1. 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

2. 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

3. 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,

4. 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

5. 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

6. 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

7. 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,

8. 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

9. 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

10. 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/cash-cow-disease-cognitive-decline- of.html)