Competing Against Price: Competitive Strategy and Profitability is Linked to Quality Improvement
Editor's note: It's now time to reacquaint ourselves with the incredible business strategy principles derived from the PIMS program. Six Sigma practitioners worldwide should read, study and apply the key PIMS strategic concepts and research.
Since 1972, the PIMS (Profit Impact of Market Strategy) program, working with an extraordinary data base of 3,000 business units, has developed clear, consistent and executable business strategy principles.
In The PIMS Principles: Linking Strategy To Performance (Free Press, 1987), Robert Buzzell and Bradley Gale summarized and explained the results of the PIMS study. They emphatically stated: "In the long run, the most important single factor affecting a business unit’s performance is the quality of its products and services relative to those of its competitors."
They demonstrated why and how a quality edge boosts profitability via higher prices. (Firms that ranked in the top third on relative quality sold their products or services, on average, at prices 5-6 percent higher, relative to competition, than those in the bottom third.)
In addition, they clearly show that improving relative quality is the most effective way for a business to grow. Buzzell and Gale clearly illustrated the linkage between relative quality and business performance in their Purdue chicken example:
"...Before Frank Purdue took over the chicken business from his father it was the quintessential commodity business. Chickens had as strong a claim to commodity status as pork bellies or crude oil.
The performance of each competitor was the same as each product and service attribute [this was actually ranked by the PIMS study]. This placed Purdue and his representative competitor at the 50th percentile on relative quality, neither ahead or behind. With no differences in performance on product and service attributes, the customer basically bought on price.
After Frank Purdue took over the chicken business, he pulled ahead on almost every non-attribute that counts in the purchase decision. His research showed that customers in his served market prefer their chickens plump... and careful breeding and the judicious case of food additives enabled Frank to produce meatier yellower chickens than competitors ..."
Buzzell and Gale detailed strategies and capital investments Purdue initiated to improve the real (and perceived) quality of his chickens. Needless to say, Purdue magnificently executed an advertising campaign dedicated to communicating the quality of his chickens to potential customers.
The key point: A company can "differentiate" its products by upgrading product via quality improvements and quality control. If customers want and need superior quality, they are willing to pay a premium price to obtain it.