137

Impact ofstrategic planningon profitperformance

Study of 57 corporations,with 620 diverse businesses,establishes relationship betweenstrategic planningand profit performance

Sidney Schoeffler,Robert D. Buzzell, andDonald F. Heany

One of the most significantresearch projects under-taken by the MarketingScience Institute is the(ingoing profit impact ofniiirket strategies (PIMS)study- The basic idea be-behind PIMS is to providecorporate top management,divisional management,marketing executives, andcorporate planners witb in-sigbts and information onexpected profit perfor-mance of different kinds ofhusinesses under differentcompetitive eonditions.Among the 37 factorsinvestigated and analyzedare market share, totalmarketing expenditures,product quality, R&Dexpenditures, investmentintensity, and so on. Tbesefactors account for morethan 80% of the variationin profit in the more tbanfioo business units ana-lyzed. In tbis article, theauthors describe tbe high-lights of tbeir researchlindings.

Mr. Schoeffler, directorof applications for tbePIMS project, is a seniorvisiting researcb fellowat Harvard Business Sebool;Mr. Buzzell, PIMS researchdirector, is professor ofbusiness administrationand cbairman of marketingat HBS; Mr. Heany, man-ager-reports and liaison forthe PIMS program, is avisiting research fellowat HBS.

What rate of return on investment (ROI) is "normal"in a given type of business, under given market andindustry conditions? What factors explain differ-ences in typical levels of ROI among various kindsof businesses?

How will ROI in a specific business be affected hya change in the strategy employed? By a change incompetitive activity?

Many corporate presidents and planning directorswish they had more reliable answers to these kindsof questions, for they are at the heart of strategicplanning in the modern corporation. Consider someof the ways in which these questions arise:

Forecasting profits: In a diversified company, the usu-al practice is for business plans to be prepared byeach product division or other operating unit. Theseplans are then reviewed by corporate executives,often with the assistance of corporate staff spe-cialists. Among the key elements of each unit's planare, of course, estimates of investment requirementsand profits for future periods.

Often these forecasts are simply projections of localexperience. But when market conditions are ex-pected to change, or when a change in strategy is

Authors' note: We wish tn .icknowledRc the contributions to this article ofour associates on iho PIMS Pmictt Tc.ini. Ralph Sultan, who is now chicieconomist, Royal Bank of Canada, served as project director of Phase I ofPIMS durinR ig7i nnd was responsiiilc Eor mucli of the basic design of thestudy, Biadlcy Gale. Thomas Wilson, Bcmatd Catry, lames Conlin, and Rob-cri McDowell also participated in various siaRts nf iho tcscareh anil offeredvaluable suggestinns on this presentation of the tatcst results.

138 Harvard Business Review March-April 1974

contemplated, how reliable is the past as a guide tothe future?

Allocating resources: A major purpose of reviewingdivisional plans at the corporate level is to makeeffective allocations of capital, manpower, and otherscarce resources among divisions. Often the capitalappropriation requests of the divisions add up tomore than headquarters can provide.

The problem, then, is one of emphasis: Which prod-ucts and markets promise the greatest returns? Here,especially, the profit estimates supplied by divisionalmanagers are likely to be of doubtful reliability,since each division is in the position of pleadingits own case.

Measuring management performance: Closely relat-ed to the problem of forecasting profits is theneed to evaluate actual profit results. Suppose Divi-sion A earns 3o7r on its investment (pretax), whileDivision B achieves an ROI of only 15 %. Is A's man-agement twice as effective as B's, and should it berewarded accordingly?

Executives of Division B would no doubt object tothis. They would attribute differences in ROI todifferences in conditions such as market growth rateand strength of competition. Perhaps they are right.What corporate management would like, in thissituation, is some way of determining what level ofROI is reasonable or "normal" for different operatingunits under given circumstances.

Appraising new business proposals: Still anothercommon problem in strategic planning is that ofestimating ROI in a prospective new business whichis being considered for either internal developmentor acquisition. When the business is new to thecompany, actual experience, by definition, eannotbe consulted. Even when entry is proposed via ac-quisition, the current performance of the existingbusiness may be of doubtful reliability as a guideto its future.

The common thread running through the four typesof strategic planning situations just described is theneed for some means of estimating return on invest-ment in a given business, under given industry andmarket conditions, following a given strategy. Everyexperienced business executive and corporate plan-ner knows that ROI varies enormously from onebusiness to another and from year to year in an indi-

vidual division or product line. How can these vari-ations be explained and predicted?

Some answers to these questions are beginning toemerge from a unique research project called PIMS—a study of actual experiences of hundreds of busi-nesses which is aimed at measuring the profit im-pact of market strategies. Building on work that hasbeen under way at the General Electric Companyfor more than 10 years (see accompanying ruled in-sert), the PIMS project is a sharing of experienceamong 57 major North American corporations.

PIMS was organized in early 1972 as a project ofthe Marketing Science Institute, a nonprofit re-search organization associated with the HarvardBusiness School. The project was established as acooperative venture, with HBS faculty members andresearch assistants working alongside planning spe-cialists from industry. (Industry personnel did not,of course, have access to any of the data supplied byother companies.) The project is now organizing itsthird yearlong phase.

This article is a progress report on Phases I and IIof the PIMS project. In it, we shall descrihe how thestudy has been carried out and summarize some ofthe major findings of the first two years' work.

PIMS profit models

In Phase I of PIMS, 36 corporations supplied infor-mation on some 350 businesses. The information in-cluded descriptions of industry and market char-acteristics, as well as selected operating results andbalance sheet figures for the years 1970 and 1971.

(All financial data were submitted to PTMS in"scaled" form-that is, actual dollar amounts weremultiplied by a scaling factor, such as .5. This pro-cedure served to ensure both the confidentiality ofthe original data and the relationships among thefigures.)

Profit performanee 139

GE's search for answers

['he eurrent effort to find better ways to explain and pre-dict operating performance began back in 1960, as an in-ternal projeet at the Geneial Electric Company.

Fred f. Borcb, then GE's vice president-marketing services,called in Jaek McKitteriek, bis director of market researcb,and pointed out wbat today is generally aceepted as anaxiom: as the market sbare of a husiness goes up, so dooperating economies. Borcb asked MeKitterick to survey.iny relevant published researcb and tbe experience ofotber businessmen with respect to tbis relationsbip. Ifthe relationsbip were valid, executives migbt have an im-portant clue as to bow to improve operating results.

tqually important, Borch wanted to find a bandle fori\E's growing "manageahility" problem. Sales were already,it the $4 billion level. By 1970, they were likely to be$8 billion to $9 billion. How could corporate officers likehimself stay in toucb witb so many diverse businesses,

all tbe way from turbine generators to toasters?

After months of exploration, McKitteriek became con-vinced tbat the best way to address the question was toJo some basic pioneering work on the apparent causes oftiE's own successes and failures. Borcb agreed and author-ized a major research project to probe for "laws of themarket place." Project PROM (profitahility optimizationmodel) was organized under tbe direction of coauthor Sid-ney SchoefFler.

After five years of intensive research and testing. ProjectPROM produced a computer-based model that eaptured

the major faetors whieh explain a great deal of the varia-bility in return on investment. Since this model reflectsdata from diverse markets and industries, it is often re-ferred to as a "eross-seetional" model—as eontrasted to atime-series model hased on data over a series of years fora single business.

Witb tbe belp of tbis model, GE eould estimate the "aver-age" level of profit or investment or eash flow tbat wentwitb various combinations of the success determinants.The model did not and eould not predict tbe "precise"ROI of any one of GE's businesses in a given year.

Wben Borch became GE's ehief executive officer in 1964,be found tbe PROM model to be (a) a tool for detectinghigb-risk strategic moves, (b) a rieb source of questions forthe review of strategies proposed by divisional managers,and (c) a means of computing tbe differential between tbeentire company's finaneial goals and tbe expected aggre-gate earnings of its components. (If the model predicted ashortfall, it could then be used to display the futureimplications of "belt tightening," component by com-ponent.)

In addition to making extensive use of the model bimself,Boreh also encouraged his group executives and divisionmanagers to use it. He supported follow-on research toimprove tbe coverage and predictive powers of tbe earlymodels.

Today, cross-sectional models are standard elements ofGE's corporate planning system.

The primary purpose of Phase I was to establish thefeasibility of obtaining reasonably comparable datafrom a large number of diverse eompanies. Althoughdifferences in accounting systems and terminologydid pose problems, the project was successful: profitresults were explained and predicted with consid-erable accuracy. Moreover, the principal results ofGE's earlier work were confirmed. By and large, thesame factors that influenced ROI in GE businesses;ilso showed up in the analysis of profitability amongthe 36 diverse corporations.

Thus, in late 1972, MSI agreed to sponsor a second,enlarged phase of the PIMS project. This time, 57companies enlisted in the study and supplied moreextensive information, covering the years 1970-1972,for 620 businesses. Analysis of this data base overthe past several months has led to the current set

of PIMS profit models. For the composition of oursample of businesses, see Exhibit I.

Explaining ROI

The models we and our associates have developedare designed to answer two basic questions: Whatfactors infiuence profitability in a business—and howmuch? How does ROI change in response to changesin strategy and in market conditions?

In building quantitative models to explain ROI andchanges in ROI, we have drawn on economic theoryand on the opinions and beliefs of experienced exec-utives. Economic theory suggests, for example, thatdifferent "market structures"—i.e., the number andrelative size of competitors—will lead to different

140 Harvard Business Review March-April 1974

Exhibit 1PIMS sample of individual businesses

Number of companies

Number of businesses

Type of company:

Consumer product manufacturers

Capital equipment manufacturers

Raw materiais producers

Componenls manufacturers

Supplies manufacturers

Service and distribution

Total

57

620'

Percent Of totai:

19.8%

15.6

11.9

24.1

16.5

12.1

100.0%

"The data presented in Exhibits Ili-X are based on analyses of 521 busi-nesses. Since the time these analyses were made, intormation has beenreceived on an additional 99 businesses.

Exhibit riROi and key profit influences

Return on investment (ROt):The ratio of net. pretax operating income to average investment.Operating income is what is avaiiable after deduction ofailocated corporate overhead expenses but before deductionof any financial charges on assets empioyed. "Investment"equais equity plus iong-term debt, or, equivaientiy, totai assetsemployed minus current iiabilities attributed to the business.

Market share:The ratio of doiiar sales by a business, in a given time period, tototai sales by aii competitors in the same market. The "market"includes ail of the products or services, customer types, andgeographic areas that are directly related to the activities of thebusiness. For example, it includes all products and servicesthat are competitive with those sold by the business.

Product (service) quality:The quality of each participating company's offerings, appraisedin the following terms: What was the percentage of sales ofproducts or services from each business in each year whichwere superior to those of competitors? What was the percentageof equivalent products? Inferior products? The measure used inExhibit iV and Exhibit V is the percentage superior" minus thepercentage "inferior."

Marketing expenditures:Total costs for sales force, advertising, sales promotion, market-ing research, and marketing administration. The figures do notinclude costs of physical distribution.

R&D expenditures:Total costs of product development and process improvement,including those costs incurred by corpcrate-level units whichcan be directly attributed to the individual business.

investment Intensity:Ratio of total investment to sales.

Corporate diversity:An index which refiects (1) the number of different 4-digitStandard Industrial Classification industries in which a corpora-tion operates, (2) the percentage of total corporate employmentin each industry, and (3) the degree of similarity or differenceamong the industries in which it participates.

profit levels. Business experience indicates that prod-uct quality—a factor that has received little attentionfrom eeonomists—is also related to ROI.

Whatever economic theory or businessmen's opin-ions may suggest, however, the ultimate test ofwhether and how a given factor is related to profita-bility is an empirical one. To make such a test, wehave constructed an equation that explains morethan 8o% of the variation in profitability among the620 businesses in the PIMS data base.

This profit level equation includes more than 60terms composed of various combinations of 37 basicfactors. As might be expected, profitability is re-lated to many different factors. Some of the mostimportant ones are listed and defined in Exhibit U.

The PIMS profit level equation and a separate equa-tion which predicts changes in ROI have been usedto construct separate reports for eaeh business inthe data pool. These reports "diagnose" the factorsinfluencing ROI in a business, given all of its spe-cific characteristics sueh as its market, competitiveposition, capital intensity, and so on.

Because every business is, in some respects, unique,these diagnostic reports vary enormously. But bycomparing businesses that are similar in terms ofone or more basic profit-infiuencing factors witbbusinesses that have different characteristics, we canidentify some general patterns or relationships.

For example, we can determine an average relation-ship between market share and profitability by com-paring average levels of ROI for groups of businesseswith different market shares. This is the approachwe have used in subsequent sections of this article.

Profit determinants

As we mentioned a moment ago, our profit modelineludes 37 distinct factors which, in various com-binations, are significantly related to profitability.

Profit performance 141

However, we shall limit our discussion to just 3major determinants of return on investment re-vealed by our analysis of the PIMS data base—name-ly, market share, investment intensity, and com-pany factors.

Market share

Our analyses give strong support to the propositionthat market share is indeed a major influence onprofitability. As shown in Exhibit 111, ROI goes upsteadily as market share increases. On the average,businesses with market shares above 36'/^ earnedmore than three times as much, relative to invest-ment, as businesses with less than 7% share of theirrespective markets. (Each of the five market sharecategories shown in this exhibit represents approx-imately one fifth of the sample.)

The relationship between market share and profita-bility has been widely discussed since the inceptionof Project PROM at General Electric, when the ideawas relatively novel. But how and why market shareaffects profitability is not fully understood as yet.

Our findings suggest that businesses with relativelyhirge market shares tend to have above-average ratesof investment turnover, particularly working capital.Also, the ratio of marketing expense to sales is gen-erally lower for high-share businesses than for thosewith small market shares. These differences are in-dications of economies of scale that may go alongwith strong market positions.

However, much remains to be done, both in explor-ing the connection between market share and ROIand in determining how the relationship varies fordifferent types of businesses or for different marketconditions.

Whatever the reasons, the data in Exhibit Ul clear-ly show that it is very profitable to have a highshare of market. Beyond this, the PIMS profit modelsheds some light on how market share and otherfactors work together to influence ROI.

Consider, for example, the impact of both marketshare and product quality on ROI, as shown in £x-hibit IV. In this exhibit, and in several others thatfollow, we have divided the PIMS sample of busi-nesses into three approximately equal groups on thebasis of each of two factors. The percentages for

Exhibit IIIRelationship of market share to profitability

ROIPercent

Under 7% 7%-14% 14%-22% 22%-36% Over 36%

Exhibit IVEffect ot market share

Marketshare

Under 12%

12%-26%

Over 26%

and product quality on ROI

Product qualityInlsrior

4.5%

11.0

19.5

Average

10.4%

18.1

21.9

Superior

17.4%

18.1

28.3

each of the nine subgroups shown include between40 and 70 businesses.

The best of all possible worlds is to have both highmarket share and superior quality: businesses inthis category averaged 28.3/'^ return on investment.But even when quality was relatively inferior, aver-age ROI for high-share businesses was a respectable19.S/V • On the other hand, superior-quality produc-ers with weak market positions earned an averagei7.4/'( on investment, which suggests that qualitycan partially offset low share.

It should be noted that product quality and marketshare usually, but by no means always, go together.The percent distribution of the three market sharegroups, in terms of quality levels, was as follows:

Percent otbutinesseG wilh:

Market share

Under 12% ia%.26%

Inferior quality 47% 33%

Over 26%

20%

Average quality 30 36 30

Superior quality 31 50

Number of butlnMset 169 176 176

142 Harvard Business Review March-April 1974

Exhibit VImpact of expenditures on product quality and market share

AHigh marketing expenditures damage profitability whenquality is low

Productquality

Inferior

Average

Superior

Ratio of marketing expenditures lo sa l «

Low AverageUnder 6% 6%-11%

15.4% 14.8%

17.8 16.9

25.2 25.5

HighOver 11%

2.7%

14.2

19.8

BHigh R&D spending hurts profitability when market position isweak but increases ROI when market share is high

Merket share

Under 12%

12%-26%

Over 26%

Ratio of R&D costs lo sales

Low AverageUnder1.4% 1.4%-3.0%

11.4% 9.8%

13.8 16.7

22.3 23.1

HighOvqr 3.0%

4.9%

17.0

26.3

While it is not surprising that both market shareand relative quality influence ROI, in the shortterm there may be relatively little that managementcan do to change these factors. Are some strategiesmore profitable than others, given the basic com-petitive position of a business? Analysis of the re-sults achieved by the businesses in the PIMS samplesuggests that some guidelines can, indeed, be for-mulated for businesses in different positions.

Consider, for example, the data in Part A of ExhibitV. Here, as in Exhibit IV, the sample has been di-vided into three roughly equal groups, this time interms of (a) relative quality, and (b) the ratio ofmarketing expenditures to sales.

When quality is relatively low—exactly equivalentto competition or somewhat inferior—there is astrong negative relationship between marketing ex-penditures and ROI. In effect, these figures confirmthe old adage that "it doesn't pay to promote a poorproduct."

ROI is somewhat diminished by a high level ofmarketing expenditure for businesses with "average"or "superior" relative product quality—but not near-ly to the same extent as for competitors with lower-quality products. This might suggest, further, thatsellers of higher-quality products or services could

1. For further thoughts on this topic, see Theodore Levitt, "Innovative Imiia-tion," HBR September-Octnbcr 1966, p. 6j.

inflict severe short-term penalties on weaker com-petitors by escalating the level of marketing costsin an industry—and that lower-quality producersshould avoid such confrontations like the plague.

Another clue to how profit influences vary, depend-ing on competitive position, is given in Part B of Ex-hibit V. This shows, for businesses in the same mar-ket share categories as in Exhibit IV, the relation-ship of ROI to R&D spending levels. When marketshare is high, average ROI is highest when R&Dspending is aTso high—above 37̂ of sales.

These figures do not, of course, show which is causeand which is effect; possibly businesses that arehighly profitable—for whatever reason—are inclinedto invest more of their earnings in research. Mostlikely, the positive relationship between ROI andR&D spending reflects both this kind of "reversecausation" and a positive impact, in the other di-rection, of R&D on profits.

When market share is low, the relationship betweenR&D and profitability is exactly the reverse of thatexperienced by those with strong positions. Thehigher the level of R&D spending, the lower profitswere, on the average. Here, there appears to be lit-tle doubt about cause and effect: low profits wouldbe very unlikely to lead to high R&D spending.

We should emphasize, however, that these data rep-resent short-term effects. Since the PIMS partici-pants supplied information only for a three-yearperiod, it may well be that Part B of Exhibit V re-flects a "transitional" cost of innovation. Some sup-port can be given for this interpretation: amongbusinesses with low market shares, ROI was high-er [11.6%-) when new products comprised a rela-tively high proportion of total sales than when newproducts represented only a small fraction of sales(average ROI, 5-3%).

Thus, when and if R&D spending is successfullyconverted into new products, it can pay off. But themost profitable course of all̂ for businesses withweak market positions, may be to seek new prod-ucts without investing in research and development—via imitation, for instance.^

Investment intensity

Apart from market share and product quality, themost important determinant of return on invest-

Profit performance 143

ment that was revealed by our analysis of the PIMSdata pool is investment intensity, which is simplythe ratio of total investment to sales.

Exhibit VI shows the overall relationship betweenROI and investment intensity: the higher the ratioof investment to sales, the lower ROI tends to be.Apparently businesses with hifih investment inten-sities are not able to achieve profit margins sufficientto offset the greater amounts of investment they re-quire to sustain a given volume of sales. We suspectihiit a prime reason for this may be the heavy em-phasis placed on achieving high volume, and thushigh capacity utilization, in investment-intensiveindustries.

Since both market share and investment intensityare major determinants of profitability, it is not sur-prising that the combination of the two factors ac-counts for a substantial portion of total variation inROI. As shown in Exhibit Vll, average ROI for busi-nesses that enjoyed both a high market share and alow degree of investment intensity was 34-67'—more than 17 times the average return earned bythe unfortunate businesses with high investmentintensity and small market share.

In most cases, the basic level of investment intensityrequired for a given business is probably not sub-iect to much control by management. The amountof capital required to support a specified amount ofsales is determined primarily by the technology ofthe business and by traditional terms of trade.

However, very often management does have somechoices that affect investment intensity—such as thedegree of mechanization or computer utilization.Our data indicate that these types of investmentsshould be carefully controlled if market position isweak. Beyond this, what can managers do about in-vestment intensity? Is a business that requires ahigh investment/sales ratio simply doomed to ex-ist with low rates of return?

Comparison of various groups of businesses withinthe investment-intensive category shows that somestrategies are likely to be more profitable than oth-ers. Consider, for example, the data in Exhibit VllJ.Among businesses in the highest investment/salesgroup, ROI was strongly—and negatively—related tothe level of marketing expenditures. For businesseswith low investment intensity, the relationship ofROI to marketing expenditures was quite different:average profitability was actually higher when mar-

Exhibit ViRelationship of investment Intensity to profitability

ROI Percent

28.7%

InvestmentIntensity

Under 40% 40%-55% 55%-65% 65%-90% Over 90%

Exhibit VliLow market share plus high investment intensity equalsdisaster

Intensity

Under 45%

45%-71 %

Over 71 %

Market share

Undar 12%

21.2%

8.6

2.0

n%-M%26.9%

13.1

6.7

Over 28%

34.6%

26.2

15.7

Exhibit VliiHigh marketing expenditures damage ROI in investment-intensive businesses

Intensity

Under 45%

45%-71%

Over 71 %

Ratio ot marketing expenditures to sales

Under 8%

29.3%

17.6

10.9

6%-11%

31.7%

13.2

10.1

Over 11%

22.0%

18.3

3.9

keting expenditures were "moderate" in relation tosales than when they were low.

Similar comparisons of subgroups within the PIMSsample show that when investment intensity ishigh (a) high levels of R&D spending depress earn-ings sharply, at least in the short run, and (b) highlabor productivity is vital to profitahility. (The aver-age return for businesses with high investment in-tensity and low productivity-measured hy sales peremployee-was a negative 17̂ of investment.)

Company factors

A third category of profit determinants revealed hythe PIMS project consists of characteristics of the

144 Harvard Business Review March-April 1974

Exhibit iXROi varies with

Average ROi

Average ROI

size and diversity of parent company

Total company tales (In million*)

LowUnder $750

15.8%

Degree of diversity

Low

16.1%

Exhibit XLarge companies benefit most from

Company sales(in millions)

Under$750

$750-$1,500

Over $1,500

Market share

Under 12%

14.5%

6.8

12.0

AverageS7S0-»1,5OO

12.5%

Average

12.9%

HighOver $1,500

21.7%

High

22.1%

strong market positions

12%-26%

13.7%

15.0

17.8

Over 26%

19.6%

25.0

29.4

company that owns a business. Even when all of theeharacteristics of two businesses are identical, ouranalysis suggests that their profit results may varyif they belong to corporations that differ in termsof size, diversity, and other factors.

Exhibit IX shows average ROI levels for businessesbelonging to companies that are in "low," "average,"and "high" sales categories, and that have differentdegrees of corporate diversity. The range of corporatesize represented in the PIMS sample is, of course,limited: "small" companies are those with annualsales volume under $750 million. Within this range,ROI at the business level was highest for the largestcompanies and lowest for those in the "average"group.

The explanation for this, we believe, is that thelarge corporations benefit from economies of scale,while the smaller companies gain some advantagesfrom greater fiexibility. Those in the middle areneither fish nor fowl, and consequently they earnthe lowest rates of return.

The relationship between business-level ROI andcorporate diversity is similar to that based on com-pany size. On the average, ROI was practically iden-tical for businesses belonging to highly diversifiedcorporations and for those operated by nondiversifiedcompanies. Presumably, the diversified corporationsachieve good results through effectivenessness as"generalists."

At the other extreme, profitability refiects the ad-vantages of corporate specialization. The lowest lev-

els of ROI are for the middle group, which benefitsfrom neither. (These and other observed relation-ships between ROI and company characteristics arctentative findings, of course, because of the limitednumber of companies included in our sample.)

Our final example of a relationship between ROIand a combination of factors serves to illustratefurther how company characteristics affect profita-bility. In Exhibit X, we show average levels of ROIfor businesses that have different market sbares andthat belong to different company size groups.

As in earlier exhibits, the positive impact of a highmarket sbare is apparent. But, in addition, the dataindicate that larger companies derive greater ad-vantages from strong market positions than smallercompanies do. This probably refiects the ability oflarger companies to provide adequate support forstrong positions, in terms of management personneland funds for marketing or R&D.

On the other hand, smaller companies do slightlybetter than large ones in businesses with low marketshares. This lends support to the belief that therelatively small companies derive some advantagesfrom flexibility.

Applying the findings

The corporate applications of the PIMS findings aremany and varied. These include aid in profit fore-casting for individual business units, measuringmanagement performance, and appraising new busi-ness opportunities.

As part of the PIMS project, reports are prepared foreach business, showing how its expected level ofROI is infiuenced by each of tbe 37 distinct factorsincluded in the profit model. The result of this kindof analysis is wbat we call a "PAR" return on in-vestment for a business, given its market and indus-try environment, its competitive position, its capitalstructure, and so on.

Profit performance 145

Some of the participating companies are beginningto put the findings to work by using the PAR reportsas a standard of performance for individual divi-sions. For example, if actual ROI is substantiallyabove the PAR level, this in an indication that di-visional management is performing well. The excessof actual over PAR refiects gains made by currenttactical superiority, since the factors considered incalculating PAR are largely aspects of the strategicposition of the business.

Apart from management performance, special cir-cumstances may cause actual ROI to fall above orbelow PAR. For instance, the effects of patents andtrade secrets are not refiected in the profit model.Subject to this qualification, we believe that PAR orexpected profit levels derived from the PIMS model—or from a similar analysis of actual experiencesunder different conditions—can serve as a meaning-tul standard for evaluating actual results. Certainly,this kind of standard is preferable to the simple in-terdivisional comparisons used to judge divisionalprofits in many large companies today.

Potentially, the most valuable application of theI*IMS findings will come from using them to esti-mate the effects of strategic changes. Eacb participat-ing corporation has recently received a second setof reports which show how ROI in a given businesscould be expected to change, both in the short andlong term, if modifications were made in its strategicposition.

It is too soon to tell how accurate those estimateswill be. But it is clear already that many of themanagers and planners have obtained valuable in-sights into the reasons for past performance and themost fruitful directions for change.

Summing up

The PIMS project has demonstrated the feasibilityand the benefits to be realized when companies pooltheir experiences. Information on strategic actions.

market and Industry situations, and results achievedcan be organized into a multipurpose data base, andanalysis of tbis data base has yielded useful generalfindings. Executives of the participating companiesare beginning to utilize these results in the develop-ment and appraisal of strategic plans for individualbusiness units.

Beyond the current benefits, we can also speculateon the broader impact that the approach representedby PIMS may have on the functioning of the pri-vate enterprise economy.

Competition is at the heart of our economic sys-tem. Will the process of competition become moreeffective or less effective if PIMS-type informationbecomes increasingly available? Is the answer thesame if we judge effectiveness by some index of"social benefit," rather than by the health and prof-itability of individual businesses?

It seems entirely probable that the answers are: moreeffective and yes.

While competition has been one of the mainspringsfor the dynamic growth of the U.S. economy, thegreat wastage of competition is increasingly retard-ing our national productivity. Can we maintain thebenefits while reducing the drag of the wastage?

Research on multicompany data may enable us toaccomplish just that, by helping individual com-petitors to lessen the frequency and scale of theircompetitive mistakes, The pooled record of busi-ness successes and failures, analyzed in PIMS-typefashion, can identify the courses of action thatsimply have no plausible promise at all, whether forthe company or the customer or anyone else. It canalso identify the other courses of action that bavea good probability of yielding viable results. Com-petitors can therefore concentrate their energies onthe higher-yield actions, and not dissipate their re-sources on quixotic ventures and forlorn causes.

Business is not a zero-sum game, where one man'sgain is inevitably anotber man's loss. Sometimesmost everyone wins, and sometimes most everyoneloses. The systematic comparative study of ongoingexperience can help maximize the frequency of thefirst outcome and minimize the second.

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