In the mid-1960s, Sidney Schoeffler and his colleagues at the Strategic Planning Institute in Cambridge, Massachusetts, began to collect and analyse data from a large number of companies, covering literally hundreds of different product markets. The intention was to provide participating companies with advice, based on empirical evidence about the most suitable strategies to pursue in search of increased profitability. Essentially the analysis focused on comparing the effect of various business strategies on net cash flow and profitability and this came to be termed the ‘profit impact of marketing strategy’ (PIMS).
Pims Model in Strategic Management
The full PIMS service is available to subscribing companies (i.e. clients). Each client is asked to subscribe more than 100 data items for each ‘business’, which is defined as an operating unit that:
- Sells a distinct set of products or services;
- Sells to an identifiable set of customers;
- Is in competition with a well-defined set of competitors.
Using a special data form, the client answers questions on factors such as:
- The market environment;
- The state of competition;
- Strategy pursued by the business;
- Operating results;
- Assumptions as to the future in terms of prices, sales, etc.
Using the evidence built up in the database, the subscribing company then receives both diagnostic and prescriptive information contained in four main reports:
The ‘Par’ Report: specifying what return on investment is normal (or ‘par’) for that particular type of business;
- The Strategy Analysis Report: the likely outcome (on profit, sales, cash flow, etc.) of several possible ‘broad’ strategic moves based on evidence of similar moves by similar businesses;
- The Optimum Strategy Report: nominates the combination of strategic moves likely to give the client optimal results for the business;
- Report on ‘Look alikes’ (ROLA): provides information on likely successful tactics based on analysing the successful moves of strategically similar businesses.
The information is thus client- and business-specific, but in addition, the extensive analyses made by the Strategic Planning Institute have provided a number of general guidelines to strategy selection and implementation.
Thirty-seven basic strategic influences on profitability and cash flow have been identified by the Institute. Taken together, the Institute suggests that these account for 80 per cent of the determination of business success or failure. Of primary importance are the following:
- Investment intensity: Higher investment intensity is associated with lower rates of return and cash flow.
- Productivity: High value is added for each employee in the businesses, making the company generally more profitable.
- Market position: Higher share of served markets leads to higher profits and cash flow.
- Growth of served market: ’Favourable to cash’ measures of profit; no effect on percentage measures of profit; negative effect on cash flow.
- Quality of products or services: Favourable impact on all measures of financial performance.
- Innovation/differentiation: Usually has positive effect on financial performance, but only if company has strong initial market position.
- Vertical integration: Positive effect in stable markets, negative in unstable ones.
- Cost push: Increases in salaries, raw material prices etc., have complex effects on performance according to specific nature of business or company.
- Current strategic effort: The existing direction of change of any of the preceding factors often affects financial performance in an inverse manner, e.g. having strong market share increases cash flow; achieving strong market share reduces it.
These and other profit impact marketing strategies (PIMS) findings provide useful insights for the process of strategy development and implementation. A company can use PIMS data in a variety of ways to help in strategic market planning. Clearly, for the subscriber company the information provided is detailed and wide-ranging; in particular, PIMS data can be used for:
- Analyzing business performance;
- Formulating and selecting future strategies;
- Analyzing and focusing on problems and opportunities;
- Assessing competitor performance.
Criticisms and limitations of PIMS
Although PIMS is useful, there is some criticism. The findings are given as conclusions from empirical research, but many of them are self-evident. O’Shaughnessy believes that ‘the findings cannot distinguish between causal factors and factors in a state of mere co-existence’. He goes on to say: ‘without supporting explanations and appropriate tests, the findings can be misleading in tempting management to deal with symptoms rather than causes’.
Three basic limitations of PIMS:
- Interpreting and utilizing PIMS findings: PIMS has been used to predict profitability. This should not be so because the model does not tell us about causality.
- Specification problems: i.e. whether the regression models have omitted important variables and have been properly structured.
- Measurement error: this happens because of eliminating outliners, standardized inputs etc. Research by Doyle,13 although not specifically aimed at criticizing the PIMS system, has shown that perhaps the database does not give sufficient importance to certain facets of marketing strategy. In particular, Doyle’s research illustrates that there is significant potential impact of the brand and its management on company profitability; an aspect which the PIMS data tends to understate.