Porter's Five Forces Analysis

Introduction

According to Krishnamurthy (2010, p2) believes, “The five-force model of competition was first introduced by Porter in 1980 in his book on Competitive Strategy. For 30 years since the concept was first outlined, the model has been considered an important tool in understanding industry structures and analyzing industry attractiveness”.
Also Krishnamurthy (2010, p2) explains, “In a recent video interview, Porter has emphasized his faith in the model and has provided examples from the airline and steel industries to argue that the model is universal. The model is an integral part of books on management in general and on strategy in particular. Thus, the five-force model can be seen as a torch-bearer of robust theory”.

The five forces identified by Porter are:

  • Threat of new entrants
  • Industry rivalry (consolidated vs. fragmented industries)
  • Bargaining power of buyers
  • Bargaining power of suppliers
  • Threat of substitutes



porters5forces-731802.jpg


Actually, icon group uses Porter’s five forces for analyzing KPJ healthcare company that you can see in below:


1. Threat of new entrants
Explain:
Threat of new entrants refers to the threat new competitors pose to existing competitors in an industry. A profitable industry will attract more competitors looking to achieve profits. If it is easy for these new entrants to enter the market if entry barriers are low this poses a threat to the firms already competing in that market. More competition or increased production capacity without concurrent increase in consumer demand means less profit to go around, According to Swathen, 2010.
Patients who are registered in KPJ Healthcare would have their medical records maintained in the system and the doctors would have knowledge of the patient’s medical history. Since these records already exist in the system, the existence of a new entrant does not pose a threat to the system as patients who have been seeking medical treatment will not resort to a new entrant as it would be inconvenient for patient to regurgitate their medical history to a new doctor. Therefore, the threat of new entrant is LIMITED.
2. Industry rivalry (consolidated vs. fragmented industries)
Explain:
As Michael E. Porter (1998) states, “The rivalry amongst existing firms analysis will help you to understand the risk that your competitors may compete for market position and if their competitive tactics are likely to be effective”.
You will find that your competitors may compete for market position using tactics such as;
  • Price competition,
  • Advertising,
  • Increased customer service, or
  • Through offering longer warrantee periods

A large number of firms, according to list of hospital in Malaysia at Wikipedia, there are more than thirty private hospitals in Malaysia that offer healthcare service that KPJ Company must be competition with other companies. for example, Sunway Hospital, Pantai Medical Centre which now runs nine hospitals in the country, Gleneagles, Mahkota and some famous hospitals in Penang. So, here increases rivalry because more firms must compete for the same customers and resources.
01.JPG


There are rapidly growing private healthcare in Malaysia that the government has set up Health-care Travel Council which promotes 35 private hospitals for medical tourism (Business Monitor, 2011). The below table shows growing medical tourism in Malaysia
02.JPG


According to the Prime Minister Najib Razak, the medical tourism revenues of the 35 designated hospitals grew up to MYR299bn from MYR59bn in the past five years, a very good opportunity to KPJ to compete with its competitors by working together with Health-care Travel Council to get more customers for them.
3. Bargaining power of buyers
Explain:

Buyers are the people / organisations who create demand in an industry
The bargaining power of buyers is greater when
- There are few dominant buyers and many sellers in the industry

- Products are standardised

- Buyers threaten to integrate backward into the industry

- Suppliers do not threaten to integrate forward into the buyer's industry

- The industry is not a key supplying group for buyers
(tutor2u,no date)
http://tutor2u.net/business/strategy/porter_five_forces.htm

This variable has the potential to be most critical for members of the for profit private hospital industry in managing viable hospital units. Individual organisations rely on key groups to supply quality and timely services and products to the various hospital locations. Each of the main
supplier components are summarised as follows;

Medical practitioners: Having a strong network of referring doctors is a fundamental prerequisite to viability and success. Case histories show that non support of doctor groups can lead to serious underperformance of both individual hospitals and company groups in this industry (Grier, 2004).

Consumable Medical supplies: Most consumables used in private hospitals are supplied by industries that are oligopolies in structure. Hence individual supplying companies can usually exercise some control over price and supply conditions. Protheses are a costly component of
some medical treatments and are supplied by a limited number of suitable manufacturers. It has been said that supplying manufacturers are specified by medical practitioners in 20 -40% of cases that require the use of a prothesis (Grier, 2004).
4. Bargaining power of suppliers
Explain:
Suppliers are the businesses that supply materials & other products into the industry.
The cost of items bought from suppliers (e.g. raw materials, components) can have a significant impact on a company's profitability. If suppliers have high bargaining power over a company, then in theory the company's industry is less attractive. The bargaining power of suppliers will be high when:
- There are many buyers and few dominant suppliers

- There are undifferentiated, highly valued products

- Suppliers threaten to integrate forward into the industry (e.g. brand manufacturers threatening to set up their own retail outlets)

- Buyers do not threaten to integrate backwards into supply

- The industry is not a key customer group to the suppliers
(tutor2u,no date)
http://tutor2u.net/business/strategy/porter_five_forces.htm
5. Threat of substitutes
Explain:
According to Swathen, 2010. Threat of substitutes is the availability of a product that the consumer can purchase instead of the industry’s product. A substitute product is a product from another industry that offers similar benefits to the consumer as the product produced by the firms within the industry. Substitute refers to products/services that can replace the other product/service while maintaining the need and the meaning of that product service. In fact, medical treatment has no substitute although others can decide to use herbals or other organic products instead of advances medical procedures. Therefore the threat of substitute is LOW that makes KPJ not to worry much on substitutes.