PIMS Analysis

Why is Market Share important? An important piece of research in the 1960's provided the basis for understanding the importance of market share - and emphasised 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.

The Strategic Planning Institute (SPI) develops and manages the Profit Impact of Market Strategy (PIMS) database. The PIMS database consists of strategic data that includes financial data, information on customers, competitors, quality, and structure. These data are provided to SPI by client corporations, which contribute data on their business. The database contains the experiences of over 3,000 strategic business units operating across all industries, offering many different types of products and services in regional, national, and international markets.

Nine Basic PIMS Proposition on Business Strategy

Business situations generally behave in a regular and predictable manner. All business situations are basically alike in obeying the same "laws of the marketplace". The "laws of the marketplace" determine about 80% of the observed variance in operating results across different businesses. There are nine identifiable major strategic influences on profitability and net cash flow. The operation of the nine major strategic influences is complex. Product characteristics don`t matter. The expected impacts of strategic business characteristics tend to assert themselves over time. Business strategies are successful if their "fundamentals" are good, unsuccessful if they are unsound. Most clear strategy signals are robust.

The implication is that business situations can be understood by an empirical scientific approach, therefore the process of formulating business strategy is becoming an applied science. The research indicated that the "laws of the marketplace" determine about 80% of the observed variance in operating results across different businesses.

The implication here is that doing the right thing seems to be much more important than doing it well, and that being in the right business in the right way is 80% of the story; and operating that business in a skilful or lucky way only count for 20%.

Regarding the nine major strategic influences on profitability and net cash flow, they account for most of the 80% of the determination of business success or failure. In the order of importance, they are as follows:

Capital investment intensity - exhibiting an inverse relationship. Businesses that are mechanized or automated or stock-intensive generally show lower returns on investment and sales than businesses that are not. Productivity - exhibiting a direct relationship. Businesses producing high value added per employee are more profitable. Share of served market - exhibiting a direct relationship. A business`s share of its served market (both absolute and relative) has a positive impact on its profit and net cash flow. Growth rate of market served - exhibiting a direct relationship. The faster the market growth, the greater the profits. Perceived product or service quality - exhibiting a direct relationship. Quality as defined by the customers` evaluation of the business`s product or service package, as compared to that of competitors, generally has a favorable impact on all measures of financial performance. Innovation and differentiation - exhibiting a direct relationship. Especially relevant to market leader who has a strong market share to begin with. Otherwise impact is usually less obvious. Vertical integration (make as opposed to buy) - exhibiting a direct relationship in mature or stable markets, but an inverse relationship elsewhere. Relative cost control (cost push) - exhibiting a direct relationship. Depends on whether the business is positioned to pass on inclusive costs.

Current strategic effort - exhibiting a direct relationship in the long term, but an inverse relationship in the short term.

The operation of the nine major strategic influences is complex. Sometimes they offset each other, in which case it is the net effect that matters, and sometimes they reinforce each other, in which case a cumulative effect occurs.

The key driving force is the "law of the market place" This implies that product characteristics on their own don`t matter as far as the success or failure of the organizations is concerned. What matters are the characteristics of the business.

Merely because a strategy has worked for another business in similar situations does not mean that the strategy is appropriate for all businesses in that same situation. The major impact of PIMS has been its findings that the two major drivers of increased return on equity are quality and market share.

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 utilisation of fixed assets.

Example

The Indian two-wheeler (2W) industry reported a strong double-digit volume growth of 17.3% in Q2, 2011-12 (YoY), even as several other automobile segments showed signs of a cyclical dip in growth during this period. While rising inflation, fuel prices and interest rates has adversely affected the automobile industry at large, the 2W industry has been relatively less impacted so far.

Hero MotoCorp is widely regarded as the dominant motorcycle manufacturer in India What does dominant mean? It refers to the fact that Hero MotoCorp (which is the market leader) has a very high relative market share. In other words, it is substantially bigger than the next largest competitor.

This can be illustrated by the chart below which lists the leading Indian motorcycle manufacturers in 201012

Market Share Trends The Indian motorcycles segment continues to be dominated by Hero MotoCorp (erstwhile Hero Honda) which has maintained its market share at over 55% in the domestic motorcycles segment over the last four quarters

How might Hero MotoCorp's market dominance enable it to further increase its market share? The reasons for the advantages of size include: Buying advantage: An ability to use size to source product more cheaply is a clear advantage in an industry that faces rapidly declining consumer prices Volume advantage: As a low-margin business, retailers that can sell in high volumes are in the best position to gain market share Access to new products: The largest retailers typically have first-mover advantage in stocking new "in demand" products that have just been released Advertising scale: As a price-led business, access to national advertising provides the ability to keep customers regularly informed of the latest product deals. This helps to reinforce customer perception of value, in addition to strengthening the Hero MotoCorp brands Access to retail property: With the continuing trend towards out-of-town, larger destination stores that offer a broader range of choice, and with restrictive planning laws limiting opportunities, the larger motorcycle manufacturers have both the financial and operational capacity to secure such important new sites.