PIMS

Brief summary of PIMS

PIMS is an acronym of Profit Impact of Market Strategies and it stands for a project in which the influence affected by the market strategies on the profit, is surveyed and studied. Originally, this project was initiated as an inhouse project of General Electric (G.E.) in 1960, for the sake of explanation and forecasting of the results of operation management. It covered market strategy and rate of return on investment. The G.E. used computer based regression model and experimented for the sake of explanation of essential differential portion of rate of return on investment (R.O.I.) on the bases of large quantity of operation data covering various operational fields. Thereafter, this project was taken over and continued till the beginning of 1970s by Harvard University, Marketing Science Research Institute.

In 1975, a non-profit making organisation called SENRYAKU KEIKAKU KENNKYUSHO (Strategy Planning Research Institute) was established with an aim to integrate the overall activities by member companies in order to promote the PIMS programme at a larger scale. In 1980, more than 200 companies with about 2000 operations participated and supplied the financial data related to different and multiple number of their operation fields. On the other hand, the research institute analysed the data and carried out the analysis of significant information which was obtained through this exercise. The results was provided back to the companies as feedback.

The problems, which are pursued by PIMS can be summed up as given below:

(a) What is the relationship of various factors and average standard of cashflow and R.I.O. in various operation fields?
(b) What would be the type of transmission in cashflow and R.I.O. in future assuming that the market environment and strategy are constant in a particular operation?
(c) How should the marketing strategy be modified so that the performance improves in future in particular operation?
(d) What would be the type of transition in a cashflow and R.I.O. in future due to the change in the strategy to be adopted in a particular operation?

If a suitable solution can be found for all these problem, it will definitely contribute in the actual management from the view point of resource distribution like management and capital as well as the analysis of performance of forecast of profits. Further, it will also be possible probably to apply the finding for the other purpose like evaluation of new operation opportunities.
However, the analysis is unit of PIMS should be so designed that the comparison among these should become meaningful. For the purpose, the following operation division standards have been provided.

· A service or a product which has been clearly differentiated and defined from others is being provided.
· The clear competition rivals are more than a particular fixed number.
· It does not depend upon other divisions for technology, product and marketing. The operation is self-sufficient and independent.
· Has or can have the management strategy for that particular operation.

Results of PIMS

Various findings have been arrived at regarding the relationship between market strategy and the performance as result of PIMS project. The most conspicuous findings are given below.

(a) The market share is the biggest most important factor among the various factors which affect the profits. Specially, the R.O.I. affects the market share in a big way. The concrete results showed that average R.O.I. for an operation having 40% or above market share was 2.5 times of R.O.I. for operation where market share is 10% or less. This means that the R.O.I. increases by 5% on an average when market share has gone up by 10% (figure 2.7)
(b) The qualitative difference of market share price among the enterprises shows the tendency of widening with the passage of time. It was confirmed that certain level of shares form the boundary line. The enterprises having market share above this boundary line show an increase whereas those which have lower market share go further down.
(c) A fixed pattern was confirmed with regard to distribution of shares among the enterprises. Comparing the shares of la few companies with some of the top enterprises in the order of their holding, it was found that in most of the markets, it showed the relationship in geometrical series with about 0.63 as the ratio.
(d) The increase in market cost in excess of market growth rate quality improvement and new product development contributes a great deal to the expansion of market share.
(e) The cost standards do not contributes to the increase or decrease of the market share.

Effect of the Experience

What is the effect of the experience?

Experience effect is a concept which was advocated by Boston Consulting Group (B.C.G). Generally, human beings learn in depth while accumulating the experience. In the process, their proficiency continuous to increase. Even in the industrial operation, the accumulation of experience plays a very important role in the reduction of cost.

Whatever has been discussed so far, was something very obvious. However, B.C.G. has proved with substantial evidence that the unit cost for the production and sale of a product reduces in percentage, everytime the accumulated production quantity in a particular product field doubles.

B.C.G. has conducted surveys in various fields ranging from automobiles, I.C, electric shaver, chicken broiler and wide ranging products and services. According to their survey, it was found that the percentage decrease in the cost should normally be ranging between 10% to 30% everytime the cumulative production quality doubles.

Why such an experience effect is seen? It is considered to be due to the involvement of factor given below.

· Improvement in working capability (as the individuals gain experience in different professions, their proficiency level increases, displaying the effect) .
· Specialisation of professions (normally this happens as a result of division of labour).
· Improvement of production process and the reforms (improvement in operation method etc.)
· Upgradation of production equipment (improvement of existing production equipment and automation etc.).
· Improvement in product design.
· Improvement in yield and bad product ratio.

The effect of experience probably can be considered as the effect obtained by a combination of all these factors.

However, there is no basis for determining whether the clear relationship. Rationally considering, any industry would like to take up only those aspects in the beginning in which cost can be reduced effectively with little efforts normally there are more opportunities of reducing the cost also. On the other hand, the experience curve can probably be understood as an index at the time of determining the cost or while planning target for the cost reduction.

The cumulative production quality expands rapidly when the scale is bigger. Therefore, the profit of experience effect and the scales act simultaneously more often. As a result, there is a tendency to pick up the two simultaneously. However, the two should be treated independently as the concepts. The experience effect is directly proportional to cumulative production quality from the past upto the current state, whereas the economy of scale is proportional to the current production quality.

1. Share Expansion Strategy
Whenever cost forms an important factor in an industry. And it is possible to except the cost reduction thought experience effect, having larger share of cumulative production quantity as compared to other companies in the industry, gives an edge for forming the resource of competition power.

Let us try to understand this fact through example. There are three companies ‘a’, ‘b’ and ‘c’ which have the major share in a particular industry and they all are above a particular experience curve. The cumulative production quantity and cost for these three companies at the present stage is shown by the three points on the broken line corresponding the strength line. The industrial cost follows the lower line as the experience of the overall industry accumulative for the sake of competition. However, at this point, the industrial cost is the going cost as expressed in the figures. The margin of the three companies is expressed by the difference in the cost of an enterprise and the going cost. The company ‘A’ which has the maximum cumulative production quantity shows the maximum margin, whereas the company ‘C’ which has little cumulative production quality has a deficit.

Under such conditions, the fight for the market share in most cases tends to spread over. Larger the shares, higher the sales quantity and better is profit rate per unit of the product. As a result, the company can have a beneficial position from the point of view of relative rate of share. Further, the company in question will enjoy the profit of scale also, the difference in share keeps on widening further with the passage of time.

With such being the prevalent conditions, there is possibility that the companies may appear which resort to dumping and try to capture the shares at a low cost beyond the future projected reduced cost. Further, if tendency prevails, there is a danger of sluggish cost competition.

Basic Concept for Formulation of Operation Strategy

The operation strategy, as described so far, is established on the basis of competition analysis, customer analysis, business system analysis and one’s own capability as well as the management resources and the mission of the operation as assigned by the head Office. It is not as simple a solution that can be obtained automatically simply by carrying out a certain analysis. The enterprises, under certain given circumstances, very often select a similar type of operation strategy.

A few major concepts, which are useful for establishing the operation strategy, are explained here along with the similar type of operation strategies which are often picked up depending upon the development state of industries and the management resources as available with the industry.