Homework No. 1
1. I was expecting an innovative name and logo from your team. 2. A very good introduction of the industry. Note ii. The second edition of the textbook (Barney and Hesterly) is copyrighted in 2008. 3. Industry rivalry: use a note to indicate the source when you applied the number (e.g., 25% of the market presence) to support your analysis. 4. Threat of substitutes: Generic brands are more likely to be considered as “competitive” products. Yes, CAM and alternative medicine are substitutes. However, there are many ways to prevent sickness (e.g., a healthy lifestyle). I think there is no “perfect” substitute to treat disease and sickness in most cases. 5. A good discussion on how the five competitive forces affect profitability of the pharmaceutical industry. 6. Please follow the proper format for using endnotes. The textbook provides good examples for you to follow. 7. Overall, it’s a very good 5-force analysis on the Pharmaceutical industry. You are able to apply textbook theories and additional information to support your analysis. 8. Grade A (90)
March 3, 2008
A Five Forces Analysis on the Pharmaceutical Industry
February 27, 2008
The Pharmaceutical Industry
Over the past few decades, the pharmaceutical industry has been struck by many challenges, such as new state drug substitution laws and federal legislation. There have also been opportunities, such as revolutionary developments in information technology and the emergence of market institutions that include health maintenance organizations and pharmacy benefit managers[i]. The pharmaceutical industry includes all companies that develop drugs and then patent and distribute the drugs to consumers[ii]. This paper focuses on how Michael Porter’s five external environmental forces – barriers to entry, bargaining power of buyers and of suppliers, the threat of substitutes, and industry rivalry each affect the profitability of the pharmaceutical industry as a whole. Industry Rivalry
The pharmaceutical industry is a highly competitive and aggressive market that makes over a trillion dollars a year in sales; with industry leaders like Pfizer, GlaxoSmithKline, and Merck who make up over 25% of total market presence. With strict government regulations, high costs with research, and highly competitive products in the market place, companies are left frantically trying to release the next best miracle product to stay ahead.
Companies in this industry depend on investing in ideas that may pay off in the long run. This sort of strategy puts a lot of pressure on them to find drugs that will pay off. This creates the necessity for microcosms in the industry to join together to gain competitive strength to take on the leaders. Within the dynamics of the industry exists a diverse struggle for market share based on innovation, intellectual property rights and patents on products. Although such ownership of patents and specific rights sometimes neutralizes competition in the market place, there still exists an avenue for higher levels of competition. Large investments in research and development budgets banks companies against their suppliers to provide a greater competitive advantage for financers. Since the industry is slightly competitive for supplier talents, companies are offering more unique incentives to gain strategic advantage. Suppliers do not set the price for products, which takes a lot of the strength out of their hands and gives companies the ultimate power. The government acts as the largest of the industries’ hurdles, which is responsible for organizations such as the Federal Drug Administration to test products for safety and reliability. Governments can also attract buyers by trying to regulate prices and keep them low. Yet in the end a company’s ability to get buyers falls...