Applying Michael Porter's Five Forces

22
Applying the Five Forces by Wesley Shu, text by D. Besanko et al.
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Transcript of Applying Michael Porter's Five Forces

Page 1: Applying Michael Porter's Five Forces

Applying the Five Forcesby Wesley Shu, text by D. Besanko et al.

Page 2: Applying Michael Porter's Five Forces

Hospital Market in Chicago Area Thriving in 80s, then declined, recently

on the rise

Page 3: Applying Michael Porter's Five Forces

Internal Rivalry – Background

about 70 hospitals, mostly independent, i.e., low Herfindahl index (HHI)

Fierce internal rivalry, because Many competitors Production costs vary Substantial excess capacity –

occupancy rate < 70% at many hospitals

Stagnant or declining demand

Page 4: Applying Michael Porter's Five Forces

Internal Rivalry – MCO Took Advantage Managed care organizations (MCO,

insurance companies) took advantage: Contract with hospitals offering the

most favorable rates Lower the co-pay to encourage

patients to choose those hospitals Due to high price elasticity, demand

increase – hospitals are more homogenous

Page 5: Applying Michael Porter's Five Forces

Internal Rivalry – MCO Took Advantage Negotiations between MCO and

hospitals were secret, hospitals in disadvantageous position

Contracts are infrequent – hospitals assumed pressure

Page 6: Applying Michael Porter's Five Forces

Internal Rivalry – Hospital Fought Back Established brand identity, e.g.,

Northwestern Medical Center Diversified into related products, e.g.,

skilled nursing services Differentiated their services, e.g.,

establishing cancer center, etc. Patients required hospital in

neighborhood – increase loyalty Merger

Page 7: Applying Michael Porter's Five Forces

Entry - Barriers

Government regulation on new hospital construction

Hospitals are capital intensive Brand identity not easy for new

hospitals

Page 8: Applying Michael Porter's Five Forces

Entry – The Other Side

Chicago area grew Innovations allowed smaller niche

hospitals

Page 9: Applying Michael Porter's Five Forces

Substitutes and Complements Few inpatient services could be

performed outside the hospitals But improvement in surgical

techniques made it possible Outpatient diagnostic facilities (ODF) –

substitutes But ODF can also be complement –

hospitals already had technology and experience to do it – economies of scope

Page 10: Applying Michael Porter's Five Forces

Suppliers

Demand for nurses high, supply low Price rising for drugs and other

medical supplies

Page 11: Applying Michael Porter's Five Forces

Buyers

Insurers wield substantial power Insurers are large size – high

negotiation power, e.g., Blue Cross and Medicare

Highly skilled physicians became strong buyers who brought patients

Page 12: Applying Michael Porter's Five Forces

Overview

Force Threat to Profit, 1980s

Threat to Profit, today

Internal rivalry

Low High but falling

Entry Low Medium but growing

Substitutes and complements

Medium High

Supplier power

Medium Medium

Buyer power Low Medium

Page 13: Applying Michael Porter's Five Forces

Pentagonal Analysis

Internal Rivalry

Buyer

SupplierSub & Comp

Entry

Internal Rivalry

Buyer

Supplier Sub & Comp

Entry

Page 14: Applying Michael Porter's Five Forces

Use of Pentagonal Analysis

Compared the intensity of competition of two industries (or the same one, different time)

Entry strategy and decision for entrant, ex. Better enter in 80s in Chicago hospitals

than now Now, form an alliance with suppliers or

buyers to bargain or compete with sub/comp and other hospitals

In 80s, differentiate to avoid sub/comp

Page 15: Applying Michael Porter's Five Forces

Template – Internal Rivalry

Current

Future

Degree of seller concentration?

Rate of industry growth?

Significant cost differences among firms?

Excess capacity?

Cost structure of firms: sensitivity of costs to capacity utilization?

Degree of product differentiation among sellers? Brand loyalty to existing sellers? Cross-price elasticities of demand among competitors in industry?

Buyers’ switching costs?

Page 16: Applying Michael Porter's Five Forces

Template – Internal Rivalry

Current

Future

Are prices and terms of sales transactions observable?

Can firms adjust prices quickly?

Large and/or infrequent sales orders?

Use of ”facilitating practices”?

History of “cooperative” pricing?

Strength of exit barriers?

Page 17: Applying Michael Porter's Five Forces

Template – Threat of Entry

Current

Future

Significant economies of scale

Importance of reputation or established brand loyalties in purchase decision

Entrants’ access to distribution channels

Entrants’ access to raw materials

Entrants’ access to technology/know-how

Entrants’ access to favorable locations

Experience-based advantages of incumbents

Page 18: Applying Michael Porter's Five Forces

Template – Threat of Entry

Current

Future

Network externalities

Government protection of incumbents

Perception of entrants about expected retaliation of incumbents/reputations of incumbents for ‘toughness’

Page 19: Applying Michael Porter's Five Forces

Template – Substitutes & Complements

Current

Future

Availability of close substitutes

Price-value characteristics of substitutes

Price elasticity of industry demand

Availability of close complements

Price-value characteristics of complements

Page 20: Applying Michael Porter's Five Forces

Template – SuppliersCurrent

Future

Is supplier industry more concentrated than industry it sells to?

Do firms in industry purchase small volumes relative to other customers of suppliers? Is typical firm’s purchase volume small relative to sales of typical suppliers?

Few substitutes for suppliers’ input

Do firms in industry make relationship-specific investments to support transactions with specific suppliers?

Do suppliers pose credible threat of forward integration into the product market?

Are suppliers able to price-discriminate among prospective customers according to ability/willingness to pay for input?

Page 21: Applying Michael Porter's Five Forces

Template – BuyersCurrent

Future

Is buyers’ industry more concentrated than industry it purchases from?

Do buyers purchase in large volumes? Does a buyer’s purchase volume represent large fraction of typical seller’s sales revenue?

Can buyers find substitutes for industry’s product?

Do firms in industry make relationship-specific investments to support transactions with specific buyers?

Is price elasticity of demand of buyer’s product high?

Page 22: Applying Michael Porter's Five Forces

Template – BuyersCurrent

Future

Do buyers pose credible threat of backward integration?

Does product represent significant fraction of cost in buyer’s business?

Are prices in the market negotiated between buyers’ and sellers on each individual transaction or do sellers post a ‘take it or leave it’ price that applies to all transaction?