Universidad del Istmo

Facultad de Ciencias Económicas y Empresariales

“MBO”
Talento Humano

LUIS DIEGO PRADO ARÉVALO

Guatemala 30 de Enero del 20

Application of the model of the 5 forces in the Pharmaceutical Industry

The idea of this work is to discuss some strategic concepts already known and developed by
M.Porter, which could be applied in the pharmaceutical sector.

As an important factor, which is sometimes overlooked, and that distinguishes one company from
the others in the pharmaceutical industry is strategic planning.

As is known, Porter's model was based on the competitive environment in which business develops,
detailing 5 basic forces that have a great impact on the ability to succeed in a business or a business
unit.

Basically, competition within a sector or industry depends on 5 competitive forces:

 The power of provider's negociation

 The bargaining power of buyers (customers)
 The threat of substitute products or substitutes
 The threat of new competitors
 The rivalry between current competitors and how intense it is in terms of the market.

Therefore, this environment would be applicable both at the industry level, in this case I choose the
pharmaceutical industry focused on a clinical research department.

The 5 Porter forces applicable to the pharmaceutical Industry

1. The power of provider´s negociation

At first point, we have to consider who are the suppliers of the pharmaceutical industry. I think that
this suppliers could be: the suppliers of raw materials, manufacturing and production plants located
abroad, local suppliers and any other supplier in the supply chain could be considered as such.

On the other hand, when we analyze the business environment, it is necessary to consider what the
real bargaining power of the suppliers is, because the more power they have, the greater their
impact is. Also, suppliers can affect in different ways:

 threatening to increase the price

 threatening to reduce the quality of their products or services.

Both of these threats are detrimental to any business because of its potential effect on profitability.
The impact may be different for different providers. Some have greater bargaining power when they
get significantly influence the market, for example, when it is difficult for the industry to switch to
other suppliers or when they threaten to suspend the supply. Either of these two situations can
have important consequences.

On the other hand, recognizing labor as a supplier is important because employees could exercise
great power by increasing "their prices", for example, by requesting salary increases or by reducing
quality as the increasing waste, or the reducing of our workday.

Therefore, for planning meetings it is important to know the level of influence that suppliers have
in our business and what could be done to reduce that bargaining power.
 2. The bargaining power of customers

In this second force of Porter in the pharmaceutic industry, we can find:

 Clients are patients,

 Family members of patients
 Hospitals
 Wholesalers
 Pharmacies

Its influence, must be considered in various ways, customers can impact the business by asking, for
example, price reduction, demanding more quality and better service.

In another order of things, it could be considered that a customer-buyer has power, in the following
situations:

 when you buy large quantities of product

 when you can buy our products from another supplier if these products are not
differentiated
 when he has a lot of information and knowledge of the market and the business, and
raises his requests based on that knowledge.

In my opinion, customers can exercise power when they chase price reduction or threaten to switch
to another supplier to get the products. It should be added that powerful clients also demand
services that cost more. For example, governments ask for more detailed analyzes that cost more
money and patients ask for timely and relevant medical information, which is another costly
service.

Therefore, in my opinion the questions that would have to be asked would be:

 Are our clients regularly pressuring us to reduce prices, particularly threatening to use
other suppliers?
 How much does the level of service they ask for cost us?

Finally the analysis of the impact of these questions is key to the management of this power and to
anticipate the effect on the profitability of the concessions that may be obtained.

3. Threat of new entrants

In this third force, the entry of new competitors in the industry affects the competitive dynamics
and has to be taken into consideration when analyzing the competition.

New competitors see the market attractive, bring new capabilities and resources and new ideas
along with the desire to gain market share. It should be added that its impact depends on the
existing barriers to entry along with the expected reaction of current competitors.

Many barriers can be created to prevent new competitors or to delay their arrival in the market.
That´s why in the pharmaceutical industry a new competitor will have to face some barriers created
by the current competitors in the market and that could be:
  Economies of scale: Manufacturing, research and development, marketing, sales
and distribution
 Product differentiation: Products already on the market, brands and relationships
with customers
 Capital needs and financial resources
 Access to distribution channels, preferential agreement
 Regulatory policies: Patents, normative standardization
 Cost of change: Training of employees, new equipment, technical assistance.

It is important to note that, in the pharmaceutical industry, entry barriers are high. Existing
companies have great manufacturing and production capacity that are difficult to copy, they have
patents to protect their products and of course, they have big budgets for marketing expenses,
prepared to protect their brands.

4. The threat of substitute products or substitutes

The substitute products have the same function as the products and should be considered as a
competitive force that can affect the demand and can retain the loyalty of those customers who
usually use the substitute products instead of the company's products.

In the Pharmaceutical Industry for example for the treatment of asthma, specifically anti-
inflammatory drugs, The Inhaled Corticosteroids that are currently the first-line therapy, providing
symptomatic benefits, decreasing the BHR and the need for bronchodilators.

The presence of substitute products usually establishes a limit on the price that can be charged for
a product (a price higher than this limit could cause consumers to opt for the substitute product).

 Substitute products usually enter an industry easily when:

 The prices of substitute products are lower or lower than those of existing products.
 There is little publicity of existing products.
 There is little loyalty in consumers.
 The cost of switching from one product to another substitute is low for consumers.

5. The rivalry between current competitors and how intense it is in terms of the market.

The rivalry between competitors exists because normally one or more of these competitors sees
the opportunity to improve their position in the market. This rivalry between companies
provokes the use of tactics such as price competition, marketing campaigns with great media
deployment and the introduction of new products. It can become intense if the companies want
to dispute the market share but if the market is growing or the position of the companies is
protected by patents, this rivalry will tend to be less intense.

After analyzing these forces, managers will be more prepared to determine:

 The strengths and weaknesses of the company.

  In what position is it against the substitute products and their relative position in
relation to the entry barriers created?
 Your ability to cope with rivalry with existing competitors.

Now if we applicate this to the pharmaceutic industry, indicates that suppliers have some impact,
but not really much. The companies, generally, have their own factories of production reason why
the suppliers do not condition the prices and are unlikely that they threaten to try to catch business
in another site.

It´s relevant to mention that clients can influence the market, particularly because governments and
health authorities usually seek price reductions. Otherwise there is not too much rivalry because
the pharmaceutical market is fragmented and comprises many companies. Also it´s not usual to
have new competitors, mainly because barriers to entry are high, especially in research and
development and in manufacturing and marketing costs.

So, in summary, the competitive force that exerts the greatest pressure in the pharmaceutical
industry are clients (buyers) and this should be the center of competitive strategies. However,
competitive forces are different for each company and all are not equally important.

As a conclusion I can say that the 5 porter forces help companies to have a better view of the issues
and can identify the different factors that are essential for their operations and also allows managers
to find the aspects of the structure of the industry which are of utmost importance to them and in
which areas they should focus in order to obtain a sustainable competitive advantage