Profit Impact Of Market Strategy Research Articles

Why do hurdle rates differ from the cost of capital?

This article considers the role of hurdle rates in the analysis of investment decisions, analysing a sample of business units from the PIMS (Profit Impact of Marketing Strategy) databank of North American companies, which provides rarely observed data on hurdle rates. Although the standard literature suggests that firms should only invest if the return exceeds the cost of capital, there are several theories that explain the use of investment hurdle rates that differ from discount rates. In fact, our data show that instances where hurdle rates are either above or below the discount rate are common. In a statistical analysis, we find that this behaviour can be explained by a combination of agency theory and real options theory. We take this as important evidence that a full explanation of capital investment cannot be accomplished without a consideration of behavioural and strategic influences on the investment decision.

What strategic investments should you make during a recession to gain competitive advantage in the recovery?

Purpose: To investigate where investment during a recession pays off and where it does not. Methods: Comparing analogous businesses in the unique PIMS database, we highlight three measures to distinguish between successful and unsuccessful strategies. They are: average profitability during recession, defined as return on capital employed, change in profitability (ROCE) during first two years of recovery, and change in market share during first two years of recovery. Scope: 1,000 businesses were compared (drawn from 4,100 in the PIMS database). Results: PIMS’ evidence distinguishes between “good costs”, “bad costs” and “it depends costs”. “Good costs” are those that should be increased and intensified during recession. “Bad costs” are those that need to be pruned hard in recession. “It depends costs” are those where the right actions are dependent on the strategic position of an individual business at the time the recession begins. Conclusions and recommendations: “In a recession, dare to invest aggressively in marketing, innovation and customer quality”, is the clear message to be drawn from PIMS (Profit Impact of Market Strategy) research into which business strategies aid success during and after a market downturn lasting several years.

Explaining Variations in the Advertising & Promotional Costs/Sales Ratio: A Reanalysis

The authors focus on their 1990 model (B&K; see Balasubramanian and Kumar 1990 ), which indicates that market share, market growth, and their interaction are important predictors of the ratio of advertising and promotional costs to sales (A&P/S). In sharp contrast, Ailawadi, Farris, and Parry's (1994; AFP) subsequent replication attempt asserts that market share and market growth are not good predictors of A&P/S. The authors’ research documents serious problems in AFP's study, including erroneous model estimates caused by incorrect execution of the SAS TSCSREG procedure, pooling data for analysis in ways that cannot be justified statistically, data preparation errors, and inappropriate operationalizations of market share and market growth. With regard to analyses of Profit Impact of Market Strategy and brand-level data reported by AFP, the authors again find that AFP have analyzed data in inappropriate ways, given the conceptual framework of the B&K model. Because these problems provide compelling evidence to disregard AFP's results, the authors conclude that the criticisms advanced by AFP against the B&K model are not valid.

The allocation of R&D funds between product development and process improvements: a follow-up study

An earlier study published in the Journal of Strategic Marketing (volume 3) analyses the link between R&D intensity, technological environment and competitive positioning. This paper builds on that study by answering the question 'how are R&D funds allocated between product development and process improvements?' The allocation of funds between product development or process improvement is crucial to business units in a rapidly changing technological environment. Current research recognizes the strategic nature of such choices, and suggests that managers have to understand their technological environment before they gain a competitive advantage. Using the Profit Impact of Market Strategy (PIMS) database, a sample of 2,498 business units are cross-classified into stable and turbulent technological environments, and by the stage of product life-cycle. Analysis of variance is applied in an attempt to determine the response pattern of the product/process technological mix for business units following different...

The link between R&D intensity and competitive positioning under different technological environments

The decision as to the magnitude of R&D spending is crucial to business units in a rapidly changing technological environment. Current research recognizes the strategic nature of such choices and suggests that managers have to understand their technological environment before they gain a competitive advantage. This paper presents a contingency model in an exploratory attempt to determine R&D intensity based on competitive strategy, product lifecycle and the perceived technological environment of the business unit. Using the Profit Impact of Market Strategy (PIMS) Data Base, a sample of business units are cross-classified into stable and turbulent technological environments and by the stage of the product lifecycle. Analysis of variance is applied in an attempt to determine the response pattern of the level of R&D intensity for business units following different competitive strategies. The results indicate that R&D intensity is dependent upon the stage of the product lifecycle, the technological environment and the competitive strategy of the business unit.

Combining knowledge-based and database technology in a tool for business planning

This project has designed and implemented a decision support tool for business planning based upon information from market research. The tool is an integrated solution, based upon a knowledge-based system, database, numerical processing and analysis of the user's own skills. The paper will show how the knowledge required was represented within the system and how the knowledge-based component was integrated with the rest of the system. The knowledge encapsulated within this system is based upon the findings of the PIMS (Profit Impact of Marketing Strategy) project, supported by portfolio analysis.

Production Processes and Organizational Policies

The Profit Impact of Marketing Strategy (PIMS) database was used to test the relationship between production process type (small batch, large batch/assembly, and continuous) and eight organizational policy decisions (new products, new plant and equipment, finished goods inventory, raw materials/work‐in‐process inventory, capacity utilization, fixed capital assets, manufacturing costs, gross margin). In addition, the effect of six broad industry types on the proposed relationships was also investigated. Overall industries, raw materials/work‐in‐progress, capacity utilization, manufacturing costs, fixed assets, and gross margin varied with production process type while new products, new plant and equipment, and finished goods inventory did not vary. Within each industry, the findings showed less support for the relationships between production process type and the eight organizational policy decisions. Further analysis showed that most of the industries are dominated by a production process type. Suggests a movement away from the traditional differentiation of production process technologies and a shift of research emphasis to the differing uses of a particular production process technology within an industry.

An analysis of the profitability of businesses of diversified companies

This paper presents empirical evidence on the relationship between diversification and profitability. The data set used in the analysis includes data on 55 U.S. corporations who participated in phase II of the project on Profit Impact of Market Strategy (PIMS). Following upon the pioneering work of Carl Kaysen, complex indices of diversification are developed. Cross sectional regression analyses indicate a statistically significant positive association between measures of corporate diversification and measures of business profitability (return on investment or profit margin on sales). These relationships are insensitive to variations in the treatment of outliers, and do not appear to be accounting artifacts. The extent to which the relationship between diversification and profitability reflects the realization of real efficiency gains from diversification, or the augmentation of market power cannot be determined from these results.

Entry order, market share, and competitive advantage: A study of their relationships in new corporate ventures

This research explored the extent to which entry order (the decision to enter a market early as a “pioneer,” or to wait and follow) determines not only market share, but other competitive factors such as position and promotion that late entrants might hope to employ to overcome a pioneer's advantages. The study analyzed data on 119 nonservice new corporate ventures (consumer and industrial) from the Profit Impact of Marketing Strategy (PIMS) research data base, STR4. Based on a review of the strategic management and marketing literatures, three hypotheses on the effects of entry order were generated and subsequently tested. The first hypothesis states that pioneers achieve higher market shares than followers. Since, a priori, the market share for the pioneer has to be larger than the market share split among later entrants, the issue is the rate at which the early entrant's market share will decrease as additional businesses enter, what we term the “degree of lateness effect.” Later entrants have the choice of being an early follower, that is entering the industry soon after the pioneers, or waiting until the industry matures (late entrants). A high degree of lateness effect would indicate that early followers would gain higher market shares than late entrants. An analysis of the data indicated that pioneers have significantly higher market shares than followers and that little degree of lateness effect existed between early and late entrants. The second hypothesis states that pioneers will achieve differentiation advantages (in such areas as product and service quality, promotion, and technological positioning) greater than followers. There is considerable theoretical and empirical evidence that pioneers are able to generate competitive advantages through name recognition, image leadership, the establishment of technical standards which make switching to other products difficult, and superior consumer information advantages due to market lead times. An analysis of the data indicated that pioneers have significant competitive advantages in product/service quality and technology over followers. The one area where pioneers did not have a competitive advantage over followers was in advertising and promotion. The third hypothesis states that followers will achieve cost advantages greater than pioneers. While learning curve theory suggests that pioneers will enjoy cost/price advantages, contrasting arguments can be made that followers can enjoy lower costs by “coattailing” on the pioneer's efforts to educate consumers, develop a dominant design, and create an infrastructure to span the gap from raw material suppliers to finished good deliveries. We suggest that because pioneers are likely to have attained differentiation advantages, followers will have only one alternative left: compete on the basis of price and become the lowest-cost producer. An analysis of the data indicates that while followers do appear to have lower prices than pioneers, followers do not have significantly lower cost structures. This result implies a lower level of profitability for a follower strategy. Overall, the results of this study advance the notion that new corporate ventures should enter as pioneers, rather than as followers. Pioneers had higher market shares and stronger competitive positions (higher quality, more differentiated products, and better service) than followers. Followers appear to have few successful competitive options available outside of promotion for gaining market share.

Examining Performance of U.S. Multinationals in Foreign Markets

In the U.S., a basic tenet of business philosophy is that profitability is related to market share. The generality of this finding in markets outside the U.S. is examined based on a sample of product businesses drawn from the PIMS (Profit Impact of Marketing Strategy) data base. All businesses belong to firms whose corporate headquarters are located in the U.S. The relation between 7 marketing mix variables and market share and ROI (return on investment) is compared. In general, the relationship between market share and ROI appears to hold in European and other foreign markets. The marketing mix variables associated with these measures of performance, however, as well as the strength of the relationship, vary by market area.

Intensive growth strategies: A closer examination

The feasibility of modeling the effects of alternative growth strategies on market performance is the subject of this report. Intensive growth strategy alternatives are discussed in terms of key products and market variables and implied growth opportunities. Microanalytic relationships among growth strategy components are developed and then reformulated in terms of a cross-sectional econometric model. Three variations of this model are tested using the Profit Impact of Marketing Strategy (PIMS) data base. The results indicate that a main-effects model and a mixed model that allows for interaction effects among alternative growth strategies provide reasonable fits to the data. The results supporting the existence of interaction effects lend support to the contention that growth strategies are not totally divorced from one another and should consequently be considered in tandem when formulating strategy policies.

PIMS and BCG: New horizons or false dawn?

AbstractStrategic market opportunities arise either because a firm is exceptionally well placed competitively or because it recognizes the opportunity, on the basis of private information, before others. Strategic market analysis must reflect these two possible routes to attractive opportunities. Both the approaches developed by the Strategic Planning Institute (SPI) through its Profit Impact of Market Strategy (PIMS) and the Boston Consulting Group's (BCG) growth/share matrix fail to reflect the full impact of competitive expectations and risk. Analysis of PIMS data should be directed more towards generalities of limited direct economic significance whereas the BCG approach should be used mostly in the context of experience curve effects. Neither approach should dominate a full analysis of the specific nature and critical ambiguities in any strategic option.

Competitive position effects and market share: An exploratory investigation

This paper investigates the relative competitive position of a firm with a view toward determining those marketing effort dimensions that significantly influence market share. The study differs from previously published reports in that it utilizes the Profit Impact of Marketing Strategy (PIMS) data base on relative marketing effort to identify key marketing effort variables for two broad classes of goods: consumer nondurables and capital goods. The framework for a competitive positive effects model is developed in terms of nine relative marketing effort dimensions expressed along categories roughly corresponding to competitive superiority, parity, or inferiority. Hypotheses for the two classes of goods, gleaned from the available marketing literature, were empirically tested with use of linear regression models. Though the sets of coefficients relating to the nine marketing decision variables significantly differed ac across industries, similar patterns were found in both groups with respect to the relative breadth of product line and relative product quality dimensions. The results also tended to (a) support the claim of Buzzel et al. [Product Quality, Strategic Planning Institute, Cambridge, 1978] that for product quality to matter, improvements relative to competition must be substantial, and (b) show that for certain effort dimensions striving for competitive superiority may not generate sizable increases in relative market share.

Planning Product Line Strategy: A Matrix Approach

anticipated performance of its products. This information should encompass both (1) consumer evaluation of the company's products, particularly their strengths and weaknesses vis a vis competition (i.e., product positioning by market segment information); and (2) information on actual and anticipated product performance on relevant criteria such as sales, profits, and market share. Whereas much has been written in recent years about the use of product positioning in strategic marketing planning,' little new information has been published about formal methods of using the product's actual and anticipated performance characteristics in terms of sales, profits, and market share as inputs to the design of a strategic marketing plan for the firm's existing product line. Several attempts have been made to use product sales (or, more explicitly, stage in the product life cycle) as a guideline for marketing strategy, including specific recommendations on items such as the type and level of advertising, pricing, and distribution.2 Yet these recommendations have usually been vague, nonoperational, not empirically supported, and conceptually questionable, since they imply that strategies can be developed with little concern for the product's profitability and market share position.3 In the 1970s, some attention has been given to va ious aspects of sales, market share, and profitability as guidelines for marketing planning. Most notable of these efforts are the Marketing Science Institute's PIMS (Profit Impact of Market Strategy) project, which examines the determinants of profitability in the modern corporation,4 and the Boston Consulting Group's product portfolio analysis.s These approaches do not, however, provide a comprehensive approach for product line planning based on all three measures-sales, market share, and profitability-which are integrally tied to positioning the product by market segment. The objective of this

Market share, profitability, and business strategy: Determinants of profitability

Most businessmen believe there is a very strong relationship between high market share and increased profitability. Indeed, this connection is supported by findings from the 3‐year‐old PIMS (Profit Impact of Market Strategy) project, a study of the determinants of profitability in the modern corporation. In a recent MSI Working Paper, Professors Robert D. Buzzell (Harvard Business School) and Bradley T. Gale (University of Massachusetts), and Dr. Ralph G. M. Sultan (Royal Bank of Canada) analyze the PIMS data to show that market share is a major determinant of business profitability. (In an earlier MSI Working Paper, “PIMS: A Breakthrough in Strategic Planning,” PIMS researchers Drs. Sidney Schoeffler, Robert Buzzell, and Donald Heany reported the major study findings and described the PIMS project's objectives, design, and background.)