Profit Impact on Marketing Strategy and Brand Management: Methodological Perspectives

Profit Impact on Marketing Strategy and Brand Management: Methodological Perspectives

Dr. Rajagopal (Monterrey Institute of Technology and Higher Education ITESM, Mexico) and Amritanshu Rajagopal (Dentalia, Mexico)
DOI: 10.4018/978-1-60566-248-0.ch014

Abstract

In developing strategy, both corporate and business unit management need to be able to realistically appraise the level of performance that should be expected for a given business, and to be clear as to what factors explain variations in performance between businesses, and within a business over time. Important guidelines that help address these questions have been developed from the Profit Impact of Market Strategy (PIMS) program1.
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Background To The Pims Methodology

At the heart of the PIMS program is a business unit research database that captures the real-life experiences of over 5,000 businesses. Each business is a division, product line, or profit centre within its parent company, selling a distinct set of products and/or services to an identifiable group of customers, in competition with a well defined set of competitors, for which meaningful separation can be made of revenue, operating costs, investment, and strategic plans. The business’s served market is defined as the segment of the total potential market that it is seriously targeting by offering suitable products and/or services and toward which it is making specific marketing efforts. On this basis each business reports, in standardized format, over 300 items of data, much of it for at least four years of operations. ROI is defined as follows: pre-tax after deduction of corporate expenses but prior to interest charges divided by average investment where this is equivalent to the historic net book value of plant and equipment plus working capital (i.e., total assets less current liabilities). Note that four year averages are used for all figures. The information collected covers, inter alia, the market environment, competitive situation, internal cost and asset structure, and profit performance of the business. A full listing of the information captured by the PIMS database is given by The Strategic Planning, Institute’s PIMS data manual2.

The businesses in the database have been drawn from some 500 corporations, spanning a wide variety of industry settings. These corporations are based for the most part in North America and Europe. An understanding of why one business should be loss making while another achieves premium returns lies at the heart of strategy formulation. To explain this variance, cross-sectional analysis is carried out on the database to uncover the general patterns or relationships that account for these profit differentials. The fundamental proposition that underpins this approach is that the name of a business has no bearing on its level of performance. Research on the database has identified some 30 factors that are statistically significant at the 95 percent probability level or better in explaining the variance in profitability across businesses. These factors, which operate in a highly interactive way, collectively explain nearly 80 percent of the variance in ROI across the database. The more powerful factors are listed in Table 1 under four categories: marketplace standing, market environment, and differentiation production structure. It should be noted at the outset that part of the explanation of variance is definitional. This comes about because some of the profit-explaining variables, such as investment/sales revenue, contain elements, which are also present in the construction of the dependent variable, ROL However; the emphasis is on behavioral relationships. Definitional elements are included in the independent variables only when it is impossible to separate out the behavioral and definitional effects of a particular factor.

Table 1.
Key- determinants of ROI in the PIMS database
Category of factorImpact on R0I as factor increases
Marketplace standing
Market share
Relative market share
Served market concentration
Market environment
Real market growth
Selling price inflation
Market differentiation
Purchase amount immediate customers
Importance of purchase to end user
Differentiation from competitors
Relative product quality
Relative price
Relative direct cost
% Sales new products
Marketing/sales revenueb
R&D/sales revenue
Capital and production structure
Investment/ sales revenue
Investment/ value added
Receivables/ investment
Fixed capital /investment
Capacity utilization
Unionization
Labor effectiveness*
Positive
Positive
Positive
Positive
Positive
Positive
Negative
Negative
Positive
Positive
Negative
Negative
Negative
Negative
Negative
Negative
Negative
Positive
Negative
Positive
Negative
Positive

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