財務績效與競爭策略 Competitive Strategies and Financial Performance-- An Application to Medical Service Industry

陳明賢 教授 台大管理學院 財務金融系

ROE = NI / Equity (manager’s goal)

ROA = NI /TA(operating strategies) ×

Leverage ratio =TA / E = (1+ D/E)(Financial strategy)

×

Asset turnover = Sales / TA(Low cost leadership)

Profit margin = NI / Sales(product differentiation)

The Du Pont System

NI: Net Income, TA: total Assets, D: Debt, E: Equity

The Du Pont System Firm pursues highest shareholders’ wealth (ROE). Firm needs to do good in both operating strategy

(good ROA) and financial strategy. (leverage) Usually Profitability and Asset Turnover have a

negative relation. High profitability shows a firm’s ability in product

differentiation. (product differentiation advantage) High asset turnover reflect a firm’s ability in asset

efficiency. A high TO firm tends to be able to lower its cost and increase demand. (low cost leadership)

Profitability

Asset Turnover

product differentiation

Low cost leadership

ResourcesResources

Distinctive competences

Capabilities

Cost advantageOr

Differentiation

Value Creation

A Model of Competitive Advantage

Competitive Advantage

A competitive advantage exists when an organization is able to deliver the same benefit as competitors’, but at a lower cost; (cost advantage) or deliver benefits that exceed those of competing products. (differentiation advantage)

Resources are the firm specific assets useful for creating a cost or differentiation advantage. Patent and trademark, propriety know-how Installed customer base Reputation and brand equity

Capabilities refers to the firm’s ability to utilize its resources effectively.

The firm’s resources and capabilities together form its distinctive competences. These competences enable innovation, efficiency, quality, and customers responsiveness.

How to improve operating performance?Improve profit margin (product differentiation)

Differentiation: A firm enjoys superior return only if the price premium leading to its differentiation exceeds the extra cost of being unique. Good brand name, utilize the core competence of the

organization. (specialized medical areas) First-mover advantage. The leader of the industry

usually owns highest margin. Foresee the trend of customers’ needs. (old age care, nursing home)

Value added. Identify which specialty will lead to most value added to the organization. (skin care, health management)

Customers loyalty, usually good service leads to Good customers satisfaction. (customer referrals are important in medical service industry)

Product Differentiation

Commonly required skills and resources

Common organizational requirements

Strong marketing abilities Strong R&D functions coordination

Long tradition in unique combination of skills drawn from other business.

Subjective measurement and incentives instead of quantitative measures

Corporate reputation for quality leadership

Amenities to attract highly skilled labor, scientists, or creative people.

Strong capability in basic research

Creative flair

Product engineering

Strong channels cooperation

Structural Analysis of Industry Competition

Industry Competitors

Rivalry Among ExistingCompetitors

Potential Entrants

CustomerBargaining Power

SupplierBargaining Power

Potential Substitutes

Asset turnover = Sales / TA(Low cost leadership)

Profit margin = NI / Sales(product differentiation) ×

Usually, the profit margin will decrease over time due to increase in competition.

The firm then can seek to increase asset turnover, to compensate the loss in margin, in order to maintain a good ROA.

This increase in asset turnover need to be done while firm still has advantage in margin.

How to improve operating performance?Improve asset turnover [Sales / TA]

Low cost leadership: if a firm maintains cost advantage, and command the prices around industry, can achieve a high profit margin, and hence higher rate of return.

Usually firms will lower price and pursue market share growth in order to maximize profit. (increase turnover)

Provide cost efficient new products, and increase customer use per unit of time.

Decrease assets invested. Reduce inventory (via efficient supply chain) Reduce idle assets

Increase efficient use of current assets. Better use of human resource and facilities Increase service channels.

Low Cost Leadership

Commonly required skills and resources

Common organizational requirements

Substantial capital investment and access of capital

Tight cost control

Process engineering skills Frequent detailed control report

Intense supervision of labor Structured organization and responsibility

Product designed for ease in manufacture

Incentive based on meeting quantity targets

Low-cost distribution system

Financial strategy-- Why use debt? What is good in using debt -- If the asset return

is greater than the cost of debt, then the higher debt ratio, the higher ROEROE = ROA + (ROA – Cost of Debt) x Financial Leverage

What is bad in using debt -- Use of debt increases the volatility in ROE (and EPS), and also bankruptcy risk.

Usually when economy is good, a levered firm’s equity would have better return (than it is un-levered); otherwise when economy is poor, a levered firm’s equity would have poorer return (than it is un-levered).

Assets Debt and Equity

Assets (100%)(ROA = 20%)

Debt (50%)Cost of Debt = 10%

Equity (50%)Return on Equity = 30%

Assets Debt and Equity

Assets (100%)(ROA = 20%)

Debt (75%)Cost of Debt = 10%

Equity (25%)Return on Equity = 50%

Un-levered (Equity $175,000 ）

50% debt (debt $87,5000, Kd=10%, Equity $87,500)

If Expected EBIT is $35,000 (before tax ROA =20%)

Expected EBIT $35,000 $35,000

Interest Exp. 0 8,750

Profit before Taxes $35,000 $26,250

Income Taxes (40%) 14,000 10,500

Profit after Taxes $21,000 $15,750

Expected ROE $21,000/$175,000=12% $15,750/87,500=18%

If the actual EBIT is ONLY $5,000 (before tax ROA =2.86%)

Actual EBIT $5,000 $5,000

Interest Exp. 0 8,750

Profit before Taxes $5,000 ($3,750)

Income Taxes (40%) 2,000 1,500+

Profit after Taxes $3,000 ($2,250)

Actual ROE $3,000/$175,000=1.7% ($2,250)/87,500=-2.6%

Financial Leverage and EPS

(2.00)

0.00

2.00

4.00

6.00

8.00

10.00

12.00

1,000 2,000 3,000

EP

S

Debt

No Debt

Break-even point

EBIT in dollars, no taxes

Advantage to debt

Disadvantage to debt

A good financial strategy should be integrated with operating environment (risk) Firms with high operating risk, tend to

adopt less financial risk financing (equity financing dominant) alternatives, to avoid high interest payment.

Firms with low operating risk, tend to adopt more financial risk financing (debt financing dominant) alternatives, to increase ROE.

SWOT analysis Strength: factors that give the firm a comparative

advantage in the market place. Such as customer loyalty, innovative R&D, market leadership, or strong financial resources.

Weakness: when competitors have potentially exploitable advantage over the firm.

Opportunities: environmental factors that favor the firm, include a growing market for the form’s products; the exit of a competitor; identification of a new market or product segment.

Threats: are environmental factors that can hinder the firm in achieving its goals. Such as: a slowing domestic economy; an increase in industry competition; threats of entry; buyers and suppliers seek to increase their bargaining power; or new technology that can hurts this industry.

Strategies External Environment

Opportunities Threats

InternalAbilities

Strength Aggressive Expansion Diversify or Respond

Weakness Turnaround Plan Rebuild or Exit

SWOT analysis

Future Trends for Health Care Management Differentiations are usually resulted from unique co

mbination with other industries Engineering: nano-materials Information technology: Business: develop health care products Service industry: Old age care, counseling

Focus: every hospital should develop its own core competence (specialized areas)

Value creation: identify, manage, and execute Spot the trend: every societal change would lead to

new demand in medical service. Find where your clients are, don’t just wait for them!