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Healthcare ArticlesCompetitive Strategy in the Pharmaceutical IndustryAn important and sometimes overlooked factor that distinguishes one company from another in the pharmaceutical industry is strategic planning. This article aims to provide information to assist managers during their business planning sessions and is based on research undertaken by Michael Porter of Harvard University. He has analysed companies across a range of industries, so the principles are also applicable to our industry, pharmaceuticals. Porter’s model looks at the competitive arena in which businesses operate and describes five basic competitive forces that directly impact on how successfully a business unit operates. By understanding and knowing what these competitive forces are and how they impact on the business, managers are better equipped to prepare their plans. They are also more able to focus on those aspects that have the greatest impact on their business and can, if necessary, realign their resources to ensure the best outcome. Essentially, competition in an industry - including pharmaceuticals - depends on five basic competitive forces:
It is the collective strength of these forces that determines the ultimate profit potential of the industry. Importantly, this framework is applicable at both the industry level (eg pharmaceuticals) and the business unit level (eg individual clinical research departments). Using some general pharmaceutical industry examples as well as examples from individual departments, these competitive forces will be examined in detail. Suppliers: They could be the providers of the raw materials and intermediates, the manufacturing and production plants, the overseas head offices who supply finished product, the local co-marketing partners who supply product and/or third party suppliers anywhere along the supply chain. Each company will have different suppliers depending on whether they are OTC, ethical, or generic businesses. It is important to remember that labour should be viewed as a supplier to industry. In analysing the business environment there is a need to consider how much
bargaining power the suppliers actually have because the more power they
have the more impact they can have. Suppliers can affect you in several ways:
by threatening to raise prices or threatening to reduce the quality of goods
and services. Both these prospects are unattractive to a business because
of their affect on profitability. Different suppliers can have different levels of impact. Some have more bargaining power when they have significant influence in the market, for instance, when it is difficult for the industry to switch to other suppliers or when they threaten to withhold supply. Either situation can cause serious consequences. Recognising labour as a supplier is important because labour can exert great power by raising prices (i.e. asking for more money) or reducing quality (defects or working less hours). In business planning sessions, it is therefore important to know how much influence suppliers have on the business and what can be done to decrease the amount of their bargaining power. Buyers: Their influence needs to be considered. In various ways, buyers can affect a business by seeking price reductions, - demanding higher quality and demanding better service. A buyer is powerful in the following situations:
In short, buyers can exercise power by seeking price reductions and threatening to go to other suppliers to get their products. Powerful buyers demand costly service. The government requires in-depth analyses that costs money, and consumers require up-to-date and relevant medical information - another costly service. So the question needs to be asked: do your buyers consistently pressure you for reduced prices, particularly by threatening to take their business elsewhere? How costly are their requests? New Entrants: New entrants see the market as attractive, they bring new capacity and resources, new ideas along with a desire to gain market share. Their impact depends on the barriers to entry already present, together with the anticipated reaction of existing competitors. There are many barriers that can be created to prevent new entrants or to slow down their arrival. In the pharmaceutical industry, a new entrant may be faced with various hurdles erected by established businesses, such as:
If the barriers are high and/or the newcomer expects sharp retaliation from entrenched competitors, then the threat of entry is low. In the pharmaceutical industry, the barriers to entry are high. Companies have significant manufacturing capabilities that are hard to replicate; they have patents to protect their products and they invariably have big marketing budgets designed to protect their brands. Substitutes: For example, generic brands are substitutes for original products and there are devices that can substitute for pharmacological treatments, like stents in thrombo-embolic disease. Rivalry: This rivalry among firms usually takes the form of jockeying for position using tactics like price competition, advertising battles and product introductions. It can be intense if companies are scrambling for market share, but if the overall market is in growth or the position of the company is protected through patents, then the rivalry is likely to be less intense. These then are the five competitive forces that affect companies. They can be analysed to see how important they are for a particular business by assigning a rating to each factor, as follows:
After analysising these forces, a business manager is better equipped to determine:
An analysis of the pharmaceutical industry proves that suppliers do have some impact - but not a lot. Therefore they are assigned a score of 3. Company’s generally own their manufacturing plants so suppliers don’t dictate prices and are unlikely to threaten to take business elsewhere. Buyers however can significantly influence the market, particularly as the government and health authorities consistently seek price reductions. Substitutes have some impact, but not a lot There is not much rivalry because the pharmaceutical market is fragmented, made up of many players. New entrants are not common, largely because of the high barriers to entry, especially R&D and manufacturing and marketing costs. So overall, the competitive force that exerts the most pressure in the pharmaceutical industry is the buyer and there should be a focus on the competitive strategies associated with this group. However the competitive forces are different for each company and not all of the five will be equally important. The five-point competitive force framework enables a business to see through the complexity of the issues and pinpoint those factors that are critical to its operation. It also allows managers to identify those aspects of industry structure that are important to them and which areas to focus on for advantage. We are now going to focus on individual business units within the industry: clinical research, regulatory and medical information departments, so starting off with the Clinical Research department as a business unit, the five forces Strategic Framework model is applied. Suppliers Buyers Potential Entrants Substitutes Therefore the Buyers can also significantly influence a business. Head offices and regulatory departments have the power to demand high quality, timely data. These demands can increase costs and increase the resources that are required. to these departments have lots of power. They have the patients and provide the data; they can ask for more money or additional resources, or withhold data. Rivalry between competing departments from different companies may also be intense due to limited patient numbers and when the buyer is head office, they may be seeking the lowest price per patient. Substitutes can be an issue. They are generally manageable and a company will know who the CROs are and this only becomes an issue if they have been bidding at head office for local projects and then get approval to go ahead. This can tie up patients into their own trials, or offer a newer therapy (phase 2 trials) and take away demand from the company’s own trials. Barriers to entry may be rated ‘medium’. A new clinical research department can enter a new therapeutic area but it will take time to understand the market and build the networks necessary to deliver the results. Actually, the greatest barriers to entry are the established relationships with investigators and sites that provide patients. By using the five-forces model in business planning, Clinical Research Managers can determine who is affecting their business the most and can apply the 0-5 analysis to determine where they should be focusing their efforts. If the analysis reveals that it is the suppliers that have the most power, departments can implement strategies designed to improve the competitive dynamics in their favour. By acknowledging that the power is with their suppliers, they are in a good position to build long term relationships with them. As well, they can:
By acknowledging the power of the buyers, departments are better able to ensure that projects run smoothly, that they are adequately funded, that SOPs are followed and that quality data is provided. So armed with this data, managers can plan according, knowing where they need to focus their efforts on their suppliers and buyers. Market dynamics affect clinical research departments differently from company to company. For instance: there may be significant activity from global CROs resulting in local companies not being able to recruit sufficient patients and this in turn means they do not get additional studies from head office. In this case, managers could allocate time and resources in their business plans to build relationships with the relevant key clinical trial allocators in head office. Structural analysis therefore identifies the key factors driving competition and the places where strategic action can influence the balance and yield the greatest payoff. By having increased knowledge about the business’ capabilities and the causes of the relevant competitive forces, a company can more easily highlight the areas where it should confront competition and where to avoid it. This same thinking can be applied to different departments within the same company, although each could be influenced by different competitive forces. For instance, the Regulatory Affairs Department where the product is the regulatory submission. In this model, the suppliers are the investigators and patients who supply data, the clinical research department who collate the clinical data, internal labour who write the submissions, external contractors who supply labour, key opinion leaders (who supply expert opinions), overseas reports. The buyers are TGA, FDA, Head office and local marketing departments. The potential entrants are the CROs who prepare the submissions. The rivalry between different pharmaceutical companies is most likely to be the race to see who can get their submission in and be the first onto the market. Looking at the impact of these competitive forces, it can be seen that suppliers can threaten to withhold supply. This can have serious consequences like delayed regulatory submissions. For their part, buyers can demand better quality and better service. Regulatory agencies are experienced and know what they can demand. They also have lots of power because they are the only regulatory agency and pharmaceutical company’s are not in the position of having a submission rejected and then being able to go to the agency next door. The assessment for Medical Information department reveals a different set of competitive forces. Their suppliers are labour, clinical trial results, databases, head office, other affiliates and advisory boards. Their buyers are doctors, hospitals, pharmacists, patients, families, sales and marketing personnel. Their substitutes are the Internet and Intranet Rivalry comes into play between competing companies. So, in business planning, managers need to take into account that suppliers and buyers have significant influence over their activities and should align their resources to better serving their relevant groups. By analysising the results of the five force competitive strategy, a company can ascertain potential entrants may play a role. One strategy recommended is to benchmark the activities of the Medical Information Department against those provided by a medical education company. SUMMARY It is important that Business Managers systematically gather competitive data from the marketplace, a place that gives out various signals and learn how to understand and to interpret these signals that really help strategic planning. The Strategic Framework model, proposed by Michael Porter, is a useful way of doing this. It highlights those areas where information needs to be obtained (i.e., about the suppliers, the buyers, the substitutes, new companies and what existing companies are up to), brings order to the data and assists with a company’s strategic planning. The data a company needs to get from the marketplace probably already exists within your organization, either in the heads of employees or buried in reports and other documents stored internally. For additional assistance with business planning, a company must understand what they need to know about the five competitive forces and what they need to find out. This is some of the key factors that can give a company that all-important competitive advantage. Additional reading: * * * By Dr Glenn Carter, Managing Director of Pharmaceutical Professionals, a Sydney professional services company. © Copyright 2005 Pharmaceutical Professionals Pty Ltd. Privacy Policy | Resource Links | Design: Jolly Good Design |
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