Analyzing the Pharmaceutical industry through Porter’s Competitive Forces

Michael Porter presents the competitive forces that shape a firm’s or industries’ strategy to realize profits. According to Porter, competition goes further than industry rivals to include four other competitive forces which are, alternate products, customers, new entrants as well as suppliers. The emergence of newcomers leads to new capacity and a drive to acquire market share, which results to pressure on costs, prices as well as the investment rate needed to compete (Porter, 2008). In the case of the pharmaceutical industry, the end of patent protection sees new firms starting to sell generic copies of similar drugs but at a lower price. In the long-run, the revenue streams of the pharmaceutical firm responsible for innovating the drug start dropping. An example is the firm Pfizer, whose product Lipitor grossed in revenues of over $10 billion between 2003 and 2011 but dropped to $4 billion in 2012 after losing its patent protection in 2010.

Suppliers, on the other hand, can leverage the power they have to create more value for themselves. Suppliers can be costly, restrict services or quality as well as transfer expenses to industry participants. Powerful suppliers have the capacity to reap off from an industry that is unable to transfer the additional expenses through their own prices. In the pharmaceutical industry, wholesalers are commonly charged with the role of organizing logistics of supplying drugs to hospitals and pharmacies. Europe’s pharmaceutical industry is dominated by a multichannel system whereby multiple wholesalers can sell a common product (Nell, 2019). Also, established pharmacy chains, unique pharmacies as well as mail-order pharmacies, to some extent, have the capacity to purchase drugs from the manufacturer directly.

The power of buyers as a competitive force holds more value as they can force a decrease in the price of a product. Buyers also have the power to demand extra services or improved quality leading to industry participants going at one another. Buyers end up possessing more power in leveraging negotiations in comparison to the industry participants (Porter, 2008).  Buyers who are sensitive to the cost of products can use their clout to mainly push for a reduction in prices. In the case of the pharmaceutical industry, European governments recently became involved in price negotiation and regulation as the principal buyers of drugs for their states. Among the regulations set by these state health systems are setting fixed prices for pharmaceutical products (Nell, 2019). Resultantly, such measures impact the pharmaceutical industry in vast proportions, which some industry experts term as an extortion-like situation.

References

Nell, R. K. (2019). Pfizer and the Challenges of the Pharmaceutical Industry. Ivey Publishing.

Porter, M. (2008). The Five Competitive Forces That Shape Strategy. Harvard Business Review, pp. 25-39.