EIO 5200 Module 5 Final Paper: Launching a New Business With the Economics of Strategy Example

Shoreline Housecall Veterinary: An Economic Case for a Mobile Practice in Ocean County

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Master of Science in Management, Thomas Edison State University

EIO-5200: Economic Issues in Organizations

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Month Day, Year

Shoreline Housecall Veterinary: An Economic Case for a Mobile Practice in Ocean County

Introduction

Veterinary care in the United States has changed in two ways that open a gap for a new kind of practice. Ownership has concentrated as corporate groups have bought independent clinics, and clients increasingly expect services to come to them, as groceries, prescriptions and many medical visits now do. A house-call practice sits in that gap. This paper uses the economics of strategy (Besanko et al., 2017) to decide whether such a practice can create enough value to succeed in one county, and how it should be built and measured if it does.

Market Definition and Demand

The market

The relevant market is not all veterinary care but routine, chronic and end-of-life care delivered at home to clients who find clinic visits hard. Emergency surgery, dentistry under anesthesia and advanced imaging are outside it and would be referred to clinics and hospitals.

Market data

Ocean County is a large, fast-growing county with many retirement communities, and the practice's own field research gathered three pieces of evidence. First, a count of online listings found about 40 general clinics and two existing house-call veterinarians, each covering only part of the county and booking two to three weeks ahead. Second, a survey of 212 pet owners at three community events and two senior centers found that 31 percent had delayed or skipped a veterinary visit in the past year because of transport, a pet's stress or their own mobility, and 44 percent of those said they would pay at least $50 more for a home visit. Third, interviews with four local clinic managers confirmed that they turn away end-of-life home visits for lack of staff.

Demand estimate

The estimate is rough, and the survey sample is not random, so it likely overstates willingness to pay. Even if true demand is half the estimate, one van needs only about a fifth of it.

Costs, Break-Even and Scale

One outfitted van costs $269,000 a year in fixed costs, chiefly the veterinarian and technician, plus $58.80 in variable cost per visit. At average revenue of $260, each visit contributes $201.20, so break-even is about 1,337 visits a year, 5.8 a day. Average cost falls from $283 at 1,200 visits to $205 at the van's capacity of 1,840, where the van earns about $101,000. A second van with a shared dispatcher would cut average cost to $195 at full use, but it pays better than one van only above about 3,325 visits a year. Economies of scale exist but are small, because the largest input, a veterinarian's time, grows in step with output. The practice should open with one van and add a second only when its waiting list proves the demand.

Startup costs are about $260,000: the van and equipment, which are financed, plus $70,000 of working capital to cover losses in the first months. A realistic ramp from three visits a day in the first quarter to eight by the fourth implies a first-year loss of about $60,000 and profit from the second year.

Break-even is sensitive to price. At an average of $240 a visit, contribution falls to $181.20 and break-even rises to about 1,485 visits; at $280 it falls to about 1,216. Because the van's capacity is 1,840 visits, a price near $240 would leave little room for a slow start, which is one more reason the positioning below rests on value rather than on matching clinic prices.

The Boundaries of the Firm

Applying transaction cost economics (Williamson, 1979), the practice will make what creates value specific to its model and buy what specialists do better. It will lease its own blood analyzer, because results during the visit avoid a second trip, which is worth more to a house-call client than the small cost difference. Specialized tests will go to a reference laboratory, which has scale and verifiable quality. Long-term medications will be referred to an online pharmacy after the first supply. Aftercare cremation will be bought from a single crematory under a long-term contract with individual tracking and audit rights, a hybrid arrangement that protects the practice's reputation where quality is hard to see.

The contract for cremation deserves particular care because it combines low frequency, high emotional stakes and quality that clients cannot verify. Williamson's framework predicts that where performance is hard to observe and a failure would damage reputation, firms move toward closer governance; individual tracking, audit rights and a long-term relationship with one provider are that closer governance short of owning a crematory, which would require far more volume than one van generates.

Market Structure and Entry

Local veterinary care is monopolistically competitive: many clinics, differentiated by location, hours and relationships, with modest barriers to entry. Building on Salop (1979) circular model, clinics earn margins because clients pay a cost to travel to them; a house-call practice removes that cost, which gives it pricing power with clients for whom travel is hardest. The most likely response from incumbents is not price cutting but imitation by a corporate group adding its own van. Signing referral agreements before rivals do is a first move of the kind Dixit (1980) showed can alter rivals' choices; the practice will also offer monthly wellness plans that raise switching costs once trust is built.

Barriers to entering the house-call segment are modest but not trivial. A new entrant needs a licensed veterinarian willing to work from a vehicle, an outfitted van and a client base built largely by word of mouth and referrals, which takes time. The referral agreements and wellness plans therefore serve as switching costs: a client enrolled in an annual plan, and a clinic that sends its housebound patients to the practice, are both less likely to move to a later entrant.

Strategic Positioning

The practice will pursue a benefit advantage. Its cost per visit will always exceed a clinic's because the veterinarian spends time on the road, so competing on cost would mean abandoning the service clients value. For its target clients, willingness to pay for a home visit is far higher than for a clinic visit once the trip, the pet's stress and lost work time are counted. Porter (1996) observed that strategy requires trade-offs, and this one is clear: no walk-in urgent care, no surgery, no price-sensitive clients. Fees will be a $60 house-call charge plus a $125 examination, with a discount for multiple pets in one home.

The value created can be put in numbers. A client willing to pay $300 who is charged $260 keeps $40; at roughly $205 of cost per visit, the practice keeps $55. A clinic visit for the same client might cost $150 but carry a trip, a missed half day of work and a frightened animal, costs the client weighs even though they never appear on an invoice. Positioning on benefit means continually widening the gap between what clients would pay and what the practice spends, through punctuality, unhurried visits and continuity with the same veterinarian.

Performance Measurement

The final module asks how a firm should measure whether its strategy is working. Kaplan and Norton (1992) pointed out that money measures only report the past, so they paired them with customer, process and learning measures that predict the future. Shoreline's scorecard links each measure to its strategy.

Economic profit is chosen as the summary financial measure because it charges the business for the capital tied up in the van and working capital. Stewart (1991) argued that profit measures which ignore capital costs encourage managers to grow investments that do not earn their cost. If the $260,000 invested must earn 12 percent, the capital charge is about $31,000 a year, so the practice creates economic value only when operating profit exceeds that figure, which the second-year plan expects. Punctuality appears in the scorecard because a benefit advantage depends on reliability; a practice that arrives late loses the very advantage it is built on.

In year one the founder and technician review the scorecard monthly, then quarterly, taking up any measure below target. Two measures act as early warnings. A falling return rate would suggest clients are trying the service once but not valuing it enough to come back, and a rising number of late starts would signal that routes are too long or the schedule too full, both of which threaten the benefit advantage before they show up in profit.

Risks

Three risks could change the decision. Demand may be lower than the survey suggests, which the one-van start and the ramp assumption are designed to absorb. Hiring a veterinarian willing to work from a van is difficult in a tight labor market, so the founder's own license is the plan's foundation for the first year. And a corporate group could imitate quickly; the referral agreements and wellness plans are the defense.

A fourth risk is regulatory. Carrying controlled drugs for euthanasia and pain management in a vehicle requires secure storage and careful records under federal and state rules, and an error could suspend the practice's ability to provide end-of-life care, one of its most valued services. The founder should arrange compliance review with the state veterinary board's guidance before the first visit and audit drug logs monthly.

Recommendations

1. Launch with one van in the northern half of the county, where survey response was highest, and expand coverage only as the schedule fills.

2. Lease the blood analyzer, use a reference laboratory for specialized tests, refer chronic medications and contract cremation under audit terms.

3. Sign referral agreements before opening and introduce wellness plans in the first year.

4. Price for value, not against clinics, and protect punctuality as the core of the benefit advantage.

5. Manage the business with the balanced scorecard, judge it by economic profit and add a second van only when turned-away requests exceed about 125 a month for two consecutive quarters.

Conclusion

The economics support the launch. A house-call practice cannot win on cost, but for a clearly defined group of clients it creates more value than any clinic, and that value can be priced. Its cost structure makes early volume critical and scale economies small, which argues for a cautious start. Its boundaries, its entry commitments and its scorecard all follow from one strategic choice: to be worth more to the clients who need it most. After twelve months the founder will swap these estimates for real visit counts and revise the plan.

References

Besanko, D., Dranove, D., Shanley, M., & Schaefer, S. (2017). Economics of strategy (7th ed.). Wiley.

Dixit, A. (1980). The role of investment in entry-deterrence. Economic Journal, 90(357), 95-106. https://doi.org/10.2307/2231658

Kaplan, R. S., & Norton, D. P. (1992). The balanced scorecard: Measures that drive performance. Harvard Business Review, 70(1), 71-79.

Porter, M. E. (1996). What is strategy? Harvard Business Review, 74(6), 61-78.

Salop, S. C. (1979). Monopolistic competition with outside goods. Bell Journal of Economics, 10(1), 141-156. https://doi.org/10.2307/3003323

Stewart, G. B. (1991). The quest for value: A guide for senior managers. HarperBusiness.

Williamson, O. E. (1979). Transaction-cost economics: The governance of contractual relations. Journal of Law and Economics, 22(2), 233-261. https://doi.org/10.1086/466942