THREAT OF ENTRY
•Capital requirements •Economies of scale •Absolute cost advantage •Product differentiation •Access to distribution channels •Legal/ regulatory barriers •Retaliation
Pharmaceuticals
• Power of buyers
– Limited
• Purchase decisions made by powerful medical profession able to influence what the state or insurance co. must pay for
SUPPLIER POWER
• Buyers’ price sensitivity
• Relative bargaining power
INDUSTRY RIVALRY
•Concentration
•Diversity of competitors
•Product differentiation
•Excess capacity & exit barriers
• These substitute products place a cap upon industry prices above which buyers will desert
B
5
Power of buyers
• Power of industry’s buyers to secure discounts or negotiate added value to products
Bargaining power of buyers
BUYERS
B
3
The threat of entry
• Threat that new entrants will start up, increase capacity and competition and erode profits
• Depends on the size of the entry barriers
• Eg scale economies, patents
B
4
The threat of substitution
• Threat other industries will take business away:
– eg aluminium industry faces threat from glass, plastics, steel
• Deregulated
• Low start up costs
• Modest economies of scale
• The threat of substitution
• High in some short haul routes
• lower in long haul
• The power of the buyers
– Eg airlines
• Others are non price competitive and highly differentiated in products
– Eg pharmaceuticals
B
8
The Structural Determinants of Competition
B
12
Airlines: conclusion
• All five forces are operating to the industry’s disadvantage
• Would expect the industry to experience poor profit performance
ቤተ መጻሕፍቲ ባይዱ
B
7
Competitive Rivalry
• The degree of competition within the industry for market share
– Especially the degree of price competition
• Some industries are very price competitive
• Power of suppliers
– Negligible
• Drug ingredients are largely commodities, widely available
• Competitive rivalry
– Limited
• Little or no price competition
• Depends on buyer concentration, information, switching costs
– Eg fragmented horticulture industry faces concentrated, expert buyers with low switching costs
(Grant, 2005)
26.8 22.0 20.5 20.3 18.8 18.8 16.5 16.0 14.3 14.3 14. 3 13.5 13.3 13.3 12.8 11.8 11.5
B
Gas & Electric Utilities
10.5
Food and Drug Stores
10.3
B
6
Power of suppliers
• Ability of suppliers to dictate the terms and conditions of supply
– Supply concentration and differentiation is key
• Eg operating system component of PC • Eg the transmission system in bicycles
new drugs • Very large medical sales force required
• The threat of substitution
– Very low
• Often no alternative to a drug in dealing with an illness
B
14
•Cost conditions
BUYER POWER
• Buyers’ price sensitivity
• Relative bargaining
power
B
SUBSTITUTE COMPETITION
• Buyers’ propensity to substitute
• Relative prices & performance of substitutes
Airlines
(34.8)
17
Some comments on the method
• Very similar to the structure, conduct performance model
– Old wine in a new bottles?
• Porter stresses that the five forces are the only factors: there never any others
– The threat of entry – The threat of substitution – The power of the buyers – The power of the suppliers – Competitive rivalry within the industry
B
2
Porter’s Five Forces of Competition Framework
Motor Vehicles & Parts
9.8
Home Equipment
9.5
Railroads
9.0
Hotels, Casinos, Resorts
8.0
Insurance: Life and Health
7.6
Building Materials, Glass
7.0
Metals
6.0
Semiconductors &
B
13
Pharmaceuticals
• The threat of entry
– Very low
• Products protected by patents and copyright • Formidable research, development and approval costs of
9
Examples of industry analysis
• Airlines • Pharmaceuticals • Professional football • Road Recovery Services
B
10
Airlines
• The threat of entry
– Very high because
Porter’s Five Forces Industry Analysis
B
1
Industry analysis
• The profitability of any industry depends upon five environmental factors
• The five forces
B
15
Conclusion on Pharmaceuticals