Michael Porters Five Forces

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 Porter's 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 firm's 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 firm's 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

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