By vertically integrating, however, PetVet forged a new business model. This corporate level strategy entailed significant risk. It was entirely conceivable that the untested concept would fail, but if it succeeded it would catch the competition flat-footed.
It required several business-level strategies to make PetVet succeed. Ultimately, the company has adopted a low cost model for both the retailing and the veterinary branches of the business. At the retail level, PetVet realized that the threat represented by warehouse retailers was significant. They could succeed if they established a presence in an area first, but would have difficulty competing head-to-head against those firms, especially on cost. Thus, while adopting a low cost strategy, PetVet also adds an element of differentiation in the presence of the veterinary clinic.
The clinic itself, while a means of differentiating a retail store, is operated more on a low cost basis as well. Most veterinary clinics operate on an approximation of a differentiated strategy, but without any real differentiation. By leaning towards a low cost strategy, and adding the differentiation of an on-site pet supply store, PetVet seeks to present a unique value proposition to the marketplace.
There are several advantages to the corporate-level strategy. The strategy developed by PetVet is unique. Thus, they automatically gain first mover advantages. This is double valuable in gaining market share in veterinary work, because the industry having been stagnant for so long, such a bold move would have caught everybody by surprise. One way to take advantage of an opportunity is to develop a strategy that exploits an industry weakness. In this case, it was the unorthodox vertical integration.
This corporate strategy also functions as a means of defense against incursions by warehouse-sized pet supply stores. These stores have significant competitive strength. Had PetVet been a direct competitor, they may have found it difficult to compete on a cost basis against the warehouse stores. As a result, they needed a point of differentiation. The strategy to deliver differentiation in terms of service synergies while maintaining a low cost strategy in the core retailing business was an excellent means of establishing market position. By creating the market, position is easily established.
The disadvantage is that creating a new market is not easy. There is no guarantee that the marketplace will respond to the specific type of offering PetVet put forth. Their previous attempts at building alliances with pet stores had yielded only marginal success. If the market in this case does not respond, PetVet is left without competitive advantage.
Additionally, creating a new market entails substantial capital input and the demolition of the old business. For Carter and Johnson, starting PetVet was like staring an entirely new business. They had gained some experience and knowledge with their previous venture, but they would now be faced with shutting those ventures down to attempt a concept that had never been tested, at significant financial risk.
The advantage of the business level strategy was that it addressed some of the previously-identified operational weaknesses. PetVet in any format was not going to thrive without addressing issues of inventory management and lack of differentiation. By adopting a low cost strategy on both fronts, PetVet was able to not only work the synergies of the two businesses but to find ways to operate each successfully.
At the core of PetVet's business level strategy was to compete head to head with the competition on price, but add the differentiating wrinkle of vertical integration. This had the disadvantage of lacking focus. Typically, a firm should have a business-level strategy that is either differentiated or low cost. It is difficult for any company to do both, and firms that attempt to often find themselves bested at both by the competition.
PetVet has not, however, chosen to attempt both low cost and differentiation because they want the challenge of doing the impossible. Rather, they do it because it seemed the only reasonable way to gain differentiation in the marketplace. It gives them an opportunity to tailor the activities in its value chain, which if it can do so uniquely, can give it a competitive advantage (Hodgetts, Porter, 1999). The advantage may not be sustainable, but that it exists is, alone, motivation for such business-level strategies.
3. PetVet engaged in three tactics in order to create barriers to entry. Remember that the most significant threat to PetVet's venture came from warehouse-style...
Without the distraction of running a veterinary clinic, these outlets could focus solely on their low-cost strategy. Thus, even the diversification of services offered by PetVet may not have been sufficient a barrier to entry without further tactical moves.
PetVet's first barrier was their economies of scale. This derives from the size of their retail operations and the contracts they have signed with suppliers. Other warehouse operators would also need to learn the veterinary business, which would impose further costs associated with the learning curve. It has been established that while managers weight all barriers to entry in their market entry decisions, the most weight is given to the set-up costs (Karakaya & Stahl, 1989). Thus, by establishing contracts and a pedigree as a volume-mover, PetVet earned itself a significant barrier to entry. It is difficult for new entrants, which typically do not have the same access to economies of scale, for enter a market and tackle the cost leader head on.
The second barrier to entry that PetVet created with the high set-up costs. As much money as it takes to open a warehouse-style store, it takes substantially more to incorporate a veterinary clinic. There is a steep learning curve with respect to that aspect of the operation that will impose significant costs on new entrants. Yet without a vet clinic, the new entrant would appear to have a lesser offering. Basic capital budgeting techniques illustrate the importance of high set-up costs to creating barriers to entry. The up front costs are not discounted, whereas revenues that are slated for years down the road will be discounted significantly. Thus, the higher the set-up costs the riskier the project.
The third barrier to entry created by PetVet is the loyalty program. The company took the competencies that it had developed in the pre-warehouse days that had won them strong customer loyalty and applied them to the new business model. This helped PetVet develop its loyalty program, and litter-to-the-grave approach to servicing the customer. If the market is close to saturated, then any new competitor must steal customers away from existing firms in order to get a foothold in the market. The PetVet loyalty program reduces the likelihood that customers will leave PetVet for another competitor. This increases the cost of acquiring customers at the new entrant's store. As a consequence, the new entrant is less likely to be profitable and therefore less likely to enter the market in the first place.
The barriers to entry that PetVet created are of limited use, creating little in the way of long-term, sustainable advantage. If we take a look at each individually, we can see that none of these barriers is enough to keep competitors at bay, and in the long run these barriers are as likely to prove harmful to PetVet. The economies of scale are difficult for PetVet to beat, but they can be duplicated. There may not be a direct equivalent of PetVet, but there are numerous potential substitutes, from existing pet supply store chains to potential incursions from Wal-Mart or like store. PetVet is a local chain and as such its economies of scale are limited. They are sufficient to insulate the firm today but will be insufficient in future.
High set up costs did not stop PetVet. They had experience, an idea and access to capital. They are not the only firm with access to capital. Even though the cost of setting up in this business is high, the 70% net margins that PetVet presently experiences will convince somebody to put the capital together and enter the marketplace.
The loyalty program is the strongest barrier to entry. Yet it does not insulate against attractive growth in market size or favorable changes in demographic composition. A new competitor could be enticed into the market regardless of the loyalty program and then proceed to take market share.
Indeed, the barriers to entry that PetVet has erected are actually rather flimsy. There is danger that PetVet will become complacent (Han, et al., 2001), feeling as though it is attained success. A new competitor can come along with an innovative idea or operational excellence and steal market share that PetVet once thought it had protected. It is important for PetVet to understand that the business environment is fluid and that there are very few barriers to entry that cannot be overcome with a little creativity. PetVet entered the market in such a way. The barriers to entry may not have been as high, but nor are the current barriers insurmountable, particularly not to a large firm given the small stake PetVet has carved…
