Profit Impact

8/8/2019 Profit Impact

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PROFIT IMPACT ONPROFIT IMPACT ON

MARKETING STRATEGYMARKETING STRATEGY


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Profitability Optimization ModelProfitability Optimization Model

500 Companies

3800 SBUs

(2-12) year data Large and small companies

Markets across the globe

wide variety of products and services

standardize format in a 200 piece data


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PIMS CharacteristicsPIMS Characteristics

Pool of information reflecting the

experience of SBUs of participating

companies PIMS attempts to answer questions such as

What strategy ,pursued under what

conditions produces what results


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PIMSPIMS --An over viewAn over view

Unit of Analysis-SBUs

Research objectives -

-Profit level-Out comes of strategic actions

-Outcomes of the changes of the business

environment


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The InformationThe Information

A description of the market condition in

which the business operates

-Distribution channel used by SBUs

-The number and size of customers

-The rates of market growth and inflation


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The InformationThe Information

The business units competitive position in

the market place

-Market share

-Relative quality

-Prices and costs relative to the competition

-Degree of vertical integration relative to

the competition


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The informationThe information

Annual measures of the SBUs financial and

operating performance over period ranging

from 2-12 years.


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PIMS Competitive Strategy ParadigmPIMS Competitive Strategy Paradigm

It views An SBUs performance as a

function of three sets of variables

-The structure of the market in which SBU

competes

-The competitive position of that SBU in that

market-The strategy pursued by the SBU


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The characteristics of the marketThe characteristics of the market

Market Differentiation

Market Growth rate

Entry conditions

Unionization

Capital Intensity Purchase Amount


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Businesss Market Competitive PositionBusinesss Market Competitive Position

Relative Perceived Quality

Relative Market Share

Relative Capital Intensity

Relative Cost


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StrategyStrategy

Pricing

Research and Development Spending

New Product Introductions

Change in Relative Quality

Variety of Products and ServicesMarketing Expenses

Distribution Channels & Relative Vertical

Integration


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Performance ?Performance ?

ROI

ROS

Growth

Cash Flows

Value Enhancements Stock Prices


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Over all resultsOver all results

Profitability is affected by 37 basic factors

explaining more than 80%profitability

variation among business studied

7 are of primary importance


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7 Primary factors7 Primary factors

ROI

Market share

Product /service quality

Marketing Expenditure

R&D Expenditure Investment intensity (Investment/Sales)

Corporate Diversity


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Quality AppraisalQuality Appraisal

What was the% of sales of products and

services from each business in each year

that were superior to those of competitors

What was the percentage of equivalent sales

Inferior Products


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Corporate Diversity IndexCorporate Diversity Index

The % of total corporate employment in

each industry

The degree of similarity or differences

among the industries in which it participates


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Major FindingsMajor Findings--Links Between StrategyLinks Between Strategy

and Performanceand Performance

In the long run the single factor affecting a

SBU performance is quality of Its products

and services relative to its competitors

-In the short run superior quality yields increased profit viapremiums

- In the long run it is the most effective way for businessgrowth leading to market expansion and higher market

share

-Heavy marketing is not a substitute for inferior quality


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Links Between Strategy andLinks Between Strategy and

PerformancePerformance

Market share and profitability are strongly

related

-SBUs with more than 50% market share enjoy rateof returns more than 3 times greater than small

share SBUs(


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Market Position and ProfitabilityMarket Position and Profitability

The effectiveness of pursuing a strategy of

increasing market share is greater under the

following conditions-

-Rapidly growing market

-Relatively young industry

-Technological factors that mandate a high degreeof vertical integration

-Absence of product or process patent


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Product Value , Market Share andProduct Value , Market Share and

ProfitabilityProfitability

Value denotes the ratio of relative quality to

relative price

Improving product value enhances a SBUs

prospects for gaining share

Late entrants in the market place can

compensate for their lack of experiencefrom enhancing product value


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Market Factors and ProfitabilityMarket Factors and Profitability

Profits are highest in high growth markets

and lowest in declining markets

Markets involving large sum transactions

tend to be less profitable

Products and services that are important to

customers tend to be less profitable

High levels of exports boosts profitability


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Market Share and order of Market EntryMarket Share and order of Market Entry

First mover advantage to three primary

sources

-Technological Leadership

-Preemption of Assets

-Switching Costs and buyer choice under

uncertainty


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Start Up BusinessesStart Up Businesses

Factors that contribute to the success of new

business

-Characteristics of the market in which the

business operates

* High Growth Market

*Proprietary Technology

* Barriers to Entry

-Corporate Environment

Nature of Competitive Strategy pursued


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High investment Intensity acts as a

powerful drag on profitability

Market growth and relative share are linked

to cash flows , many other factors also

influence dimension of performance.So

forecasts of cash flows based on growthshare matrix is misleading


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Vertical integration is a profitable strategy

for some kind of business but not for

others.Whether increased verticalintegration helps or hurts depends on the

situations other than the cost of achieving it.

Most of the strategic factors that boost ROIalso contribute to long term value.


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BENEFITSBENEFITS

Provides a realistic and consistent method

for establishing potential return levels for

individual business

Stimulates managerial thinking on the

reasons for deviations from par performance

Provides insights to strategic moves thatwill improve ROI

Encourages more discerning appraisal of

business unit performance


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Suggestions From The DataSuggestions From The Data

For followers current profitability is

adversely affected by a high level of

product innovation, measured either by ratioof new product sales total sales or by R&D

spending.The market leaders profitability is

not affected by both of the above


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Suggestions From The DataSuggestions From The Data

High rates of marketing expenditure depress

Return on investment for followers not for

leaders .

Low ranking market followers benefit from

high inflation.For No 1,2,3 players inflation

has no relation to Return on Investment


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PIMS ReportsPIMS Reports

PAR REPORT

* What ROI (Cash Flow) is normal for this

combination of Strategic circumstances

*What are the businesss strengths and

weaknesses


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PIMS ReportPIMS Report

Strategy Analysis Report

* What would happen to

+Profit

+Cash

+Value of BusinessIf the business makes certain strategic

changes


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PIMS ReportPIMS Report

Optimum Strategy Report

What combination of strategic moves would

optimize a given measure of profit ,cash or

value of the business ?

Report on Strategic Look- Alikes

What combination of tactical moves would

maximize the probability of successfully

executing the selected strategy ?


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Limitations of PIMSLimitations of PIMS

It is not a total strategic concept -a

diagnostic appraisal device

All analysis conducted at SBU level-

analysis does not take in to consideration

the synergistic effects of SBUs for the entire

organizations Time frame of data


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PIMSPIMS --LimitationsLimitations

Problem of Multi colinearity between

explanatory environmental and strategic

variables

Treatment of outliers

PIMS development is an acceptable

application of Known Technology


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PIMS LimitationsPIMS Limitations

Suitability of data base as a guide for future

strategic decision

GIGO syndrome

Only used when major environmental changes

have not occurred

Not a representative of Industry base

No of data inputs required are quite large and

information that are not commonly available are to

be estimated.So data reliability is a question


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Thank YouThank You

Documents

Profit Impact