Michael Porter’s Five Forces Model

Michael Porter … “An industry’s profit potential is largely determined by the intensity of competitive rivalry within that industry.”

Porter’s Five Forces

Portfolio Analysis … … Strategy at the time (1970s) was focused on two dimensions of the portfolio grids … … Industry Attractiveness … Competitive Position

Porters Five Forces … * Threat of Entry * Bargaining Power of Suppliers * Bargaining Power of Buyers * Development of Substitute Products or Services * Rivalry among Competitors

Barriers to Entry … … large capital requirements or the need to gain economies of scale quickly. … strong customer loyalty or strong brand preferences. … lack of adequate distribution channels or access to raw materials.

Power of Suppliers … … high when * A small number of dominant, highly concentrated suppliers exists. * Few good substitute raw materials or suppliers are available. * The cost of switching raw materials or suppliers is high.

Power of Buyers … … high when * Customers are concentrated, large or buy in volume . * The products being purchased are standard or undifferentiated making it easy to switch to other suppliers. * Customers’ purchases represent a major portion of the sellers’ total revenue.

Substitute products … … competitive strength high when * The relative price of substitute products declines . * Consumers’ switching costs decline. * Competitors plan to increase market penetration or production capacity.

Rivalry among competitors … intensity increases as * The number of competitors increases or they become equal in size. * Demand for the industry’s products declines or industry growth slows. * Fixed costs or barriers to leaving the industry are high.

Summary … As rivalry among competing firms intensifies, industry profits decline, in some cases to the point where an industry becomes inherently unattractive.

Overview about Pharma Industry 89,000 cr. Pharma Market Growing at slower pace because of DPCO Top Player contribute less than 10% of Market Share 6-Aug-18

Industry Competition Most competitive industries in the country with as many as 10,000 different players. Top player in the country has only 6% market share and top five have 18%. High growth prospects. Very low entry barriers. Fixed cost requirement is low and need for working capital is high. 6-Aug-18

Bargaining Power of Buyers End user of the product is different from the influencer (read Doctor). Consumer has no choice but to buy what doctor says. Buyers are scattered and they as such does not wield much power in the pricing of the products. 6-Aug-18

Bargaining Power of Suppliers Pharma industry depends upon several organic chemicals. Very competitive and fragmented industry. Chemicals are largely a commodity. Suppliers have very low bargaining power. Pharma industry can switch from their suppliers without incurring a very high cost. 6-Aug-18

. Barriers to Entry Most easily accessible industries for an entrepreneur in India. Capital requirement for the industry is very low, creating a regional distribution network is easy. Point of sales is restricted in this industry in India. Creating brand awareness and franchisee amongst doctors is the key for long-term survival. Quality regulations by the government may put some hindrance for establishing new manufacturing operations. Impending new patent regime will raise the barriers to entry. 6-Aug-18

Threat of Substitutes One of the great advantages of the pharma industry. Demand for pharma products continues and the industry thrives. Key reasons for high competitiveness in the industry is that as an on going concern. 6-Aug-18

Conclusion Industry is not static in nature, it's dynamic. Larger players in the industry will survive with their proprietary products and strong franchisee. In the Indian context, companies like Cipla, Ranbaxy and Glaxo are likely to be key players. Change in the patent regime, will see new proprietary products coming up, making imitation difficult. Government too will have bigger role to play. 6-Aug-18

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