The modelling of business profitability: A new approach

Arthur R. Burgess

Strategic Management Journal, 1982, vol. 3, issue 1, 53-65

Abstract: Various methods are in use for the ‘top down’ assessment and comparison of the future profitabilities of businesses. The most advanced is the PAR equation of the PIMS programme, which combines quantitative evaluations of the average effect of various business characteristics on profitability. However it is not a true model in the OR sense being essentially a linear regression equation. The proposed new approach is a first attempt to combine the characteristics in a way which models the bargaining of customers with suppliers who are in competition for the supply of a bulk product. All the constants in the resulting non‐linear equation (called 5C) are meaningful in marketing or production terms. The model is in a preliminary non‐optimized state, but seems to offer opportunities for ongoing development. It is in this spirit that it is offered for discussion.

Date: 1982
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