Porter's Five Forces Model helps strategic business managers analyze the industry in which their companies operate to determine what can be done to get an advantage over their existing competitors and also to determine how attractive a particular industry would be for new entrants.
Porter's Five Forces are: 1) Threats of entry posed by new or potential competitors; 2) Degree of rivalry among existing firms; 3) Bargaining power of buyers; 4) Bargaining power of suppliers and 5) Closeness of substitute products.
Below is an anlysis of the Pharmaceutical Industry using the above named forces:
1. Threats of entry posed by new or potential competitor (LOW)
- High entry barriers due to costs associated with research & development of new drugs (i.e. years of investment in R&D for a drug that may/may not work)
- Government regulation (i.e. FDA)
- The threat of entry posed by new or potential competitor is a LOW competitive force due to the above entry barriers & regulatory constraints.
3. Bargaining power of buyers (MEDIUM)
- Hospitals & other health care organizations buy in bulk quantities and exert pressure on pharmaceutical companies to keep prices in check
- Regular patients have lost bargaining power due to price increases in generic drugs
- The bargaining power of buyers is a MEDIUM competitive force.
4. Bargaining power of suppliers (LOW)
- Sales for the pharmaceutical industry concentrate in a handful of large players and that has decreased the bargaining power of suppliers.
- The bargaining power of suppliers is a LOW competitive force
5. Closeness of substitute products (HIGH)
- Demand for generic versus brand name drugs has increased because of the costs
- Generic drug companies do not have the high costs associated with the research & development of new drugs and that allows them to sell at cheaper prices
- The closeness of substitute products is a HIGH competitive force
Overall and based on the above analysis of Porter’s Five Forces, we can conclude that the pharmaceutical industry is not attractive for new entrants.