Profit Impact Of Marketing Strategy Pims

In 1960, the vice president of marketing services at GE authorized a large-scale project (called PROM, for profitability optimization model) to examine the profit impact of marketing strategies. Several years of effort produced a computer-based model that identified the major factors responsible for a great deal of the variation in return on investment. Because the data used to support the model came from diverse markets and industries, the PROM model is often referred to as a cross-sectional model. Even today, cross-sectional models are popularly used at GE.

In 1972, the PROM program, henceforth called PIMS, was moved to the Marketing Science Institute, a nonprofit organization associated with the Harvard Business School. The scope of the PIMS program has increased so much and its popularity has gained such momentum that a few years ago its administration moved to the Strategic Planning Institute, a new organization established for PIMS.

The PIMS program is based on the experience of more than 500 companies in nearly 3,800 "businesses" for periods that range from two to twelve years. "Business" is synonymous with "SBU" and is defined as an operative unit that sells a distinct set of products to an identifiable group of customers in competition with a well-defined set of competitors. Essentially, PIMS is a cross-sectional study of the strategic experience of profit organizations. The information gathered from participating businesses is supplied to the PIMS program in a standardized format in the form of about 200 pieces of data. The PIMS database covers large and small companies; markets in North America, Europe, and elsewhere; and a wide variety of products and services, ranging from candy to heavy capital goods to financial services. The information deals with such items as

• A description of the market conditions in which the business operates, including such things as the distribution channels used by the SBU, the number and size of its customers, and rates of market growth and inflation.

• The business unit's competitive position in its marketplace, including market share, relative quality, prices and costs relative to the competition, and degree of vertical integration relative to the competition.

• Annual measures of the SBU's financial and operating performance over periods ranging from two to twelve years.

Overall Results

The PIMS project indicated that the profitability of a business is affected by 37 basic factors, explaining the more than 80 percent profitability variation among businesses studied. Of the 37 basic factors, seven proved to be of primary importance (see Exhibit 12-3).

Based on analysis of information available in the PIMS database, Buzzell and Gale have hypothesized the following strategy principles, or links between strategy and performance:

1. In the long run, the most important single factor affecting a business unit's performance is the quality of its products and services relative to those of competitors. A quality edge boosts performance in two ways. In the short run, superior quality yields increased profits via premium prices. In the longer term, superior or improving relative quality is the more effective way for a business to grow, leading to both market expansion and gains in market share.

2. Market share and profitability are strongly related. Business units with very large shares—over 50 percent of their served markets—enjoy rates of return more than

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