Business Strategy

Section A

Question No 1

How relevant do you think the Five-Forces Framework map is to identify environmental forces affecting the global pharmaceutical industry? Justify your answer

Answer 1

Porters Five Forces Model for Global Pharmaceutical Industry

Degree of Rivalry among Existing Firms

There is a high level of market fragmentation. As of 2011, there were more than 10,000 firms in the market, of which, around 200 of them collectively controlled about 70% of the market share.

There are strong credit profiles: companies operate off of high margins (high 70%), healthy balance sheets, and good liquidity. There are industry benefits from strong demand from consumers. There are some weak, small companies usually go out of business (bankruptcy) if they have no potential “blockbuster” in future pipeline. Others that have some significant research or valuable assets will be bought by big and strong pharmaceutical companies. 

 Threats of entry posed by new or potential competitors 

There are high barriers to entry; the company needs to put a lot of capital into research and development, lengthy approval process, marketing before it is able to receive any returns. 

The “big Pharma” companies that were able to build global operations are benefiting from economies of scale in terms of manufacturing. They are able to access low-cost supplies, as a result. 

Pharmaceutical companies benefit from continuation of UK employer-based health coverage. Customers buy medication that was prescribed by the doctors.

Bargaining power of customers

Little bargaining power

A powerful customer may require discounts or preferential service, or delay payment. For example, supermarket chains, with its enormous power, enjoy a very strong bargaining position in relation to their suppliers.

Generally consumers have very little bargaining power. Most of the medication is prescribed by the doctors. Consumers will have to buy the drug at any given price if they need it. More educated consumers may buy a generic alternative (which have the same impact but less expensive) if available on the market.

Pricing pressure

The UK remains one of the few developed markets where drug manufacturers have significant pricing flexibility, and this is in jeopardy due to increasing pressures from consumers and legislators to control health care costs. Governments in other markets are generally the primary customers, and therefore, enjoy substantial pricing leverage. Government price controls created another challenge for the industry in the form of 'parallel trade.

Shareholders

Shareholders continue to pressure the companies for increases in the share repurchase programs. The companies looking for ways to increase shareholders returns partly because the industry is approaching maturity and is not growing as rapidly, and because many companies have a lot of cash on their balance sheet.

Bargaining power of suppliers

Suppliers generally have little room for negotiation. Large pharmaceutical companies generally enjoy significant buying power. They can dictate the price they want to buy or take their business elsewhere. 

One of the biggest changes relating to sales and distribution would be taxability of stock transfers. At present, the biggest challenge for a Pharma distribution company is movement of goods across UK to cater to the need of each State locally

Threat from Generic Competition

Customers ...