Michael Porters Five Forces
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INTRODUCTION
Five Forces Affecting Competitive Strategy
Harvard Business School Professor Michael Porter is the undisputed guru of competitive strategy. In his book of that name Porter identifies five forces that drive competition within an industry:
One obvious application of all this is to would-be entrants and the problem of entering new markets. Another is to the current competitors and the ongoing task of staying competitive in markets where they already operate.
Diagram of Porters 5 Forces
SUPPLIER POWER
Supplier concentration
Importance of volume to supplier
Differentiation of inputs
Impact of inputs on cost or differentiation
Switching costs of firms in the industry
Presence of substitute inputs
Threat of forward integration
Cost relative to total purchases in industry
BARRIERS
TO ENTRY
Absolute cost advantages
Proprietary learning curve
Access to inputs
Government policy
Economies of scale
Capital requirements
Brand identity
Switching costs
Access to distribution
Expected retaliation
Proprietary products
THREAT OF
SUBSTITUTES
-Switching costs
-Buyer inclination to
substitute
-Price-performance
trade-off of substitutes
BUYER POWER
Bargaining leverage
Buyer volume
Buyer information
Brand identity
Price sensitivity
Threat of backward integration
Product differentiation
Buyer concentration vs. industry
Substitutes available
Buyers incentives
DEGREE OF RIVALRY
-Exit barriers
-Industry concentration
-Fixed costs/Value added
-Industry growth
-Intermittent overcapacity
-Product differences
-Switching costs
-Brand identity
-Diversity of rivals
-Corporate stakes
This assignment will focus on Gertrude’s Garden Children’s Hospital which is the main paediatric hospital in Eastern and Central Africa until late 2006 when other hospital ventured into the pediatric field. Porters five forces are analyzed as follows:
1. Barriers to Entry / Threat of Entry: Barriers to entry are more than the normal equilibrium adjustments that markets typically make. For example, Being the only paediatric hospital in Eastern and Central Africa Gertrude’s enjoyed a profit increase and as such, we would expect additional hospitals to enter the market to take advantage of the high profit levels, In this case most hospitals (e.g Nairobi Hospital, Aga Khan University Hospital) have come up with paediatric wings to care for the paediatric patients. Barriers to entry are unique industry characteristics that define the industry. Barriers reduce the rate of entry of new firms, thus maintaining a level of profits for those already in the industry. From a strategic perspective, barriers can be created or exploited to enhance a firms competitive advantage. Barriers to entry arise from several sources:
(a) Government creates barriers. Although the principal role of the government in a market is to preserve competition through anti-trust actions, government also restricts competition through the granting of monopolies and through regulation..
(b) Patents and proprietary knowledge serve to restrict entry into an industry. Ideas and knowledge that provide competitive advantages are treated as private property when patented, preventing others from using the knowledge and thus creating a barrier to entry.
(c) Asset specificity inhibits entry into an industry. Asset specificity is the extent to which the firms assets can be utilized to produce a different product. When an industry requires highly specialized technology or plants and equipment, potential entrants are reluctant to commit to acquiring specialized assets that cannot be sold or converted into other uses if the venture fails.
(d) Organizational (Internal) Economies of Scale. The most cost efficient level of production is termed Minimum Efficient Scale (MES). This is the point at which unit costs for production are at minimum – i.e., the most cost efficient level of production. The existence of such an economy of scale creates a barrier to entry. The greater the difference between industry MES and entry unit costs, the greater the barrier to entry.
2. Barriers to exit work similarly to barriers to entry: Because of the high specialized assets and high exit costs have made the health care sector difficult to exit. Exit barriers limit the ability of a firm to leave the market and can exacerbate rivalry – unable to leave the industry, a firm must compete.
3. Buyer Power: Considering the defined clientele of Gertrude’s Children’s Hospital it can be clearly stated that they have a strong buyer power. This is because they specialize in paediatric health care products hence they have significant market share, they also purchase a significant proportion of output and distribution of purchases or products are standardized and lastly thye posses a credible backward integration threat