Over the past 50 years PIMS has worked with many different businesses – this has allowed us to identify nine PIMS principles:
I: despite all the changes we undergo, business situations generally behave in a regular and predictable manner.
The operating results achieved by a particular business – its profit, cash flow, growth etc. – are determined in a rather regular and predictable fashion by the “laws of nature” that operate in business situations. This does not mean that we can foretell the exact results of every business in any given short period. However, it does mean that we can estimate the approximate results (within 3-5 points of after-tax ROI) of most businesses over the medium term (3-5 years), on the basis of observable characteristics of the market and of the strategies employed by the business itself and its competitors.
II: business situations basically obey the same “laws of the marketplace”.
People, despite their many differences in appearance, personality, religion, behaviour, state of health, etc., obey the same laws of physiology. In the same way, businesses, despite their many differences in product, company personality, state of profit health, etc., obey the same laws of the marketplace. The first fact makes possible the applied science and art of medicine, in which a trained physician can usefully treat any human being. The second makes possible the applied science and art of business strategy, in which a trained strategist can usefully function in any business. Of course, many physicians and many strategists elect to specialise, but that merely implements a division of labour; it does not argue against the principle.
III: the laws of the marketplace determine most of the observed variance in operating results across different businesses.
Some businesses are very profitable or have favourable cash flows; others are very unprofitable or have unfavourable cash flows. When we try to understand the variance between them, the laws of the marketplace account for most of that variance.
This means that the characteristics of the served market, of the business itself, and of its competitors constitute about 80% of the reasons for success or failure, and the operating skill or luck of the management constitute about 20%.
Another way of stating Point III is to say that doing ‘the right thing’ is much more important than doing ‘the thing right’.
IV: there are nine major strategic drivers of profitability and net cash flow.
In approximate order of importance, they are:
1. Lean investment: Technology and the chosen way of doing business govern how much sales or value added are generated for each pound of capital employed in the business. Lean investment generally produces a positive impact on percentage measures of profitability or net cash flow; conversely, businesses that are mechanised or automated or inventory-intensive generally show lower returns on investment and sales than businesses that are not.
2. Customer preference for the products and/or services offered: The specifying of customers’ preference for the non-price attributes of the business’s product/service package, compared to those of competitors, has a generally favourable impact on all measures of performance. In so doing, this helps businesses to understand competitive advantage and leverage from it.
3. Market position: A business’s share of its served market (both absolute and relative to its three largest competitors) has a positive impact on its profit and net cash flow, but tends to create a ceiling for growth.
4. Managing complexity: Many costing systems underestimate the true costs of supplying small orders, so businesses unnecessarily proliferate products and customers. This hurts performance.
5. People: Businesses in periods of opportunity and change need adaptability, a participative culture and incentives to thrive. In maturity, businesses need discipline and clear systems to survive.
6. Innovation/differentiation: Extensive actions taken by a business in the areas of new product introduction, R&D, market effort, etc., generally produce a positive effect on its performance if that business has strong market position to begin with. Otherwise they can create growth but destroy profits.
7. Customer power: Customers buying (or specifying) in large money amounts, particularly for customised products, are in a clear position to demand big discounts and costly features. This impacts negatively on performance and creates greater exposure to business risk.
8. Growth of the served market: Growth is generally favourable to dollar measures of profit, indifferent to percent measures of profit, and negative to free cash flow.
9. Vertical integration: For businesses located in mature and stable markets, vertical integration (i.e. make rather than buy) generally impacts favourably on performance. In markets that are rapidly growing, declining, or otherwise changing the opposite is true.
V: the operation of the nine major strategic influences is complex.
Therefore, when formulating business strategy, it is dangerous to use simplistic logic.
VI: the product is not the issue.
In modelling profitability for a business, it doesn’t matter if the product is chemical or electrical, edible or toxic, large or small, or purple or yellow. (Except insofar as these are attributes of customer preference – e.g. the banana business!). What matters are the characteristics of the business, such as the nine cited before. Two businesses making entirely different products, but having similar market growth, customer structure, production structure, market position, etc., usually show similar operating results. And two businesses making the same products but differing in their profile generally show different operating results.
VII: the strategic business characteristics tend to assert themselves over time.
This means basically two things. First, when the “fundamentals” of a business change over time (for example, its relative quality improves or its vertical integration goes down, whether by inadvertence or as a result of deliberate strategy) its profitability and net cash flow move in the direction of the norm for the new position. Second, if the actually-realisedperformance of a business deviates from the expected norm (expected on the basis of the laws of the marketplace), it will tend to move back toward that norm.
VIII: business strategies are successful if their fundamentals are good, unsuccessful if they are unsound.
A good strategy is one that can confidently be expected to have good consequences; a poor strategy is one that can confidently be expected to have poor consequences. The laws of the marketplace are a reliable source of confidence in estimating both the cost of making a given strategic move and the benefit of having made it.
IX: most clear strategy signals are robust.
Where a particular strategic move for a business is clearly indicated to be a good idea (that is, where the cost/benefit projections look clearly favourable), that signal is usually quite robust. This means that moderate-sized errors in the analysis – such as wrong assessments of current customer preferences or wrong estimates of future market growth – don’t usually render the signal invalid; and moderate-sized changes in the position of the business – such as its vertical integration or operating skill – don’t either.
