A Scientific Approach

to Strategic Management?
PIMS
We learn from experience
but
Can we learn about business strategy and
performance by analysing the experience of
companies?
Experience
PIMS Approach
Statistical Analysis
and
Logic
PIMS and Portfolio Planning
Similarity:
The notion that financial objectives and the general
characteristics of the strategy of a business should
adopt depend on:
(1) strategic position

(2) characteristics of the marketplace
PIMS and Portfolio Planning
Differences:
(1) PIMS looks at many dimensions of strategy and
the market environment


(2) PIMS have used a database to determine how
strategies affect results under different
circumstances
What is PIMS?
A unique & continually
evolving management
technology
Origins:
General Electric (US)
Harvard Business School
Strategic Planning Institute
Approach:
Measurement
Rigorous analysis
Learn from experience of
others

Focus on the business unit,
where:
Wealth is created
Competitive advantage gained
Marketing and investment
decisions implemented
Profit Impact of
Market Strategy
PIMS History
PIMS
Europe
Consulting
Corporate level
Business unit level
Planning partner
Research Association
Corporate membership
Tools for planners
Conferences for applications
Research Programme
Industrial economics meets marketing
Data at the strategic business unit level
Harvard
Business
School
Strategic
Planning
Institute
PIMS
Associates
GE
1960s
1970s
1980s
1990s
Looking for insights
Looking for applications
Meeting needs
The PIMS Program: Key Concepts
Facts are more durable than theories

Assemble real and diverse business experiences where
competitive advantage is achieved: the business unit

Find and quantify the differences that matter

Insights from strategic (not just industry) peers

Process to aid management judgement and consensus-
forming

Run by participating companies to ensure confidentiality/
usefulness
Strategic Business Unit (SBU)
PIMS
An SBU is defined in terms of:
Production/Services
Customers
Competitors
Focus on SBUs because:
Best context for investment and marketing decisions
Where financial performance is determined
An SBU is characterised by distinctive
Marketing skills
Technology
Maturity
Competitive position
Financial results

Industry Categories
PIMS
The data base contains:
Established
Businesses
Consumer
Start-up
Business
Service and
Distribution
Industrial
Durable
Non-Durable
Capital Goods
Raw & Semi Finished Goods
Components
Suppliers
PIMS - Two Steps in Addressing Any
Issue
DIAGNOSIS
Benchmarks
for reference
PIMS
PIMS
Knowledge
Base
Cross-sectional
research
PIMS
Peers
Experiences
of others
PRESCRIPTION
Market Share Drives Profitability
0
5
10
15
20
25
30
35
40
Market Share
ROI
8
15
24 37 %
IDEA 1: Par
Par is your expected value given your
characteristics
Example: Weight vs. height/sex. Real life has
more than two explanatory factors - such as age,
diet, and exercise. So does PIMS.
Height
Weight
Your height
(Man)
Weight above Par
Weight at Par
Weight below Par
Assessing Strategic Potential

Competitive Position
Market Share & Relative Share
Relative Quality
Capital & Production Structure
Investment Intensity
Investment Mix
Operating Effectiveness
Capacity Utilisation
Value Added
Market Characteristics
Real Market Growth
Customer Power
Customer Logistics
Innovation
Industry Concentration
Impact on Par ROI
Weak Strong
Inferior Superior
Heavy Light
Working Fixed
High Low
Full Low
High Low
Growth Decline
Small Large
Simple Complex
Moderate None Rapid
Concentrated Fragmented
-
0
+
Par ROI = PIMS Mean ROI + sum of impacts
IDEA 2: Peers
What have you in common:

Industry Peers Strategic Peers
MATERIALS
Material - Cost
Purchases/Sales
Supplier Relations
Capital Intensity & Mix
Process (Batch/Continuos/..)
Customisation
Productivity
Capacity Utilisation
Customer Characteristics
Channels
Marketing Mix
Lifecycle Stage
Growth
R & D Mix
Concentration
Market Share
Market Rank (1,2,3,..)
Relative Quality
Relative Price
Relative Innovation
Patents
OPERATIONS
CUSTOMERS
LIFECYCLE STAGE &
MARKET GROWTH
CONCENTRATION
???
Selection and Analysis of Strategic
Peers

3000 PIMS Businesses
Filtering
Important
Characteristics
of your business
30 Strategic Peers:
Look-Alikes
Measure
of Success
LOSERS WINNERS
Significant
Differences
Possible Winning
Moves
Analysis
The PIMS Database
The database generates the following:

General principles of business strategy

Specific reports on each business that is a member
The Par report
The Strategy Analysis report
The Optimum Strategy report
Report on Look-Alikes (ROLA)

PIMS isnt

a substitute for understanding
your





PIMS is

an effective way to





that understanding
markets
customers
competitors
industry economics
elucidate
enhance
communicate
Are There Any General Strategy Principles?
PIMS -
- We can relate business strategies to performance
by studying past experience
- Many companies (3,000+), large and small
- Wide variety of industries
- North America, Europe, elsewhere
- Wide variety of products and services
PIMS Approach
How can Strategy principles be discovered?
- Market Conditions

- Competitive Conditions

- Financial and Operating Performance
Reaction against Strategic Planning
Business Strategy:
Mechanistic application of formulas to complex management
problems, with predictably unhappy consequences
PIMS claim that there are NO
formulas, easy wins, precise laws of strategy
BUT
- There are principles that can help
- Some apply to all businesses, others apply to specific types
or under certain conditions
- There are always situation-specific factors
Primary Linkages Among Relative Quality,
Market Share, and Profitability
Production/
operations
efficiency
Product/service
conception and
design
Served
market(s)
selection
Relative Costs
Relative quality
of products/
services
Relative Scale
Relative Prices
Profit Margins
Relative
Value
Market
Share
Nine Findings of PIMS
Businesses behave in a regular and predictable manner

All business situations are alike in obeying the laws of the
marketplace

Laws of the marketplace determine about 80% of variance
in results across different businesses
Nine Findings of PIMS
There are nine major strategic influences on profit and
cash flow:
- Investment intensity
- Productivity
- Market position
- Growth of served market
- Product quality
- Innovation/differentiation
- Vertical integration
- Cost push
- Current strategic effort
Nine Findings of PIMS
The operation of the nine major strategic influences is
complex

Product characteristics do not matter

The expected impact of strategic business characteristics
tend to assert themselves over time

Strategies are successful if their fundamentals are good

Most clear strategy signals are robust
Source: PIMS Associates Ltd. Reproduced with permission.

Average PIMS
ROI (%)
RELATIVE MARKET SHARE
RELATIVE
QUALITY
High
Low
High
Low 25% 60%
9 17 29


13 20 29


16 24 37
(a) A market leader with premium
products has a very strong
competitive advantage
-10%
10%
MARKETING/SALES
Average PIMS
ROI (%)
RELATIVE
MARKET
SHARE

Low
High
25%
60%
Low High 5% 10%
14 13 10


21 20 21


30 36 34
(b) Market share is critical when
marketing intensity is high
Figure 7.5(i) The PIMS findings relating to various
types of consolidation strategy
15 16 15


22 20 20


27 32 27
MARKETING/SALES
Average PIMS
ROI (%)
RELATIVE
QUALITY
-10%
10%
5%
10%
(c) Heavy marketing is no
substitute for quality
40
30
20
10
ROI
(%)
51 30 41 66
(d) High investment is a
drag on ROI
Investment/sales (%)
Figure 7.5(ii) The PIMS findings relating to various
types of consolidation strategy
30
20
10
-4 0.6 4.6 10.9
ROI
(%)
(f) Shrinking markets provide less
opportunity for profitable
performance
Long-term real market growth (%/year)
Average PIMS
ROI (%)
Low High 5% 10%
Low
High
70%
110%
INVESTMENT
VALUE ADDED
23 30 47


12 20 27


5 10 18
(e) The combination of weak
marketing position and investment
intensity is very damaging
Figure 7.5(iii) The PIMS findings relating to various
types of consolidation strategy
PIMS and Consolidation Strategies
Market share is important
asset turnover
purchasing costs
marketing costs

Quality Matters

Marketing cannot substitute quality

Capital intensity damages profits?

Shrinking markets squeeze profits

PIMS and Market Penetration
Easiest in growing markets

Costly in static markets

Complacency a danger

Segments used as `bridge-heads

Perceived quality - a key issue
Source: PIMS Associates Ltd. Reproduced with permission
(a) Dominant-share businesses are not hurt by
heavy research and development
Low
High
26%
60%
RELATIVE
MARKET
SHARE
0.5% 2.1%
R&D / SALES
High
Low
Average PIMS
ROI (%)
13 13
10
23
22
15
32 35
33
Figure 7.7(i) The PIMS findings relating to
product development
Bottom quartile
Top quartile
Median ROI
Bottom quartile
Top quartile
Median ROI
Market leaders (rank 1) Market followers (rank 2,3...)
New products (last 3 years)/sales (%)
ROI
(%)
New products (last 3 years)/sales (%)
(b) High innovation hurts lower-ranking competitors
ROI
(%)
60
50
40
30
20
-10
0
10
0 10 40
60
50
40
30
20
-10
0
10
0 10 40
Figure 7.7(ii) The PIMS findings relating to
product development
PIMS and Product Development
Low share companies suffer from R&D



Rapid product development damages profits