Porters five forces free essay sample

Porters five forces help identify their attractiveness in the industry in terms of the five competitive forces which are:The threat of entry: Barriers to entry are the factors that need to be overcome by the new entrance if they are to compete in the industry. Many pharmaceutical companies are progressing in the market by shifting from traditional business approach to emerging new business approach. The new business technique includes contract research (drug discovery and clinical trials), contract manufacturing and co-marketing alliance.The threat of substitutes: Substitutes are products or services that offer similar benefits to industries products or services by different process. Substitute can reduce demand for a particular product as customers switch to alternatives. The simple risk of substitution puts a cap on the prices that can be charged in an industry. Generic manufacturers do not incur the high cost involved in research and development and regulatory activities such as FDA approval and clinical trials. We will write a custom essay sample on Porters five forces or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page The power of the buyers: Buyers are the organizations immediate customers, where buyers are powerful they can demand cheap prices or products improvements liable to reduce profits. When buyers can easily switch between one supplier and another they have strong negotiating position. Pharmaceutical industry has one unique feature that the buyer is different from influencer who is a doctor. The consumer has no option but to buy drug as prescribed by physician. Therefore, the bargaining power of patient is very low. The power of the supplier: Suppliers are those who supply the organizations with what they need to produce the products. Where just a few producers dominate supply, suppliers have more power over buyers. If it is expensive to move from one supplier to another the buyers become dependent and correspondingly weak.Competitive Rivalry: Due to increasing demand of high-quality drugs, low-to-moderate entry barrier to the new entrant, the presence of a number of large and small firm this market is highly competitive.2. The two external industry changes that might have affected companys profitability within the Pharmaceutical industry are :Political Regualtions: The global pharmaceutical industry is currently in a dynamic state due to the rise in the number of partnerships, mergers, and acquisitions that have taken place in the past few years. Therefore the political changes across the globe are set to make things more uncertain. This has a direct influence on the profits of a pharma company. The tax regulations, price control, drug regulations by government play a key role in deciding the profits of a firm.Economic Conditions: The well-being of the pharmaceutical industry is dependent largely on the economy. The main factor that affects the industry is employment because a majority of people receive health insurance through their employers. However, other economic factors such as the number of people who are uninsured or underinsured and the recent government stimulus plans also affect the industry.3. Pharmaceutical industry has always been an attractive industry. When the challenge of affording prescription drugs is raised, pharmaceutical manufacturers often argue that steps to reduce prices will lead to less innovation in the future. This response presumably applies to policies that use the market, such as shortening periods of exclusivity and making approvals of generics more rapid, as well as regulatory tools such as price controls.Pharmaceutical innovation has produced an enormous amount of social value. The evidence on this point is strong and comes from multiple sources. Studies of disease-specific spending on prescription drugs, macro-comparisons in the United States, and international comparisons have all pointed to high social returns with respect to longevity and functional health outcomes.Those benefits from pharmaceutical innovation stem in great measure from patent policy and the granting of marketing exclusivity to new drug products.Drug company profiteering is also on display when it comes to off-label prescriptions, which acc ording to Forbes accounts for nearly 20 percent of all prescriptions and brings in $40 billion in sales annually. Surely, these companies would remain enormously profitable by simply sticking to FDA-approved uses for their drugs. Porters Five Forces free essay sample Porter’s Five Forces which categories into 5 segments, is a modern competitive strategy to look at the larger value system of activities and actors in order to evaluate the potential of an industry and understand the effective competitive strategies. Suppliers and Buyers, and not only direct competitors, affect both how much value is created and who gets the share of the value created by the value system. Potential Entrants Unilever faces low threat of new entries since the market has been more or less gained Economies of Scale with a few of the big companies like PG, Kraft and Nestle. Wtih such barriers to entry, it makes new comers coming into the industry very difficult in terms of survival. High product differentiation enables Unilever to command a price premium while deterring new entrants since their customers recognized their brand names whereas start-up entrants are relatively unknown. Such industry is also capital intensive, requiring big amount of capital to operate. We will write a custom essay sample on Porters Five Forces or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page Being capital intensive and existing high switching costs acts as the barriers to exit. Bargaining Power of Buyer With intensive rivalry for market share within the big companies within the industry, buyers had gained significant power in deciding which products of which company to choose from. Switching costs are low for buyers since they can easily find substitutes easily, for example a consumer can switch from using Persil Capsules to Ariel Liqui-Tabs (both are liquid detergent in the form of capsules, having Persil manufactured by Unilever and the later by PG.. Buyers incurred low costs in switching suppliers since they hold more power over them. Bargaining Power of Suppliers Unilever has a low supplier power since it has been believed that a brand manufactured by whichever company does not make a difference and it should not make a difference, because the retailer has to take a decision with regards what is best for their shopper and having brands on the shelves that do not sell does not do anything for the shopper, no matter who manufactured the product. Since, their business to business customers at the same time still preserve supplier-customer relationship; they too have powers over Unilever in deciding which products they choose to be placed on their shelves. Power of Substitutes With intense competition within the fast moving consumer goods industry by the few big companies, especially PG, with regards to Unilever’s Home Care and Oral Care products; substitution power of the consumers have increased tremendously. Although by having product differentiation has created chances for suppliers to command premium pricing, there may be a point where they would hit a saturation point whereby growth will slow down and branding becomes arguably the leading form of product differentiation. With the modern market flooded by all sorts of brands for both Home Care and Oral Care products, substitution is made common among consumers when they take pricing versus quality into consideration. At times in recession, price may make a bigger impact in consumer’s choice. Power of Other Stakeholders With the recent Melamine contamination case, health and food authorities all over the world has taken a stamp in reducing such health pact on its population by increasing their attention in checks on both Oral Care and Home Care products, even though they are not consumable products. Unilever is also accountable to the shareholders in maintaining a social responsible image. Higher restrictions from government bodies may mean higher cost of production in certain products which may require higher quality ingredients. More stringent checks may also mean a delay in shipments towards delivery schedules which results in customers dissatisfaction or shelf replacement lead time. Rivalry Among Existing Competitors Unilever is operating within the Fast Moving Consumer Goods industry which is mainly operated by a few large companies like Procter Gamble (PG), Kraft and Nestle. Zooming into just Home Care and Oral Care products, there is a fierce rivalry between Procter Gamble and Unilever. Both companies needed to compete against each other for a bigger piece of pie within the market. Porters Five Forces free essay sample Discuss Porter’s five forces theory of market competition. How does strategic group analysis provide a refinement to the five forces model? Key words here are: -discuss -Porter’s five forces -strategic group analysis -refinement of it(improve it yaani k extra benefits of strategic group analysis compared to five forces) Strategic decisions have always been a vital part of business as ever since their conception but the word strategy is barely mentioned pre 1960s. However, the concepts of strategy were linear and largely inefficient before the 1980’s and Micheal Porter’s contribution to modern businesses. He presented many theories and â€Å"models† on how to improve decision making and gain competitive advantage in the market. One of these models was the â€Å"five forces analysis of industry attractiveness† which said the â€Å"attractiveness† i. e. profitability of an industry or market is based on five factors which are: Threat of new entrants l Bargaining power of supplier Rival firms(competition) bargaining power of buyers l Substitute firms(if you make butter, they make margarine and might steal your customers) What this means is the industry should be judged or analyzed by viewing these five factors and comparing them to find out how profitably it can be. We will write a custom essay sample on Porters Five Forces or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page The centre point of this seems to be the competition from similar firms in the industry and this depends on a certain factors like how differentiated or homogenous the firms are, more homogenized they are the more they are affected by the change in one firm e. g. similar soap making companies exist, selling at almost identical prices and market shares but suddenly one firm launches a half price deal for buying two soaps. The other firms will have to react with a similar deal or there is a serious threat to lose customers. Also changes in demand must be viewed as an increase in demand signifies higher potential for success. The second factor to analyze is threat of new entrants i. e. new companies starting up in your industry/market. This is different from competition as new entrants will not be as established or known as the current competing firms and they have to be competed with in different ways. The threat of new entrants depends on the barriers to entry and this will vary from industry to industry. For example in the catering business the barriers to entry will be fairly low as starting a small catering company will not require much capital or paperwork as compared to starting a nuclear power generation company, which will have many barriers to entry such as high capital, lengthy paperwork and rigid inspection, to name a few. Another factor is indirect competition from substitute firms who make products different to ours but they fulfill similar needs. An example would be butter and margarine or light bulbs and fluorescent tubes (tube light oi! . many times the demand will overlap but if the industry has little to no substitutes, the firm supplying to it can charge higher prices and vice versa if there were high substitutes available. The fourth factor to keep in mind is the bargaining power of suppliers. This means how much the firm can negotiate with the suppliers and this depends on various factors such as the availability of substitutes and how many clients they have and th eir percentages of sales will affect how much they can negotiate(how important of a customer they are) e. . firm A buys 80% of Firm B’s products so it will have more leverage in negotiating as compared to firm C who only buy 20%. Another factor affecting bargaining power of suppliers is how high the switching costs are, this is largely dependent on how differentiated or unique the supplier’s product is. Also the ability of the supplier to forward vertical merge(become direct competition) and the firm’s ability to backward vertical merge(become its own supplier) affects the bargaining power immensely. The last factor of the Five forces model is the bargaining power of buyers. This is similar to bargaining power of supplier but the roles are switched, and the firm is the supplier. The buyers have a high bargaining power when there are many firms producing the same products, i. e. high competition. Also if the buyers are buying larger quantities of a firms output they will have leverage in deciding prices. Also if the firm is largely dependent on the buyer such as the native craft ndustry in most countries is highly dependent on tourism, any change in tourism greatly affects them. Also similar to bargaining power of suppliers, if the buyers can backward vertical merge and secure their own supply easily, they will have more negotiating power. What the five forces model does is it’s a easy and relevant method to organize various chunks of information under one roof to be understood quickly. This helps in the development of competitive advantage as the managers begin to think of strategic decision making in a wider sense. It is best if the five forces model is used several times on various levels such as a different managers working on the analysis of the industry as a whole, a certain segment and then the industry as it will be 10 years in the future, and then use the three analysis to help in planning and/or decision making. Even though the five forces model is a strong management tool, it does have many limitations and should not be used as a stand-alone, step by step guide. The first of the limitations is that usually the model is used in a static manner, i. e. ow things are right now, and this limits the firm greatly and might not prepare it for change. Also its qualitative in nature, which is not a completely bad thing but it does make it very hard to measure anything and because of this it is very difficult on how to give importance to each factor as they will not always be equal in importance. Also the vastness of reality makes it hard to find out everything about everyone in the industry. The five forces model is also very paranoid in nature, discouraging every kind of risk , sharply cutting down most profitable options. This is mainly because the five forces model does not account for networks or alliances. However this does not mean the five forces analysis is a waste of time, in 1995 Mcgee, Thomas and Pruett proposed an improvement to the earlier model in several ways. They argued that in reality all businesses in any industry will have certain differences and in most industries every business was focusing on a certain â€Å"niche† or segment of a market, thus succeeding at profiting. This concept based off the five forces approach, analyzing the industry’s various factors mentioned in the five forces model. It addressed the basic idea of competitive strategy which is to offer a product/service to the market which has or is presumed by the market to an advantage over competitors. This can be done by satisfying a niche not previously satisfied by another product/service. For example low fat milk when it was not previously available. This approach states that the industry is divided in â€Å"strategic groups† and entry barriers exist WITHIN the industry in resulting in the strategic groups and keeping them from merging. Some of these factors are capital costs and legal barriers to entry(in the form of patents or legislation). A strong example of this is seen in pharmaceuticals and the automotive industry. Many small companies exist; even thrive in the presence of giant multinationals, all producing â€Å"medicine and transport devices† but satisfying different niches. According to Strategic group analysis a firm must not focus much outside of its strategic group as the other strategic groups won’t be strong enough threats compared to rival firms within the strategic group or new entrants within it. To put this in perspective we can look at the automobile industry, Mercedes should not be bothered about another company like Suzuki even though they both make cars. Mercedes is clearly defined as producing luxury high performance cars and Suzuki is clearly defined as economic, easy maintenance and affordable by most. Mercedes potential clientele won’t be affected by Suzuki as the products are for different needs, however Mercedes would have to keep an eye on other companies with similar luxury/high performance products (Audi, Rolls Royce etc). The strategic group analysis approach is almost identical to Porter’s Five Forces model as it too analyzes the industry, the competition, power of supplier/buyers etc, but it is more effective in real business situations because of its nature to focus down to the immediate strategic group. This shows a truer picture of the business world, especially where the products are more differentiated. It reduces some of the five forces â€Å"paranoia of risks† as indirect competition from other strategic groups is not focused on, making it easier for the managers to make profitable decisions thus making the five forces approach more relevant.