Strategic Analysis for Healthcare Chapter 6 Copyright © 2016 Foundation of the American College of Healthcare Executives. Not for sale.

Five Forces in an Industry Five forces analysis is a popular approach to analyzing industry factors that are likely to affect strategy. The five forces shape, constrain, and provide opportunities for competitive advantage for your organization. The forces influence how profitable a business in the particular industry will be, how much reasonable investment can be made into the industry, and how much growth opportunity exists in that industry. Copyright © 2016 Foundation of the American College of Healthcare Executives. Not for sale.

Five Forces in an Industry The five forces are (1) threat of entry, (2) intensity of rivalry, (3) threat of substitute products, (4) bargaining power of suppliers, and (5) bargaining power of buyers. Copyright © 2016 Foundation of the American College of Healthcare Executives. Not for sale.

Porter’s 5 Forces Threat of entry Bargaining power of sellers Rivalry among existing firms Bargaining power of buyers Threat of substitutes Copyright © 2016 Foundation of the American College of Healthcare Executives. Not for sale.

Threat of Entry The threat of new competitors entering a given market is one industry force that affects strategy. If a company invests billions of dollars to create a new product that can be easily imitated by new entrants in the market, where is the competitive advantage? On the other hand, if competitors are hard pressed to enter the market, a significant competitive advantage may exist for your company to move into the market first. Copyright © 2016 Foundation of the American College of Healthcare Executives. Not for sale.

Threat of Entry Threat of entry can be considered in terms of two main factors: (1) barriers to entry and (2) response of existing competitors. Exhibit 6.2 in the book shows some potential barriers to entry. Copyright © 2016 Foundation of the American College of Healthcare Executives. Not for sale.

Barriers to Entry If there is one supplier of a critical component and your company has a contractually exclusive arrangement with that supplier, if a resource is scarce and you have it controlled, or if the dollar investment is prohibitively high for a competitor to justify entering the market, one would say the barrier to entry for a new entrant is high. Copyright © 2016 Foundation of the American College of Healthcare Executives. Not for sale.

Response of Existing Competitors Competitor responsiveness can lower the threat of entry if the existing competitors are well funded, have the ability to leverage well-established brand names, can aggressively cut prices and maintain low profit margins that would put new competitors out of business, or have a willingness to “defend their turf.” Organizations will be less likely to invest large sums of money in a venture that might not get off the ground or might fail to deliver a generous rate of return on investment. Copyright © 2016 Foundation of the American College of Healthcare Executives. Not for sale.

Intensity of Rivalry The higher the intensity, the more difficult it will be for your organization to profit and grow in the market. A high intensity will also dictate a strong need for defensive strategies to protect your competitive advantages for as long as possible. Copyright © 2016 Foundation of the American College of Healthcare Executives. Not for sale.

Threat of Substitute Products The availability of substitute products limits the amount of money a company can charge for its product or service. All things being equal, if prices rise, customers will switch to a cheaper competitor to substitute an equivalent product. In reality, the competing options in a market are rarely equivalent. But when they are, the product is referred to as a “commodity” product—in other words, the product is perceived to be the same regardless of where it was purchased. Crude oil is one example of a commodity product. An example from the healthcare industry is generic drugs. Is urgent care a substitute for the ER? Copyright © 2016 Foundation of the American College of Healthcare Executives. Not for sale.

Bargaining Power of Suppliers The power held by raw material, component, subassembly, assembly, transportation, disposal, and other suppliers to companies in an industry directly affects the competitive nature of the industry. The theory of supply and demand suggests that, if there are only a small number of suppliers of a necessary component, prices will rise. Suppliers can hold the corporate buyer “over a barrel.” A category of supplier not found in general business consists of the physicians and surgeons who provide services to healthcare organizations. Most are independent contractors who essentially provide labor to the hospitals. Healthcare organizations must recognize the power of these providers and work to meet their needs through efficient and effective support services. Copyright © 2016 Foundation of the American College of Healthcare Executives. Not for sale.

Bargaining Power of Buyers The bargaining power of buyers is the opposite of the power of suppliers. If large corporate buyers can shop around for their raw material, components, subassemblies, or other inputs and find lower prices, then these buyers have significant power over their suppliers. Conditions through which industry buyers can gain bargaining power include the following: The buyer buys in sufficiently large amounts to be able to demand lower prices. The buyer buys in sufficiently large amounts to make the supplier dependent on the purchase. The buyer has the ability to easily switch to a different supplier. The buyer has the option of dropping the supplier and fulfilling its own need. The buyer has the ability to buy a supplier and cut the current supplier out. Quality or brand is unimportant to the business. Copyright © 2016 Foundation of the American College of Healthcare Executives. Not for sale.

Analyzing the Five Forces To assess the five forces, the analyst considers each force, one at a time. The analyst identifies all the issues that impact the particular force, how each issue that has been identified affects the company, and what implications each issue has for strategy. Exhibit 6.3 in the book provides an example of an analysis of the threat of entry for hospitals. Note that “Implication for Strategy” is different from “Strategy.” An implication for strategy identifies a broad possibility and allows for future brainstorming of many different strategies that could respond to that possibility. In contrast, identifying a particular strategy here ends the discussion and shuts out other possible strategies that have not yet been considered. For example, Issue 4 in the exhibit has many possible strategic responses. If the issue had instead been addressed with “Buy out a supplier,” that strategy would be identified and the search for strategies would be over, eliminating other, maybe better, strategies that could have been developed. Copyright © 2016 Foundation of the American College of Healthcare Executives. Not for sale.

Analyzing the Five Forces— An Example Copyright © 2016 Foundation of the American College of Healthcare Executives. Not for sale.

Exercise Divide into groups of 5–8. Identify a healthcare organization and its industry. Use the Five Forces Table at the end of Chapter 6 to brainstorm the five forces in the industry, related issues, impacts the issues have on the organization, and implications for strategy. Copyright © 2016 Foundation of the American College of Healthcare Executives. Not for sale.