An important piece of research in the 1960’s provided the basis for understanding the importance of market share – and emphasized the implications for marketing and business strategy.
The Profit Impact of Market Strategy (“PIMS”) analysis was developed at General Electric in the 1960’s and is now maintained by the Strategic Planning Institute. The PIMS database provides evidence of the impact of various marketing strategies on business success.
PIMS summarizes information about profitability, cash flow and marketing factors. This information is used to help companies develop effective marketing strategies. Some of the components of PIMS focus on product quality, customer service levels and investments. PIMS is a performance improvement technique.
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 most important factor to emerge from the PIMS data is the link between profitability and relative market share. PIMS found (and continues to find) a link between market share and the return a business makes on its investment. The higher the market share – the higher the return on investment. This is probably as a result of economies of scale. Economies of scale due to increasing market share are particularly evident in purchasing and the utilization of fixed assets.
PIMS helps marketing managers to:
- Select the appropriate market to target
- Identify the marketing strategy that will maximize profits in a business unit
- Compare a firm’s actual return on investment (ROI) and return on sales (ROS) with the ROI and ROS that are expected from firms in comparable businesses and circumstances
A PIMS analysis can show a firm:
- How well it has met its profitability potential
- The reasons for its success or failure in achieving the expected profitability.
PIMS can be brieﬂy described as follows:
- There are general conditions that control an organization’s proﬁtability.
- These conditions are independent of industry.
- Strategic conditions that affect proﬁtability explain about two-thirds of a business’s results. The remaining third is explained by other factors relating to management skills.
- There are about 35 generally applicable parameters forming thebasis for a classiﬁcation of business units.
- A database covers data for about 3,000 business units, which makes it possible to compare a business unit with the average in the database for every one of the 30 strategic variables.
PIMS is an excellent instrument for providing metrics for business units in a diversiﬁed portfolio. PIMS has also attempted to evaluate value creation in synergic portfolios, or clusters.