

federation of consumer groups, has

found.The drug companies are:

1. Promoting their products through

patients’ groups, students and chat-

rooms to bypass a ban on direct

advertising to the public and to

‘create a subtle need among

consumers to demand drugs for the

conditions’.

2. Marketing which involvesthe

provision of disease information via

general health pamphlets and

magazine articles on ‘modern’

lifestyle conditions, such as stress

and eating habits, to encourage

people to ask their doctors for

medicines.

3. Suppressing the doubtful opinions

and reviews of their products by

relevant field experts.

A natural molecule called laetrile (a

molecule found in apple seeds, apricot

seeds, etc.) can target and kill cancer cells.

Dr. Philip Binzel, M.D., and Dr. John

Richardson, M.D. both used liquid laetrile in

cancer treatment. In the 1920s Johanna

Brandt had demonstrated the potency of

purple grapes in cancer treatment. Her

treatment was ignored by the medical

community long before chemotherapy was

introduced. It is now known that purple

grapes have at least 12 molecules that can

safely kill cancer cells. Dr. Royal Rife, a

microbiologist, made strides in reverting

cancer cells into normal cells in the 1930s,

long before the discovery of DNA. After a

pressurized cessation, Rife's technology has

now been replicated using modern

electronics.

X. CORRECT APPROACH TO R&D

The company Apple builds products with

relatively large profit margins. If a

developmental idea does not meet such high

standards, no resources are wasted on

it.Demanding money for products gives a

flow of hard, precious information on their

ground workability.Mistakes are made, but

there's a tight feedback loop that catches

them early.

Firms must be rigorous about demanding

money from their users, and so they pay

close attention to what people in the real

world actually want. This helps in avoiding

the cash cow disease.The problem with this

kind of thinking is that in order to get the

corporate ladder to invest in an idea, there is

a need to demonstrate its prospective high

returns, which is extremely hard to do in

technology, particularly in software. The

largest ideas almost always start as some

startup whose market turns out to be much

larger than originally assumed. In the early

days, Google was a B2B product to provide

backend search for large sites like AOL. In

fact, IBM had famously asked Microsoft to

develop an operating system for them

because "there was no money in it".

The fix is two-fold. First, since prospects of

an idea always carry some uncertainty,

grass roots innovationshould flourish within

organizations by making smaller

investments with smaller expectations.

Second, firms should have a substantial

venture capital arm. Google has a great

venture capital arm. They should cultivate

and encourage these investments to grow in

external startups which are best structured to

succeed (and fail) by market forces. By

using their own venture capital arms, they

benefit from the smaller successes and they

are first in on the developing "big" stories

and better positioned to decide which

companies to strategically purchase and

actually bring into the main fold of the

companies.

Big firms should think of themselves as

managers of innovation enabling software

which would change their vision of

themselves to software incubators and the

path to market scale for a young company,

and which would change investment

strategies and channel funds into the

upcoming projects.

CONLUSION

Some effects of single product domination

in firms were explored. Possible ill effects of

cash cows were enumerated and discussed.

A comprehensive case study on Dell Inc.

was conducted. Points including cash cow,

competition, negative impact on other

products, R&D and over-dependency were

discussed. Furthermore, phenomena

including consumer satisfaction, ‘cash cow

diseases’, stifling of innovation, cash

mismanagements, increased risk and

malpractices in sustenance of cash cows

were examined. A corrective approach to

R&D was suggested and an analytical study

on these lines was completed.

REFERENCES

Hax, A., C. and Majluf, N., S.

(1983). “The use of the growth-share

matrix in strategic planning,

Interfaces”, 13, (1), 46-60

Hannah Weerman (2010) (5733642).

“Is there more earnings management

in growing or in cash cow

companies?”, FEB, University of

Amsterdam.

Ron Burk (2010). “Cash Cow

Disease: The Cognitive Decline of

Microsoft and Google”.

(http://ronburk.blogspot.in/2010/08/c

ash-cow-disease-cognitive-decline-

of.html)