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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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Links Between Strategy andLinks Between Strategy and
PerformancePerformance
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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Links Between Strategy andLinks Between Strategy and
PerformancePerformance
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