Cash Cows vs. New Products, What Should Receive the Most resources Next Year?

Contributed by Niv Edward Caviar

One of the most difficult decisions facing managers is the best use of human, capital, and organizational resources to meet their company’s goals. Within an organization’s planning cycle, one of the most recurring decision points is whether firms should invest in current, stable, profit-producing products (Cash cows), or higher growth but riskier new products and new markets.

A firm’s intrinsic constraints are its resources. These include its management time, financial capital and reserves, employee time and effort, IP, and often overlooked investor expectations and goodwill. For-profit organizations generally try to deploy their resources in a manner to maximize profit streams.

We propose a framework for evaluating the decision of how much to invest between the Cash Cow Project and the New Product/Market.

Proposed Management Decision Framework:

  1. Economic: A Net Present Value for each Product should be considered. Theoretically the project with the highest Net Present Value should be prioritized.
    Also a simpler exercise should be a ROI return on investment calculation.
  2. Budgetary Constraints. Does the company have excess funding to pay for the new project? If so how much?
  3. Access to Capital. Does the company have access to capital sources that could be used to fund the new project?
  4. Expectations of Investors. Are the investors looking for current income, dividends, and near term cash flows? Alternatively are they looking for the company to grow in value and potential? Will they be patient?
  5. Mid- to Long-Term Company Goals. What is the long term strategy of the company? Is it just survival and focused on near term cash or is it looking to develop a broad array of products that will diversify and grow the firm?
  6. Competitive Defense and Differentiation. How long is the IP on the current product vs. the other products? Alternatively, if there is no IP what is the current competitive landscape and market share? How likely will it change in the future (with and without) the new product?
  7. Organizational Culture. Are employees and managers more interested in near term stability, or are they motivated by innovative ideas?

Try using this framework as a basis of decision making when allocating resources.

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