Porter's Five Forces Model - Example: Pharmaceutical
Porter's Five Forces Model - Example: Pharmaceutical Industry
In 1979, Harvard Business Review published How Competitive Forces Shape Strategy by a young economist and associate professor, Michael E. Porter.
The main purpose of Porters Five Forces is to find a position in an industry where a company can defend itself against competitive forces or it can influence them in its favour.
A strategist can analyse, any market by rating each competitive force as high, medium, low in strength and rate as follows.
If we look at the pharmaceutical industry worldwide, the five forces could be rated as follows.
Competition among existing rivalry is high as key players Pfizer, Glaxo Smith Kline, Bayer and Eli Lily compete closely and strongly in the market.
The threat of new entrants is seen as low, since high entry barriers due to costs associated with research , development of new drugs and government regulatory barriers make it difficult for new entrants.
The threat of substitutes could also be seen as medium as Generic drug companies do not have the high costs associated with the research and development of new drugs and this allows them to sell at cheaper price points.
The bargaining power of buyers could be rated as medium because hospitals, health care organizations can exert pressure on Pharmaceutical companies to keep prices in check. Generic drugs give patients lower price options.
The bargaining power of suppliers is low as sales for the pharmaceutical industry concentrate in a handful of large players and that has decreased the bargaining power of suppliers.
Overall, based on the above analysis of Porter's Five Forces, we can conclude that the pharmaceutical industry is not attractive for new entrants.
Reference: Porter, M.E. (March/April 1979). "How Competitive Forces Shape Strategy". Harvard Business Review.
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