A Business Illusion?

by Thomas Sim, 19 Jan, 2001

About half a year ago, a trading company specialized in bulk purchase cost saving strategy was formed by pharmacists for the pharmacies in Sarawak. While in KL for a meeting recently, a close associate of mine mentioned to me the same concept of a similar business strategy. We had a detailed discussion though our views were entirely different.

This strategy proves one thing - size does matter or else, why bulk purchase? Notwithstanding, it is still what chinese proverb called: 'goat skin comes from goat'.

The pharmacy profession should always emphasize service over price. However, that is the dilemma because price is always the primary driving factor for patients in choosing which pharmacy to get the medicine from. Take note, medicine is not commodity selling! On the contrary, the profession is now tarnished by price-cutting and rivalry among pharmacists that many small ones are facing the threat of closure. Therefore, by having this trading house, price is no more a determinant in competition. But look, a sad reality of competition and short-termism can change its course.

The mover of the project has visionary plans. The story they sell is that all members of the profession would ultimately be member of the trading company and enjoy a knock-down price for things purchased from this company. It seems is a noble plan, full proof at a glance.
Where is the catch? The trading company cannot survive with plans and dreams alone. It needs capital. Who is to provide that? The members, of course!

How much? RM1 per membership fee? Are you kidding? What can you buy with a few RM1s?

The capital needed to bulk purchase must be huge! Therefore, who would become the member? Obviously, those with capital to invest and dying to reduce price to sustain the price war. Who are they? These are large retailers with cost strategy as mentioned by Michael Porter. As a result, the big retailers will become stronger, the gap of price difference will surely become even larger.

The scenario has turned to subvert the mission. This is a business illusion.

Even if the capital investment is minimal that all pharmacists can come out with - ideally. Yes! Price is no more a competitive advantage! Think! What would the big retailers do? They will not sit tight and watch their price advantage be eroded. They will form among themselves a bigger trading house to get even cheaper cost of goods. This again is back to status quo - the chicken and the egg phenomenon.


On the other hand, most realistically, the established retailers would join the trading company first. It is the mover's aim too to get the established pharmacies because they contribute to the volume of

sales. Then, as they expand the noble mission of supporting the small retailers will subject to attack.

If you have an established practice with more than 10 years and your customers trust you with their lives. On top of that, you offer a reasonable price with good profit margin. Your business is doing well.

Now, new comers with no experience appeared across the street. If you are a member of this trading company which you contribute to it sales of 40% per year, do you want your new competitors across the street to enjoy the same pricing advantage like you? Imagine, they also enjoy the profit you make in this trading company because they are also members!

Money and profit apart, can you go down with the integrity and respect that you have earned over the years? You see, they can tell your customers how much you have made from them all these years. They undercut you!

Remember! You have earned your success with hard work and all sort of business risks for more than 10 years. The new comers who have yet do their part, despite being new, to make things worse, have attitude, ego and ethical problems. And now, they are enjoying the same price advantage like you ...

So what do you think? Isn't it a 'goat skin comes from goat' situation?