Transcript product differentiation

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
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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
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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)
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Resources are the firm specific assets useful
for creating a cost or differentiation advantage.
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Patent and trademark, propriety know-how
Installed customer base
Reputation and brand equity
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Capabilities refers to the firm’s ability to
utilize its resources effectively.
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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)
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Differentiation: A firm enjoys superior return only
if the price premium leading to its differentiation
exceeds the extra cost of being unique.
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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)
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×
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]
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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.
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Reduce inventory (via efficient supply chain)
Reduce idle assets
Increase efficient use of current assets.
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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?
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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
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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)
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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
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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
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Differentiations are usually resulted from unique
combination with other industries
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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!