Growth and Portfolio Theory

In the 1970s much of strategic management dealt with size, growth, and portfolio theory. The long-term PIMS study, started in the 1960s and lasting for 19 years, attempted to understand the Profit Impact of Marketing Strategies (PIMS), particularly the effect of market share. It started at General Electric, moved to Harvard in the early 1970s, and then moved to the Strategic Planning Institute in the late 1970s. It now contains decades of information on the relationship between profitability and strategy. Their initial conclusion was unambiguous: the greater a company's market share, the greater their rate of profit. Market share provides economies of scale. It also provides experience curve advantages. The combined effect is increased profits.

The benefits of high market share naturally led to an interest in growth strategies. The relative advantages ofhorizontal integration,vertical integration, diversification,franchises,mergers and acquisitions, joint ventures and organic growth were discussed.

Other research indicated that a low market share strategy could still be very profitable. Schumacher (1973), Woo and Cooper (1982), Levenson (1984), and later Traverso (2002) showed how smaller niche players obtained very high returns.

By the early 1980s the paradoxical conclusion was that high market share and low market share companies were often very profitable but most of the companies in between were not. This was sometimes called the “hole in the middle” problem. Porter explained this anomaly in the 1980s.

The management of diversified organizations required additional techniques and ways of thinking. The first CEO to address the problem of a multi-divisional company was Alfred Sloan at General Motors. GM employed semi-autonomous “strategic business units” (SBU's), with centralized support functions.

One of the most valuable concepts in the strategic management of multi-divisional companies was portfolio theory. In the previous decade Harry Markowitz and other financial theorists developed modern portfolio theory. They concluded that a broad portfolio of financial assets could reduce specific risk. In the 1970s marketers extended the theory to product portfolio decisions and managerial strategists extended it to operating division portfolios. Each of a company’s operating divisions were seen as an element in the firm's portfolio. Each operating division was treated as a semi-independent profit center with its own revenues, costs, objectives and strategies.

Several techniques were developed to analyze the relationships between elements in a portfolio. B.C.G. Analysis, for example, was developed by the Boston Consulting Group in the early 1970s. Shortly after that the G.E. multi factoral model was developed by General Electric. Companies continued to diversify until the 1980s when it was realized that in many cases a portfolio of operating divisions was worth more as separate completely independent companies.