PIMS (PROFIT IMPACT OF MARKETING STRATEGY) PROGRAM

By
Prof R K Gupta
BE (Hons), MBA, FIE
Aravali Institute of Management
Jodhpur (Rajasthan)
E-mail :
cityju@rediffmail.com / rkgupta_India@hotmail.com
URL :
www.Geocities.com/rkgupta_india

PIMS (PROFIT IMPACT OF MARKETING STRATEGY) PROGRAM

A powerful performance improvement technique which is widely practiced by World class organizations (W.C.O) is Benchmarking. However, the fear of industrial espionage stops many companies from releasing competitively sensitive information about their operations and techniques. Moreover, situation in India is worse with little reliable data available about major companies, though organizations like CMIE are trying to build such analyses. In view of globalization and need for world class working there is a vacuum felt for  analytical databases about top companies and their performance in India and comparing these with global databases. PIMS is one such one such answer in global context only.

Overview

The PIMS (Profit Impact of Market Strategy) of the Strategic Planning Institute is a large scale study designed to measure the relationship between business actions and business results. The project was initiated and developed at the General Electric Co. from the mid-1960s and expanded upon at the Management Science Institute at Harvard in the early 1970s; since 1975 The Strategic Planning Institute has continued the development and application of the PIMS research.

The comprehensive profiles of over 3,000 strategic experiences constitute this unique data pool. The items of information were collected by PIMS' trained professionals working directly with participating companies to assure data integrity. The data covers the important characteristics of the market environment, the state of competition, the strategy pursued by each business and the results obtained.
Taking a data-driven, empirical approach, PIMS has provided insights that have had a profound impact on business strategy thinking. PIMS principles are taught in most business schools; PIMS data has been used in dozens of academic articles; and PIMS theory guides the thinking of senior executives in major companies around the world.

PIMS today is much more than the research study from which it originated. PIMS is

    • a database of business strategies, used to generate benchmarks and identify winning strategies.
    • a set of data-derived business strategy principles to guide strategic thinking and strategic measurement.
    • a methodology for diagnosing business problems and opportunities, and for measuring the profit potential of a business.


The PIMS database forms the core of all services delivered by The Strategic Planning Institute. The database is a collection of statistically documented experiences drawn from thousands of businesses, designed to help understand what kinds of strategies (e.g. quality, pricing, vertical integration, innovation, advertising) work best in what kinds of business environments. The data constitute a key resource for such critical management tasks as evaluating business performance, analyzing new business opportunities, evaluating and reality testing new strategies, and screening business portfolios.

The primary role of the PIMS Program of the Strategic Planning Institute is to help managers understand and react to their business environment. PIMS does this by assisting managers as they develop and test strategies that will achieve an acceptable level of winning as defined by various strategies and financial measures.

The PIMS database allows for the identification of those critical strategic factors that enable a business to achieve an improved sustainable position. The years of research on the PIMS database and on other cross-sectional databases of business units show quite clearly that profitability is strongly linked to strategic position. The R square of .65 of a regression of ROI on 18 key strategic variables indicates that strategic positioning is the major determinant of business success.

Those businesses that position themselves to win the strategy game through a sustainable advantage also win the performance game. PIMS can also serve as a screen such that a business's future direction, a competitor or a potential acquisition can be evaluated and benchmark performance levels can be measured.

The key strategic factors influencing business performance are:

Competitive Position
Market Environment
Stage of Lifecycle

Market Share
Marketing/Sales
New Products/Sales
Relative Market Share
Customer Concentration
R & D/Sales
Relative Quality
Customer Purchase Amount
Real Market Growth
Relative Price
Industry Concentration
Capital and Operating Structure

Investment / Sales
Receivables / Investment
Investment / Value Added

Capacity Utilization
Gross Book Value of P&E/Total Investment

Value Added / Sales
Operating Effectiveness

Here's how pimsonline.com works:

PIMS researchers have:

    • Identified key strategic questions.
      e.g. What level of profitability is expected?
    • Identified factors which both micro-economic theory and the PIMS experience show drive results.
      e.g. market share rank

Business management:

    • Selects a key question.
      e.g. What level of ROI (pre-interest/pre-tax Return on Investment) is expected for my actual/proposed business?
    • Estimates the driving factors for this business.
      e.g. Our market share rank: #2.

pimsonline.com software:

    • Uses these estimates as matching criteria to draw a sample of comparable businesses from the PIMS database.
    • Reports the sample averages for a) the matching criteria and b) the matter in question.
      e.g. The 20 businesses in the sample were all ranked #2 and their average ROI was 18%.

Business management:

    • Uses the insights to help develop and reality-test strategies.

Four key questions

To date, pimsonline.com software has been written to address four key questions:

      1. What level of profitability is expected for this business?

      2. What level of market share gain/loss is expected for this business?

      3. What level of marketing expense is expected for this business?

      4. How does this business rate as an opportunity for generating profitable growth?

And "What If?" questions

Of course getting the PIMS answer to a question like "What ROI is expected?" is only the beginning. Immediately we want to know what the ROI would be if we improved customer-perceived quality, invested in automation to reduce manufacturing costs, "bought" market share, etc. To explore these questions you simply need to describe the what-if scenario, re-estimate your ROI-driving factors and resubmit the question to the report.

Steps in pimsonline.com analyses:

    1. Define the business and identify key issues

    In PIMS, a business is defined as an entity that sells a distinct set of products or services, serves a specific group of customers, and competes with a well-defined set of competitors. e.g. The General Motors Corporation is not a PIMS business; it's many PIMS businesses. GM's Saturn business is a PIMS business. In fact, both Saturn's small-car and its large-car lines can each be correctly defined as a PIMS business, as can individual models (such as convertibles) within Saturn's small-car line.

    Key issues currently addressed by pimsonline.com are:

      1. Return on Investment Report - What level of profitability is "expected" for comparable businesses?

      2. Market Share Change Report - What level of share gain/loss is "expected" for comparable businesses?

      3. Marketing Budget Report - What level of marketing expenses is "expected" for comparable businesses?

      4. Market Attractiveness/Competitive Strength Report - How attractive is the market/competitive position of comparable businesses?

Sample:>

Your business' position:

-On a PIMS Marketing attractiveness scale of 1(very unattractive) to 5 (very attractive) is: x.xx

-On a PIMS Market competitive Strength Scale of 1 to 5 is  : x.xx

PIMS suggests this business strategy should be……………………………

    2. Develop a quantitative profile of the business

    The profile should include estimates of all the criteria used to select PIMS comparables for the issues to be addressed. The pimsonline.com criteria have been selected because both PIMS experience and micro-economic theory have shown them to be powerful drivers of the factor under study. e.g. Market share is a powerful driver of profitability. To explore profitability levels for a business, the market share for this business and each of its three leading competitors must be provided.

    Frequently businesses defined as specified above to explore competitive-strategy issues do not align with existing management or financial reporting structures. The analyst must develop a "green-field" quantitative profile by referring to relevant documents and interviewing knowledgeable individuals. Just because the data is not readily available, don't give up. Experience shows that this work of profiling competitive product/market segments that are not aligned with traditional reporting structures can be highly instructive.

    3. Enter values for sample variables and run program to select sample of comparable PIMS businesses

    4. Review results

    How closely does the sample's profile match the business' profile? If sample does not match the businesses, return to step 3 and change the bounds to get a different (better) match.

    Note: This sample/business criteria-matching process is like trying to keep a set of balloons under water - when you shift emphasis to push some balloons further under, others begin to pop up. Similarly, when you tighten the bounds on one criterion to force the sample to more closely match the business on that criterion or to increase/decrease the sample size, the sample/business match of other criterion may be degraded.

    5. What outcome is "expected" for PIMS businesses comparable to this business?

    The outcome shown on the pimsonline.com report represents the average reported by the selected sample of comparable PIMS businesses. The sensitivity of the outcome to various levels of input criteria and or sample size can be explored by systematically varying the sample-selection bounds and running additional pimsonline.com reports.

    6. What's the potential of this business?

    To explore the potential of this business given alternative strategic positioning, "what if" scenarios can be identified and profiled, and additional pimsonline.com reports run.

Important Strategic Principles Derived From PIMS

* In the long run, product quality is the single most important factor affecting performance

* Market share and profitability closely correlated

* High-investment intensity reduces profitability

* Cash implications of growth rate and relative market share are affected by many factors

* Vertical integration is profitable for some businesses only

* Most factors that boost ROI also contribute to value
   Examples of Application of some of the Principles of PIMS in ASPAC

* Pursuit of product quality

    * Australian Quality Council

    * Hong Kong Awards for Industry (Quality cat.)

    * Japan Quality Award

    * Malaysia's Prime Minister's Quality Award (Private Sector)

* Examples of Application of some of the Principles of PIMS in ASPAC

        Pursuit of market share

    * Nova Group and Europa Holdings of Singapore expanding their pubs and restaurants business (Source: The Straits Times; Dec 10, 1992; pp.2)

* High investment reduces profitability

    * The acquisition of new machinery caused a reduction in SM Summit Holdings gross margin SM (Source: SM Summit Holding's Annual Report 2000

Limitations of PIMS

* Key market-share variable is sensitive to product-market definition

* Other variables depend on subjective judgments

* Inherent limitations of cross-section analysis

* Sample biased toward larger firms that are industry leaders

  • PIMS is an effort to examine the profit performance of different marketing strategies. It seeks to quantify the behavior of factors that influence business performance.
  • PIMS started as an internal project at General Electric (GE) in 1960 to explain and predict operating performance, eventually the PIMS effort led to a regression model that explained a substantial variation in return on investment (ROI).
  • Development of the PIMS model continued at GE, then at Harvard Business School and the Marketing Science Institute. At these latter institutions, the PIMS database was expanded to include other corporations.
  • In 1975, the Strategic Planning Institute (SPI) of Cambridge, Massachusetts, a nonprofit corporation governed by the member companies, was formed to manage the PIMS project.
        • o The PIMS database now includes financial and strategic information for approximately 3,000 business units operated by some 450 corporations, primarily in North America and Europe, for periods that range from two to twelve years.

  • Each PIMS "business" is defined as a division, product line, or other profit center within its parent company, selling a distinct set of products or services to an identifiable group of customers in competition with a well-defined set of companies.
  • For each business, separate data are collected on revenues, operating costs, investments, and strategic plans.
  • SPI collects PIMS data not only on traditional balance sheets and income statements but also on each business's relative product quality, market share, price, and direct cost.
    • o The database describes more than 200 characteristics for each business and in addition documents its actions, the market it serves, its competitive environment, and its financial results.
       

  • In over 100 published studies, the PIMS database has been used to establish relationships between a variety of strategic and market environment dimensions that might influence various measures of performance, e.g., ROI and cash flow.
  • By means of a multi-industry, multiple regression models, SPI has related profitability to 28 associative variables or "profit-influencing" factors and explained over 70 percent of the cross-sectional variance in ROI.
  • "Universal laws of the marketplace" are used to explain why a business is under performing its "expected" ROI. A similar model has been developed that explains 70 percent of the variation in cash flow among these businesses in the terms of 19 "cash-flow-influencing" factors.
  • After the first PIMS research results were reported publicly in the mid-1970s, some writers and managers reacted by acting as if universal laws of strategy had been discovered.
  • Those closely associated with PIMS warn against over simplification, they did stress that there were principles that could help managers understand and predict how strategic choices and market conditions would affect business performance.
  • Although they believe that some of these principles apply to virtually all kinds of businesses, others apply only to specific types of businesses or under certain conditions.

STRATEGY PRINCIPLES:

Six of the most important linkages between strategy and performance are summarized:

 The most important single factor affecting a business unit's performance is the quality of the products and services, relative to its competitors. This is done in two ways. In the short run, superior quality yields increased profits via premium prices. In the long run, superior and/or improving relative quality is the most effective way for a business to grow, leading to both market expansion and gains in market share. 

  • Market share and profitability are strongly related. Business units with over 50 percent of their served markets experience ROIs more than three times greater than SBUs with fewer than 10 percent of their markets. Apart from the connection with relative quality is the fact that large-share businesses benefit from economies of scale, which result in lower peer-unit costs than their smaller competitors. 
  • High investment intensity acts as a powerful drag on profitability. Businesses that employ a great deal of fixed assets or working capital per dollar of sale, per dollar of value added, or per employee usually have lower rates of return. The average rate of return for the most capital-intensive businesses is less than half that earned by the low-capital-intensive ones. 
  • Many so-called "dog" and "question mark" businesses generate cash, while many "cash cows" are dry. Although market growth and relative share are linked to cash flows, many other factors also influence this dimension of performance. In fact, more than half of the "question marks" (businesses with positive market growth rates and that occupied follower positions in terms of market share) and six out of ten "dogs" (businesses with negative market growth rates, and that were followers in terms of market share) were net cash generators (net cash flow equaled after tax income, plus depreciation, plus or minus the net change in a unit's investment base). Conversely, more than one in four "stars" (those with top ranking market share in a growing market) and almost as high a proportion of "cash cows" (those with top-ranking market share but negative market growth rates) were net cash users. 
  • Vertical integration is a profitable strategy for some kinds of businesses but not for others. For small-share businesses, ROI is highest when the degree of vertical integration is low. For businesses with average or above-average relative market share, ROI was highest when vertical integration was either low or high, and lowest in the middle. 
  • Most of the strategic factors that boost ROI also contribute to long-term value. Although there were some trade-off between current profitability and long-term value enhancement, businesses with strong initial competitive positions generally scored well on long-term value as did businesses with high employee productivity, superior relative quality, and cost advantage relative to competitors.

An important question about the geographic scope of PIMS industries has been raised. Since an industry's competitive environment cannot be assumed to be either stable over time or easily ascertainable, is the PIMS definition of market share/return on investment dangerously misleading? Some of the present evidence linking market share and ROI tends to be vague on this point since:

  • The precise geographic definition of the market is unseated.
  • The evidence showing a positive relationship between ROI and market share is based primarily on comparisons among U.S. companies. These companies may be unrepresentative of global or international companies since the exceptional size of the North American market may dominate the market share / ROI relationship to the point where it may swamp international effects. 

Although there have been other criticisms of PIMS, the crux of the criticism of the PIMS approach centers around the importance of market share.

  • The PIMS research has reinforced the long-held notion that market share is the key to profitability - a concept that seems to have gained wide acceptance in recent years. For example, one study concluded that a difference of ten percentage points in market share is accompanied by a difference of about five points in pretax ROI.
  • Despite numerous articles pointing out how many smaller companies are outperforming industry leaders, many managers continue to hold to the notion that market share is the key to success.
  • In fact, the PIMS data also shows that market share only accounts for approximately 15 percent of the observed variation in profitability, but rarely will a single definition of market boundaries give an adequate picture of the overall competitive standing of the business or of the relationship of market share and profitability.

Prof R K Gupta
BE (Hons), MBA, FIE
Aravali Institute of Management
Jodhpur (Rajasthan)
E-mail :
cityju@rediffmail.com / rkgupta_India@hotmail.com
URL :
www.Geocities.com/rkgupta_india

Source : E-mail November 2003

 

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