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 The Du Pont System ROE = NI / Equity (manager’s goal) ROA = NI /TA (operating strategies) Profit margin = NI / Sales (product differentiation) × × Leverage ratio =TA / E = (1+ D/E) (Financial strategy) Asset turnover = Sales / TA (Low cost leadership) 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 product differentiation Low cost leadership Asset Turnover A Model of Competitive Advantage Resources Resources Distinctive competences Capabilities Cost advantage Or Differentiation Value Creation 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 Potential Entrants Industry Competitors Supplier Bargaining Power Rivalry Among Existing Competitors Potential Substitutes Customer Bargaining Power Profit margin = NI / Sales (product differentiation) × Asset turnover = Sales / TA (Low cost leadership) 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 ROE ROE = 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 unlevered); otherwise when economy is poor, a levered firm’s equity would have poorer return (than it is un-levered). Assets Assets (100%) (ROA = 20%) Debt and Equity Debt (50%) Cost of Debt = 10% Equity (50%) Return on Equity = 30% Assets Assets (100%) (ROA = 20%) Debt and Equity 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 0 8,750 Profit before Taxes $35,000 $26,250 Income Taxes (40%) 14,000 10,500 $21,000 $15,750 $21,000/$175,000=12% $15,750/87,500=18% Interest Exp. Profit after Taxes Expected ROE If the actual EBIT is ONLY $5,000 (before tax ROA =2.86%) Actual EBIT $5,000 $5,000 0 8,750 Profit before Taxes $5,000 ($3,750) Income Taxes (40%) 2,000 1,500+ $3,000 ($2,250) $3,000/$175,000=1.7% ($2,250)/87,500=-2.6% Interest Exp. Profit after Taxes Actual ROE Financial Leverage and EPS 12.00 Debt 10.00 EPS 8.00 6.00 4.00 No Debt Advantage to debt Break-even point Disadvantage to debt 2.00 0.00 1,000 (2.00) 2,000 3,000 EBIT in dollars, no taxes 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. SWOT analysis Strategies External Environment Opportunities Internal Abilities Strength Aggressive Expansion Weakness Turnaround Plan Threats Diversify or Respond Rebuild or Exit Future Trends for Health Care Management Differentiations are usually resulted from unique combination 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!