PIMS concept

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The Profit Impact of Market Strategy (PIMS) (dt. Profit Impact of Market Strategies ) comes from the strategic management and was developed with the intention to prove empirically understand which business strategies across industries to success. A study identified several strategic variables that typically affect profitability. Some of the most important strategic variables examined were market share, product quality, investment intensity and quality of service.

Short Story

The PIMS project was originally initiated by General Electric (GE) executives who wanted to know why some of their business units are more profitable than others. Under the direction of Sidney Schoeffler , an economics professor commissioned by GE, the PIMS project was started as an internal empirical study in the 1960s. The aim was to make GE's different strategic business units (SBU) comparable.

Since General Electric was highly diversified at the time , they looked for key factors that would affect economic success regardless of the product; the return on investment (RoI) (i.e. the profit per unit of capital employed) was used as a unit of measurement .

In 1972 the project was transferred to the Marketing Sciences Institute (then under the umbrella of Harvard Business School ), which expanded it to other companies. In 1976, the American Strategic Planning Institute in Cambridge, Massachusetts took care of the project.

Between 1970 and 1983 around 2,600 strategic business units (SGEs) from around 200 companies took part in the surveys and provided key figures for the project. Today there are around 12,570 observations for 4,200 SGEs. PIMS Associates in London has been the global competence and design center for PIMS since the 1990s and has been part of Malik Management in St. Gallen (Switzerland) since 2005 .

The PIMS project analyzes the collected data in order to identify problems and opportunities for the individual SBUs. Based on the distribution of each business across different industries, it was expected that the data could be used to provide empirical evidence to other companies in the same industry as to which strategies would lead to higher profitability.

The databases are still updated and used today by scientists and companies. They currently encompass over 25,000 years of business experience at the SGE level. Each SBU is characterized by hundreds of factors over a period of more than 3 years, such as market share, customer preferences, relative prices, service quality, innovation rate, vertical integration, market attractiveness factors as well as financial metrics and much more.

Data collected

Over 50 different parameters were regularly collected; the most important of these are shown below:

  • Characteristics of the business environment (market attractiveness):
    • (short / long term) market growth
    • Market size
    • Distribution channels (direct, wholesale, retail, etc.)
    • Customer characteristics (purchase quantity, frequency, importance, etc.)
    • Inflation (materials and energy, labor costs, prices)
    • Position in the product life cycle
  • Relative competitive position:
    • relative market share (compared to the largest competitor)
    • relative innovation rate and range of products
    • Location cost advantage
    • relative marketing effort (sales promotion, advertising, promotion)
    • relative market coverage
    • relative product quality
    • Features of service delivery
  • Features of service provision:
    • Investment intensity (= investment volume / turnover)
    • Extent of vertical integration versus outsourcing
    • Labor productivity
    • Capacity utilization
    • Investment mix (fixed vs. working capital)
    • Lean overhead
    • Marketing intensity (= marketing expenditure / sales)
    • Research and development intensity (= research and development expenditure / sales)
  • Change of key factors (trends):
    • Change in market share
    • Product quality change
  • Economic success variables (as variables to be explained):

While most of the variables appear obvious, PIMS has the advantage of providing empirical data that define quantitative relationships and trace them back to what some may think makes sense.

Participation in the PIMS study: costs and benefits

Companies wishing to use the service will receive detailed information about each of their key strategic business units, including:

  • Market and customer structure
  • Competitive strengths and weaknesses
  • P&L (profit and loss account) and balance sheet
  • Existing market forecasts and business plans

Based on the data provided, PIMS delivers four reports (Lancaster, Massingham and Ashford):

  1. The "par" report shows the expected profitability for this business profile and why it differs from the average company.
  2. The "Strategic Analysis" report uses several alternative strategic measures to calculate the predicted consequences. Information from companies that operate in a comparable business environment and are facing a similar starting point are taken into account.
  3. The "Report on Look-Alikes (ROLA)" report analyzes profit and loss accounts and balance sheets of strategically similar transactions and is intended to show why the performance of each SBU is above or below "par".
  4. The "Best Strategy" report is based on the experiences of other companies in "similar" circumstances and aims to predict the best combination of strategies for the company.

Results

The following factors correlate particularly strongly with the success variables RoI and RoS:

Investment intensity correlates negatively (explained approx. 15%):

On the one hand, this has the formal-analytical reason that with increasing investment intensity, i.e. the investment volume related to sales, the depreciation volume related to sales, the depreciation intensity, increases and thus the profit decreases.
On the other hand, fixed assets increase with high investment intensity and there is an urge to use this capacity, i.e. to increase the output volume and, under certain circumstances, to lower prices and thus the profit margin.

Relative market share correlates positively (explained approx. 12%):

The main reason for the positive influence of the relative market share is the economies of scale : the higher the market share, the greater the production volume and the lower the unit costs; this can also be explained with the experience curve .
In addition, as the market share grows, power over suppliers increases, which means that better conditions can be achieved.

Relative product quality correlates positively (explained approx. 10%):

Important reasons for the positive correlation are above all higher achievable prices for premium products, but also the greater willingness of customers to buy high-quality services, so that the sales volume increases and thus has a positive influence on the market share (see above).
Another reason are the lower complaint costs.

Overall, the factors surveyed explain around 70 percent of the differences in profitability between successful and unsuccessful business areas in the PIMS database (measured as variance ).

criticism

The following main criticisms of the PIMS project are raised (according to Homburg / Krohmer):

  • Criticism of the data basis:
    • Subjective evaluation of individual variables (e.g. relative product quality)
    • Short-term consideration of individual variables
    • Insufficient representation of less successful SBUs, non-US SBUs, smaller SBUs and SBUs from the service sector

The main PIMS database, which is the heart of the PIMS program, now includes more than 25,000 years of business experience from a wide range of different industries worldwide. More than 90% of these are processing companies. About a third of them manufacture consumer goods, 15% manufacture capital goods. The remaining business units are suppliers of raw materials and semi-finished products, components or accessories for industry and trade. Retail and service companies make up less than 10% of total companies and still represent a fairly large sample (over 250) of strategic business units in this category.

About half of the business units in the PIMS database market their products or services nationally in the United States or Canada, while 11% serve regional markets in North America. European companies are also well represented today and comprise around 1,000 business units from continental European countries and 600 from Great Britain.

  • Criticism of the research methodology:
    • Conclusion on causal relationships from correlations (problem of sham correlations )
    • Neglecting interdependencies between explanatory variables (for example, the relative product quality partially affects the relative market share, see above)
    • The multiple regression analysis used is insufficiently suited to identify complex dependency structures such as B. investigate causal chains
    • too large aggregation of the data due to permanent averaging

In connection with the market share, the allegation that has already been hinted at, and that it is often the case that PIMS studies draw conclusions about causal relationships from correlations, i.e. that correlation is equated with causality. However, this problem is too obvious not to have been examined in detail during the development of the PIMS program. Backhaus et al. aptly formulate on this: "The primary area of ​​application of regression analysis is the investigation of causal relationships (cause-effect relationships), which we can also call per-desto relationships." Backhaus et al. (2006), p. 46 (emphasis in the original. ) These authors then add: “It should be emphasized here that neither regression analysis nor other statistical methods can prove causalities beyond doubt. Rather, the regression analysis can only demonstrate correlations between variables. This is a necessary but not yet a sufficient condition for causality. ”Backhaus et al. (2006), p. 48 f. As part of the PIMS investigations, it was accordingly possible, due to the availability of data over longer periods of time, to determine causalities with the help of time series analyzes. See, for example, Barilits (1994), p. 61. Correlations in this sense, also in the PIMS program, initially give nothing other than a reason to investigate any causalities thoroughly and thoroughly.

  • Criticism of the strategy recommendations (content-related criticism):
    • one-sided orientation towards return on investment as a success factor
    • Neglecting possible synergy effects between individual SBUs of the same company
    • no consideration of industry-specific features

The connection between strategy and business success - requires a precise definition of how success is to be measured. Following the usual management procedures and in line with the profitability considerations (...), the PIMS analyzes primarily apply two benchmarks for profitability: Return on Investment (ROI) or the net operating profit before interest and taxes (EBIT) as a percentage of sales . The former is clearly more informative as a success indicator, especially since it relates the results achieved to the resources used. Aiming to be able to make reasonable performance comparisons, as well as to achieve the most unobstructed results possible, one uses the profit before deduction of taxes and interest and takes into account the specific financing and tax situation of each company or each country. In some (rare) cases, the cash flow of a business unit is also added as a further success indicator. Since they usually show the results of a strategy choice only over a period of several years, the appropriate core measure for the effect of such a choice is the average profitability over a period of several years; As a basis for comparing alternative strategies, the PIMS program mainly uses average ROI and ROS values ​​for four-year periods.

There are significant differences in profitability between the individual business units in the PIMS database: the four-year averages of the ROI are between -100% and +400%, those of the ROS between -40% and + 40%. These differences in success are due to the equally large differences in competitive positions and market conditions that exist even between the strategic business units of a single company. The large ROI range can also be attributed to the large differences in the amount of capital invested in a business unit. The key performance indicators show a pattern similar to that of a normal distribution.

literature

  • Robert D. Buzzell; Bradley T. Gale: The PIMS Program: Strategy and Business Success. Springer, Wiesbaden 1989, ISBN 3-409-13343-7 .
  • Harald Hungenberg: Strategic Management in Companies. Goals - Processes - Procedures. Springer, Wiesbaden 2001, ISBN 3-409-23063-7 .
  • Dietger Hahn , Bernard Taylor (ed.): Strategic corporate planning. Springer, Heidelberg 1999, 8th edition, ISBN 3-7908-1155-6 .
  • Heribert Meffert : Marketing Management: Analysis, Strategy, Implementation. Springer Gabler, Wiesbaden 1994, ISBN 978-3-409-23613-3 .
  • Christian Homburg , Harley Krohmer: Marketing Management. Springer Gabler, Wiesbaden 2003, ISBN 3-409-12515-9 , p. 355.
  • Pedram Farschtschian: Private Equity for the Challenges of the New Age: Strategic Innovation for the Functioning of Private Equity in the 21st Century. Campus Verlag, Frankfurt 2010, ISBN 978-3-593-39207-3 .

Individual evidence

  1. ↑ Heribert Meffert: Marketing Management: Analysis, Strategy, Implementation . Springer, Wiesbaden 1994, ISBN 978-3-409-23613-3 .
  2. ↑ a b Robert D. Buzzell; Bradley T. Gale: The PIMS Program: Strategy and Business Success . Springer, Wiesbaden 1989, ISBN 3-409-13343-7 .
  3. ↑ Harald Hungenberg: Strategic Management in Companies. Goals - Processes - Procedures . Springer, Wiesbaden 2001, ISBN 3-409-23063-7 .
  4. ^ Dietger Hahn: Strategic corporate planning . Ed .: Bernard Taylor. Springer, Heidelberg 1999, ISBN 3-7908-1155-6 .
  5. ↑ a b c d Homburg, Christian: Quantitative Business Administration: Decision Support through Models; with examples, exercises and solutions . In: Homburg, Christian . 3. Edition. Springer-Verlag, 2000, Wiesbaden 2000, ISBN 978-3-8349-4341-5 .
  6. ↑ a b c d e Pedram Farschtschian: Private Equity for the Challenges of the New Era: Strategic Innovation for the Functioning of Private Equity in the 21st Century. Campus Verlag, Frankfurt 2010, ISBN 978-3-593-39207-3 .
  7. ↑ a b Robert D. Buzzell; Bradley T. Gale: The PIMS Program: Strategy and Business Success . Springer, Wiesbaden 1989, ISBN 3-409-13343-7 .