Updated: Dec 29, 2019
Last week I talked about Walmart and how they won’t be running you out of business – if you handle it the right way. I brushed on the topic of Michael Porter’s generic business strategies: low cost, differentiation, and focus.
Here, I want to dive further into the “low cost” strategy and discuss what it is – and what it isn’t. You might be surprised, so it’s worth better understanding, even if it’s not your strategy.
And hang in there – because there are plenty of cost-saving techniques that everyone can use!
First of all, let’s note that Low Cost is not “Low Price.” This strategy is all about getting your costs down – the low prices that you can offer your customers are just a happy consequence.
Better known as “Cost Leadership,” this business strategy creates reasonable profits for the business by driving down costs from suppliers and creating more efficiency within the business itself. More importantly, these businesses exploit economies of scale to do so. They do a lot of what they do, and in turn, they get lower costs on supplies, their cost of operations decreases per unit, and they become more efficient through greater experience.
Cost Leaders do not offer the lowest prices because they first set the lowest prices possible and then work backwards to make their costs meet this price. They instead make their costs as low as possible, then they create a price based on their cost.
Let me reiterate: If you are trying to compete by lowering your prices, but you are doing nothing to lower your costs, you are simply losing profits. That is not Cost Leadership, and it is a recipe for business failure. I believe this is where some of us as veterinarians get this wrong (as a young business owner trying to compete, I didn’t get this myself).
When it comes to making this model work for you, where I believe many veterinary clinics tend to miss the mark on the Cost Leadership strategy is that it is difficult for many clinics to scale what they do. For the most part, each patient is different; most cases present to us with different needs; and we provide each patient with different recommendations, procedures, and medications. In other words, what we provide is custom service tailored to each patient.
What’s the problem with that? Custom work is usually slow, costly, and almost impossible to standardize. From the medical standpoint these are not necessarily a problem (although they may be, if you consider the idea that protocols and standardization often helps increase quality of care), but from a business perspective, these are certainly an issue.
So who does Cost Leadership work for? Clinics that do one thing – think just spay and neuters or just vaccines – and do a lot of it. These clinics repeatedly perform a high volume of a low quantity of services and save a lot of money on quantity discounts on the few supplies they do order. Additionally, their services ideally are streamlined: they only do one service, so they should know how to do it inside and out.
When asked for an example of a business who rocks in Cost Leadership, it's Walmart. Sorry. And they're probably going to do great on the vet side, too, because they're the experts at exploiting the economies of scale. We already know that they're going to just be offering minimal veterinary services in their clinics, so they will be using their typical Cost Leadership strategy on the veterinary side also.
THIS is how they are going to make their veterinary care so affordable.
Luckily, there are a lot of cost-reduction methods that this strategy uses that can be used by anyone, using any strategy!
Many competitive companies are starting to move towards “Lean Organizational” techniques, which place emphasis on creating value for the customer while continuously improving the organization itself. These techniques are also wonderful at reducing costs and increasing efficiency!
I’m going to outline a few Lean principles below, but please understand there are many more. It’s a fascinating topic from which your business certainly can benefit if you implement even a few of these principles!
The 5s: These principles help you increase your business’s productivity and efficiency.
Sort/Segregate: Only keep what is needed in the work area and get valuable space back.
Simplify/Straighten: Konmari your space, or a place for everything and everything in its place! Get rid of items you will never use. This will help with inventory control as well as work flow.
Shine: Clean the work space every day. This will help you spot problems in the work area sooner and will increase work efficiency.
Standardize: Your products and processes. Create checklists and protocols to decrease variability and make sure everything is getting done as indicated. Going through the process of standardization will often point out how much variability you have in your business, and your goal should always be to reduce variability as much as possible.
Sustain: Keep going! You have to have the discipline to keep up with your new plan, as well as proper training for new staff coming into the system.
Additional S’s not included in the original:
Safety: Of course, safety measures should be included in your planning as well. OSHA guidelines should be followed. In addition, I would recommend ergonomic practices, as our industry tends to be hard on our bodies: what is physically easy when you first graduate is not so easy a decade or two later if you’ve not been kind to your body.
Support/Maintenance: Understand how to properly maintain your equipment and keep the preventive maintenance on schedule to prevent down time. Our equipment is expensive, so make it last!
Ohno’s 7 Wastes: Where does the majority of waste occur within an organization? Follow these guidelines to help you find your areas of wastage.
Overproduction: The concept of overproduction might apply more so to manufacturing, but in terms of the veterinary field, think of how you might oversupply your product: do you have too many staff sitting around? Have you hired too many vets? Getting these areas under control can cut down your costs.
Waiting: Any time staff, equipment, or facilities are not being used effectively, it is time being wasted, as the cost of these items are still being incurred while they sit.
Transportation: The more items are moved, the more costs are incurred – from simply the energy used to move them, to storage, wages, gas, and inventory-associated costs. Overall, you want to keep transportation to a minimum.
Inventory: Inventory is a huge area of financial waste and most likely one you should evaluate if you look at nothing else on this list. The two big inventory questions are when to order and how much to order, and there are very helpful tools available to guide you with these answers. In addition, inventory is often used to hide variability issues, so it’s strongly recommended to get your inventory under control if you want to expose where your biggest process issues are – so that you can solve them!
Motion: Similar to transportation, excess movement around a facility is waste. Optimizing your layout – sometimes through minor changes – will reduce wasted movements, in turn, increasing your efficiency.
Overprocessing: If a step adds no value to the customer, it is simply waste.
Defective Products: Warranties, returns, scrap. Basically, when you mess up, you waste money. Quality control is an area that aims to perfect your processes so that you don’t mess up in the first place. Click here to learn more about starting quality control in your business.
Other wastes not included on this list include items like energy and water. Using sustainable practices, which are good for the environment, are often good for your bottom line also. Bonus! Younger generations increasing are drawn to businesses that practice sustainability, so be sure to publicize your efforts in this area!
Do you want to learn more about Lean Practices? Check out the following business areas that lend themselves to Lean ideology:
Organization, in General
Cost Leader or not, there are many ways to get your cost down in practice; however, I think the most important concept is to truly understand which business strategy you are pursuing. If you are not working to severely lower your costs, you are not a “Low Cost” Clinic – which is okay! But you need to understand then that you need to instead be hitting all the right points in the Differentiation Strategy.
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