Shaping strategy with Five Forces
Whenever I read a case study about an Industry, the first thing that I see on their strategic analysis is the ‘Porter’s Five Force’. I have read about the methodology in Wikipedia but I never got the chance to study in detail. When I read this week’s article ‘The Five Competitive Forces that shape Strategy’ I was truly stunned by how this simple tool can be used to formulate a giant corporate’s strategy and several subtle underlying factors that I was not aware before. I am a major in Biomedical and after reading this, I would like to apply this concept in my area of expertise- Healthcare especially Pharmaceuticals.
Threat of Entry – The threat of new entrants is very high in Healthcare industry. The main reasons are to establish a pharmaceutical company, you need a high initial capital for the Research & Development. Forming a business model is another big issue. The US health market is very diverse, the rules and structure varies widely between the insurance companies and they mostly control the pharmaceutical industry as they are the one’s covering patient’s bills. Another big challenge is the Government policy on drugs. A new drug developed has to undergo through a series of FDA regulations and tests and this usually takes several years before reaching the market. Navigating through all these channels sets a high barrier for new entrants to the market. This is the reason why the US Health industry is primarily dominated by only few companies.
The power of Suppliers – The key suppliers for this industry can include chemical companies, IT vendors, and providers of raw materials. The suppliers have advantage in some areas. For example, the clinical study and Drug safety testing software have high designing and implementation costs. Once they are implemented in the company, the switching cost is very high. But, they have advantage over some suppliers, For example, the companies can easily change their raw material provider, if the prices of materials are not negotiable with their current supplier.
The power of Buyers – The buyers could include Hospitals, pharmacies, patient and insurance companies. Usually the power of buyer is high, the Hospitals and Insurance companies has the power to choose between their suppliers. But in some cases, if the pharmaceutical company offers patented and efficient drug with distinctive medical benefits they have more power over the hospitals and other drug buyers. But it loses its power once the patent expires and the drug becomes generally available.
Rivalry among Competitors – The pharmaceutical industry is highly competitive. This is due to the reason that they have High Fixed costs and Exit barriers. The industry is associated with substantial long-term investment and continuous research which leads to high fixed cost. Also they have high exit barrier because of Labour settlements, contract with suppliers, agreement with government and the Insurance companies. Because of these reasons they prefer to stick to the competitive market by price advantage and continually providing low risk, low side effects and efficient drugs.
Threat of Substitutes - The pharmaceutical industry’s profits are greatly affected by substitutes after the patents of drugs has expired. When the patents expire, all pharmaceutical companies have the opportunity to make the drug. Consumers tend to move toward cheap drug if it has the same effect as of another costly drug. So, you are forced to reduce the price and sell it for thin margin. This is the reason why pharmaceutical industries invest heavily in research and development. They could eliminate the risk of substitute by always introducing efficient drugs and stay ahead in the market.
references - http://eopoku3.blogspot.com/2011/03/porters-five-forces-healthcare-industry.html