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In this scenario, it has been assumed that I am employed in health care industry (hospital), so the strategic plan and business report will be according to the framework of healthcare industry.
One of the dominant features of the hospital industry is that it has very higher entry barriers that protect incumbent companies from the increased competition and thus create opportunities for above-normal profits. Similarly, low exit barriers allow the firms to leave easily without any heavy financial risks. Thus such a competitive environment, high entry barriers and low exit barriers allows members to have consolidation among current members in industry in their drive to gain from achieving economies of scale.
This means that continuous healthy investments are required to enter and sustain the industry.
As mentioned that the health care industry has high entry barriers and low exit barriers, this provides the overall industry players with above-normal profitability and this element of high entry barriers and low exit barriers is a significant force that mainly affects the profitability of the industry. As we have mentioned earlier that companies can have consolidation to achieve economies of scale, then this can also enhance their pricing power by reducing the number of competitors in the industry. The dynamics of profitability of industry are also influenced by the relative bargaining power of suppliers and customers. The diagram below is a simplified presentation of the framework:
According to the research, the nature of the competition in the industry is oligopolistic competition. It has been identified by the research that instead of the individual companies in most cases. The total volume of purchase of entire industry in 1999 was between $148 to $165 billion and it rose to $ 257 to $ 287 in 2009. The industry is operated by the top 16 GPOs (Group Purchasing Organizations). These are the group of companies ,who acted together to compete with the competition in the industry. Thus, we have planned similar; we will join one of the GPOs, which terms and conditions are most suitable for us, thus this way we can compete in the industry. This is part of our strategic plan to face the Oligopolistic Competition in the industry.
The first competitive characteristic is the formation of GPOs, as thus this their size can generate additional economies of scale and increased bargaining power with the suppliers. Thus large size can even provide member companies with greater savings. Large organizations can operate better rather than small organizations.
Secondly, due to the highly concentrated oligopoly, companies have large chances of earning large non-market rent, i.e. above average profits from their operations. In addition, the structure of the industry is also protected by government exemptions.
If we are taking profitability on the Y-scale and economies of scale on X-axis, then our company should be located here. Red color rectangle is representing us and green color is showing the rival companies. So, we will put ourselves higher in both ways in terms of profitability and economies of scale too. There is a connection between these two elements, as we will go more for economies of scale, the profitability will rise.
Firstly, change in GPOs policy can impact our company’s success. As above, we have mentioned that we will become a part of any GPO, so in this way, if the GPO and all the members in it decide to buy the raw material from a specific supplier at certain rate higher than our prediction, then this can impact our objectives and can have an impact on our company’s success.
Another factor can be the removal of government’s exemptions on healthcare industry; this can increase the cost of the company. Though, it can be translated into by pushing cost in terms of higher...