Wednesday, April 5, 2017

Effects of the Five Forces on a Pharma Retail Start-up

Michael E. Porter’s article “The Five Competitive Forces That Shape Strategy” gave me a formal insight into how competitive forces play a major role in the promotion of a product or service in the intended market. Further, it also gives a good base from where we can design a good strategy to capitalize on the industry’s strengths while mitigating the weaknesses. Technology is playing a major role in shaping the present Pharma retail market. The disruptions caused about by new IT-enabled business models is seen in various places. One such example has been the start-up company where I worked before coming to CMU. I experienced first hand how the various market forces affected the working and the culture of the company. 

The competition in the Pharma retail space has been fierce due to a large number of competitors. The rivalry among the existing competition is high but the retail space has seen low industry growth. In essence, the leaders in this space have been comfortable with their market shares and have thus innovated at a very low pace. With high fixed costs and marginal costs, this market was ripe for disruption. The threat of new entrants has been low owing to the various barriers to entry. The capital requirements were high and the various legal issues dissuaded new entrants. The supply side market was cornered by a few large wholesale dealers and thus added to the problem of unequal access to distribution channels. When it comes to “Buyers,” the switching costs was high for specialized medicines. But, due to the presence of many buyers, the Pharma retail suppliers had more bargaining power when it came to offering new schemes or discounts. On the other hand, the threat of substitutes seemed to exist. But, this was not actually the case as the Pharma retail market was cornered by chains of the same company. The illusion of choice and substitution gave a false sense of power to the customers.

Analysis of the above market forces gave us the first direction to the kind of strategy we should adopt — “use innovative technology as a market disrupter.” The culture was designed to be fast paced with short cycles for new updates to our product. Further, to get an edge over competitors, we had innovations in operations and sourcing of our inventory. The advantage which the incumbents had due to their long time in the industry was nullified by collecting customer specific data and performing superior forecasting and predictive analytics. Essentially, Porter’s five forces shaped the strategy of the company. Further, as a conscious strategic decision, we positioned our company to attract customers from all walks of life. With the increasing adoption of smart technology in developing countries, people expect comfort and more value for the money they spend. The buyer was given the power to get good discounts and also have medicines delivered to their doorstep with a quick turn-around time.

In conclusion, I would like to refer back to the article from McKinsey Quarterly on how technology has accelerated new trends in IT-enabled businesses. Big data and advanced analytics will play a much important role in the Pharma retail industry. New business models especially for delivery of “anything as a service” will require innovative technology. In the years to come, mass personalization will be the key to attract and retain customers.

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