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Why the Network Effect Matters
Wednesday, January 10, 2007

A couple weeks before the end of 2006, I had a few tests done for my yearly visit to the Dr. It takes a few days for the results to be completed, then results are "sent" to the Dr.'s office.

Because of the way the Ontario health care system works (Universal Health Care), patients can get tests done in different lab companies regardless of the costs of the tests. As a patient, I go in, give my health card and get the tests done. No, the test are not free: my taxes pay for it. My point is that there is no product differentiation and there is no price competition.

These companies are government created oligopolies, in other words, they have been given the power to offer services based on different criteria that I don't know about.

Life is good in this industry since there are always sick (and healthy) people that need tests done and because there is no product differentiation, it is likely patients go to the most convenient location: the closest one. So having geographical dispersed labs on densely populated areas is a very good business strategy.

At least this is what I thought.

I found out that one of these lab companies is directly linked with my Dr.'s office, hence, results are immediately "uploaded" when they are complete (in quotes, because I don't really know how they upload the results). My Dr. likes this service so much that she actually suggested (she said preferred) that I use a particular company instead of the one I used (the one with no direct link to her office). With the other company, test results are either snail-mailed of faxed, and this becomes a problem when the paper results get lost.

This happened to me last week while on my follow up appointment: no one could find my test results, so I had to wait an extra 20 minutes for the lab to fax them again.

I'm sure the lab had already sent them and somewhere along the line someone lost the results. This is in itself an operational issue, but it is not the main problem--we loose paper all the time--the main problem is the inefficiency of storing thousands of results for thousands of patients in paper form.

The ideal solution would be to store them electronically in one location and have them available on computer screens throughout the building, i.e., results are searchable and available in seconds.

Of the two lab companies that I know of, only one has made it their business to solve this particular problem (the "lots of paper for a lot of customers" one). This very fact has given one of them a competitive advantage. The word "advantage" may sound out of place in a government created industry, as they will get paid for services rendered regardless. However, if patients go to one lab instead of the other at Dr.'s orders, then revenues will definitely have an effect for both companies. This is a zero sum game, really, if patients don't go to one lab they will go to the other one.

So competition doesn't only happen in pricing wars, or marketing campaigns (these companies don't advertise), or the obvious market competing arenas (customers, et al). These labs are competing in convenience, and it is not patient convenience directly but my Dr.'s convenience. Moral of the story: know thy customer.

I really can't say why only one particular lab has this implementation (it seems such a simple thing to do now a days: connect computers over the internet) but I can tell you that in the future I will be using the company that emails test results to my Dr., even if I have to drive an extra 5 minutes. I rather waste 5 minutes driving to the nearest location than waste 20 minutes sitting down in an empty, cold office waiting for results to be faxed again and hearing my Dr. and nurse repeating every time they come into the room that "[I] should have used the other lab company."

What is the network effect?
The most successful example of the network effect I can think of is the telephone. Having a telephone is only useful if a large number of people you know have telephones. Obviously, without one you can't call them and so the theory goes that if I have a telephone and tell you about all its marvellous qualities, it is likely you will also want a telephone and in turn you will tell all your friends and they will all get telephones. In a very short time, we all are on the phone discussing the deep secrets of the universe, or how cute our puppies look with that red, gag sweater--whichever is more important at the time.

It seems to be a very simple concepts, and if a product can in fact solve a problem for many companies (or individuals as the case for the phone) then this "networked" distribution can be used as a form of competitive advantage.

For my sake, let me define competitive advantage: it is that "something" that allows a business to earn above average profits in any industry. For example, if the average profit in a particular industry is 15% and your company is earning 17% (with a reasonable standard deviation), this is not competitive advantage. However, if the average profit is still 15% and your company is able to generate 30% profits in the same industry, then and only then you have a clear competitive advantage over your competitors. Likely with this profit margins your company will drive other companies out of business as you have likely decreased the cost of production to such a low level that competitors are not able to match you costs. In some instances, a company with relatively low costs of production will essentially become a monopolists.

Here is where my observation comes in: even in this type of government oligopoly (or duopoly, as I've only seen two companies doing this), companies need to be on their toes and always be looking for that extra edge to stay competitive. In fact, I am predicting that one of this companies will likely go out of business if it doesn't change its current strategy. And likely the one that doesn't connect to Drs. offices.

Michael Porter wrote in his essay "What is Strategy?" for the November 1996 issue of Harvard Business Review magazine that "strategy is the creation of a unique and valuable position, involving different set of activities." It is clear from this simple statement and my ramblings above what the activity for this particular example is--electronically make results available to Drs. However, not everything is lost for the competition as this particular "edge" gained currently can be quite easily copied.

And so the gears of commerce turn and turn and competition continues. The question is, how long will it take for every lab company in the province (or country) to connect to Drs. offices?

12:30 PM | 0 comment(s) |


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