In the realm of strategic management, the interplay between growth and portfolio theory has been a cornerstone for understanding how businesses can thrive. The 1970s marked a significant era where these concepts were scrutinized, leading to groundbreaking insights that continue to influence corporate strategies today. This article delves into the evolution of growth and portfolio theory, highlighting key studies and their implications for modern businesses, while also exploring the nuanced approaches to market share and profitability.
The Profit Impact of Marketing Strategies (PIMS) study, initiated in the 1960s and spanning 19 years, stands as a monumental effort to decode the relationship between market strategies and profitability. Originally started at General Electric, the study transitioned to Harvard in the early 1970s before finding a home at the Strategic Planning Institute in the late 1970s. The PIMS database is now a treasure trove of data, offering decades of insights into strategic profitability. The study's initial findings were clear-cut: companies with larger market shares tend to have higher profit rates, benefiting from economies of scale and experience curve advantages, which in turn boost profits (Harvard Business Review).
Tom Peters, a renowned business management author, has praised the PIMS study, stating, "PIMS provides compelling quantitative evidence as to which business strategies work and don't work." The study's conclusions remain a touchstone for both scholars and practitioners in the field of strategic management.
Despite the strong correlation between market share and profitability suggested by the PIMS study, subsequent research in the 1970s and beyond revealed that companies with low market shares could also achieve exceptional profits. Scholars like Schumacher (1973), Woo and Cooper (1982), Levenson (1984), and Traverso (2002) demonstrated how niche players, by focusing on specific segments, could secure high returns. This counterintuitive finding suggested that there isn't a one-size-fits-all approach to market dominance and profitability.
By the early 1980s, a paradox emerged: companies with either high or low market shares were often very profitable, while those in the middle frequently struggled. This phenomenon, known as the "hole in the middle" problem, puzzled strategists until Michael Porter provided an explanation in the 1980s, emphasizing the importance of competitive strategy and the pitfalls of being "stuck in the middle" without a clear strategic positioning.
Alfred Sloan, the CEO of General Motors, was a trailblazer in addressing the complexities of managing a multi-divisional company. He decentralized GM into strategic business units (SBUs) while maintaining centralized support functions, a model that has been emulated by diversified organizations worldwide.
The concept of portfolio theory, initially developed by Harry Markowitz and other financial theorists for financial asset management, was ingeniously adapted for corporate strategy in the 1970s. Marketers applied it to product portfolios, while strategists extended it to the management of operating division portfolios. Techniques like the B.C.G. Analysis, created by the Boston Consulting Group, emerged to evaluate the relationships between portfolio elements, giving rise to the iconic image of a CEO strategically managing a portfolio of SBUs as if they were financial assets.
In conclusion, the evolution of growth and portfolio theory has been instrumental in shaping strategic management practices. The PIMS study and subsequent research have provided a nuanced understanding of market share and profitability, while portfolio theory has offered a framework for managing diverse business units effectively. These concepts continue to be relevant and are applied in various forms across industries, guiding companies in their pursuit of sustainable growth and competitive advantage.
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