To: Tom who wrote (1509 ) 4/2/1998 12:51:00 PM From: William Shen Read Replies (2) | Respond to
Tom: Thanks for your message. I agree to a certain extent on your message. However, I would like to point out the trade-off between cash flow and earning growth depends on the industry you look at. I am not sure if you are familiar with the growth share matrix from the Boston Consulting group. What this matrix (by the way, this has become the golden rule for corporate strategy development in corporate America) says is that cash cows (divisions and companies) which generate a lot of cash from operations are generally in low growth industries either by the very definition of the industry or because the product has already entered into maturity. No further investment is required, so just milk the business as hard as you can. You should certainly not expect a high earnings multiple for this type of business. On the other hand, there are stars which are in high growth markets which require a lot of investment to fuel the growth, beat the competition and hopefully emerge as the eventual industry leader. The idea is to use cash cows to fuel the growth of the stars.
