Since its introduction by management guru Peter F. Drucker (1909-) in the mid-1960s, the term "cash cow" has taken on a variety of related meanings. Drucker used the term to describe a business or product line with large market share in a stagnant or declining market. Consequently, Drucker coined the term to refer to the process of ceasing to invest in such a business or product line when the market declines past a certain point and discontinuing it when it stops yielding a profit. Hence, Drucker's "cash cow" designates a product or business that can yield profits reliably for a limited number of years without further investment and with little attention and maintenance.
The term "cash cow" also has its origin in a matrix developed by the Boston Consulting Group, in which enterprises are classified as having positions in either a growing or shrinking market, and with either a growing or shrinking total market share. An operation with a large market share in a growing market is called a "star," while an operation with a small market share in a growing market is called a "question mark" (or sometimes a "problem child").
While the cash cow has a large market share in a stagnant or shrinking market, a company with low market share in a declining market is called a "dog."
Question marks generally require high investment to achieve a more favorable position and become a star (hence they are sometimes referred to as "cash hogs"). If they can manage the transition to star, they will, over time, be subjected to intense competition. As the market matures, stars become cash cows. If a cash cow's competitive position is allowed to deteriorate, it becomes a dog.
Dogs are enterprises that generally can never operate in high-growth markets because those markets have matured. The investment needed to turn them into cash cows is, in many cases, prohibitive. As a result, dogs are either divested by sale to a competitor or, especially if they are losing money, are closed down and liquidated to prevent further losses.
Because the cash cow has a high market share in a stable or slowly growing market, it is generally able to maintain a profitable position, hence the name "cash cow"—the operation may be "milked" for profit as long as its margins and market share can be maintained.
Additional investment in the cash cow's products, representing technological improvements that yield new applications, can sometimes result in its transformation into a star. Because it is profitable, the cash cow can often provide its own investment capital.
More often, however, the cash cow is milked for capital to fund the development of question marks into stars because it is easier to build market share in a growing market than to revive an entire market that has matured.
Over the decades, however, "cash cow" has come to mean a profitable enterprise with a stable market share in a growing market. Such an entity—whether a company, a division of a company, a product, or an investment—is in a highly competitive position as long as it can take advantage of growing production expansion and efficiency or economies of scale.
As long as a cash cow has the capacity to expand its shipments and sales, its margins—and therefore its profitability—are in a strong growth position. These profits may be reinvested in the operation to build additional capacity to further fuel growth in market share. Consequently, when used loosely, "cash cow" often can refer to refer to any investment, product, or service generating at least a modest profit.
[ John Simley
updated by Karl Heil ]
Bartol, Kathryn M., and David C. Martin. Management. McGraw-Hill, 1991.
Donnelly, James H., Jr., James L. Gibson, and John M. Ivancevich. Fundamentals of Management. 6th ed. Plano, TX: Business Publications, 1987.
Drucker, Peter F. The Frontiers of Management. New York: Truman Talley, 1986.