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Background
Starting in 1972, Profit Impact of Market Strategy research assembled a database of 450
companies and 3,000 business units with information on market strategy and company
performance. The PIMS database set the stage for later studies on how specific strategic elements
affect company profits. Based on the PIMS information and more recent data, companies can
increase profitability by a focused approach in their market strategy.
Advertising
One of the aims of market strategy is to build brand awareness and develop a positive image for
a brand. Advertising is one of the key elements of market strategy that helps meet this goal.
Companies that advertise, especially during economic downturns, outperform companies that cut
back on advertising. In the short term, ads generate sales that impact profits. In the long term,
they build brand value, which allows higher pricing and profitability.
Related Reading: Highest Profit Margin Strategies
Promotion
Promotions that offer discounts or incentives have a slightly different effect than ads. Over the
short term, promotions increase sales and may increase profitability; over the long term,
however, discounts tend to hurt the brand. This means promotions can be a short-term strategic
tool to address particular problems such as overstocks or end-of-line issues. In the long term,
their impact on profit is neutral or possibly negative.
Customer Service
While customer service is not directly a marketing function, market strategies can focus on
developing superior customer service as a competitive advantage. The broad elements of
customer service are awareness, association, attitude, attachment and experience. Advertising
affects some of these elements, but the key is to maximize customer satisfaction through
customer focus at all aspects of the purchase and ownership experience. A successful strategy
results in high customer retention, lower customer acquisition costs and higher profitability.
Quality
Underpinning the other elements of market strategy is quality. Without a quality product or
service, it is difficult to maintain profitability. When market strategy focuses on quality, market
share, employee productivity and customer satisfaction all increase. Quality in this sense means
meeting and exceeding customer expectations. Advertising reinforces those expectations, and
achieving high levels of customer satisfaction consumes fewer resources. These savings,
combined with increased volume from higher market share and better productivity, result in
higher profits.
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
o a set of data-derived business strategy principles to guide strategic thinking and strategic
measurement.
o 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
Identified factors which both micro-economic theory and the PIMS experience show drive
results.
e.g. market share rank
Business management:
o
pimsonline.com software:
o
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:
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 sampleselection 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)
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.
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.
"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 largeshare 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 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.
At RAS (Restaurant Advisory Services), we are regularly engaged by both local and
out-of-town restaurateur's, who are searching for assistance in both the strategic
planning and site selection processes for restaurants. The purpose of this article is to
offer a restaurant primer to those interested in either opening a new restaurant or
modifying an existing one. The first part of this article will focus on factors affecting
menu pricing and the budget for food and beverage costs. The second part of this
article will focus on the controllable costs involved in operating restaurants the costs
that must be incurred that the customer does not see.
One of the most important factors in the strategic planning of a restaurant is in the
development of the menu. It involves designing an appealing selection of menu items
that are competitively priced in the marketplace. Menu pricing is a very tricky task
because you need to price items so that you can operate profitably and, just as
important, offer your targeted guests a good price/value relationship.
What the market will bear You must analyze the demographics (income,
population, age, etc.) of your market to determine if your proposed concept,
menu, and pricing is correct. Minimum rules of thumb for casual theme chain
restaurants (e.g. TGI Fridays) for demographics include a median household
income of at least $35,000, population of over 50,000 within a 3-mile radius and
median age of about 35 years old.
What are your competitors charging and offering? You should compare
your menu prices with your potential market competitors. Simply perform some
market research by visiting these competitors and taking note of their menu
prices. Use this competitive pricing analysis as a test of reasonableness to
determine whether your menu and prices are in line.
After you have determined the type of menu you want to serve that will provide the best
price/value for your target market, even better that your competition, you will have to
price the items on the menu. You have probably already started this thought process
because it is related to and overlaps the preceding points.
The following factors affect menu pricing for food:
What Should Your Food Cost Percentage Be? Successful restaurants typically
generate food costs in the 27 to 32 percent range of Food Sales. However,
different types of restaurants typically run higher (steak houses) or lower
(pizzerias) percentages. Comparing your cost percentage to restaurants with
similar menus and service levels provides a more accurate perspective. It is
important to include all ingredients when calculating food cost. You must cost out
each recipe for each menu item. Dont forget to include things such as spices
and garnishes in the recipe cost. After you have determined total recipe costs for
items and sales prices, you can determine if your food cost is in line with industry
averages. Sources for industry averages include The RAS Report, a report on
restaurant industry operations published annually by RAS and the National
Restaurant Association annual report.
How Can You Use Your Food Cost Percentage? Monitor your food cost and
compare it to previous performance and industry averages. Consistent analysis
can prove very helpful in identifying problems and trends. It is important to
determine why food costs increase as well as decrease. Ideally you should be
able to determine a consistent overall food cost which, when combined with
properly pricing your food menu items, positively impacts your profitability.
Other Costs of Operation Keep in mind there are other costs of operating a
restaurant that a customer does not notice that need to be factored into the mix
to determine optimal pricing for menu items. These costs such as labor, rent, and
debt service will be discussed in greater scope in the second part of this article.
How Can You Use Your Beverage Cost Percentage? As with food cost,
beverage cost must be constantly monitored. Comparing costs to previous
performance, comparable restaurants (if the information is available) and industry
averages will help. Always look for problems and identify trends that will enable
you to stabilize this cost (meaning consistently achieving the same percentage).
Controlling beverage cost to the point where you can predict what it will actually
be on a consistent basis will allow you to competitively price items and increase
profitability of your total operation.
Taxes Be wary of additional taxes in your local jurisdiction which may impact
beverage pricing. For example, in Philadelphia, there is a beverage tax of 10
percent either added to or included in the menu price. It is up to you the operator
to be aware of this and make a strategic decision on how to present the recovery
of this tax in your pricing.
There are many factors that come into play when attempting to operate a restaurant
profitably. The most important are the initial factors such as knowing your market and
understanding menu pricing and food and beverage costs. These issues need to be
addressed in the beginning of your endeavor and constantly adjusted to the prevailing
market conditions. The next part of this article will address the other hidden costs of
restaurant operations that affect menu pricing and the profitability of a restaurant
operation.
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