Porter's Five Forces

PHARMACEUTICAL INDUSTRY

I begin with discussing how Michael Porter’s five external environmental forces threat of entry, threat of rivalry, threat of substitutes, threat of suppliers, and threat of buyers affect the pharmaceutical industry as a whole. The pharmaceutical industry consists of firms that develop, patent, and distribute drugs. This industry has important economies in research and development (R&D), also, the product is differentiated because firms often sell branded products (Barney & Hesterly, 2010). However, the competition is high between these firms until the product is developed and patented. Then competition is reduced. (Cavusgil, Knight, & Riesenberger, 2008) About 10 major firms dominate the global pharmaceutical industry; five of them are headquartered in the United States and five in Europe. Examples include GlaxoSmithKline (United Kingdom). Novartis AG (Switzerland), Sanofi Aventis (France), Merck and Pfizer (United States). Europe and the United States account roughly 25 and 50 percent, respectively, of the worldwide pharmaceutical sales.

The threat of new entrants into the pharmaceutical industry is very low because of the high costs required to enter the industry, which means their profit is high, as Dr. MacDonald mentioned in the class "The higher the threat the lower the profit and vice versa". Even though the economies of scale for production may not be very significant, but other barriers to entry are high. It takes firms 12 to 15 years, and over 800 million in R&D expense to successfully develop new drugs and it takes a lot of follow-up costs and time to be approved for patient use (Cavusgil, Knight, & Riesenberger, 2008). Along with high R&D costs, the heavy regulation of the pharmaceutical industry is another barrier to entry. All drugs and chemicals used need to be approved by the Food and Drug Administration (FDA), and when the drugs are not approved the time and money used to develop them is lost by the firm.

The...