Pharmaceutical Sector Analysis with the help of

Porter’s Five Forces Model

In this COVID -19 situation, today’s market environment is very competitive and especially a
pharmaceutical sector which is growing all over the world. I have chosen this sector by taking
advantage of pandemic situation to study this sector well and in-depth, to maintain good
portfolio and to earn maximum amount of profit.

As an entrepreneur I would like to do my business in pharmaceutical industry which remains

unaffected in any adverse economic condition. In India also it has shown major growth and
volatility in past 3 – 4 months, and which is expected for further one more year and so on after
vaccine production. Also, major investments are made in pharma sector by Indian government
as well as private companies for Research & Development, new infrastructures, etc.

To know the feasibility of this business, ‘Five Forces Model’ is one of the best methods to
analyze. This model was coined by Michael E. Porter to help companies for assessing the nature
of an industry’s competitiveness and develop corporate strategies as per that. It is as follows –

Porter’s Five Forces Model

Business

Bargaining Threat of
power of New
Buyers Entrants

Bargaining Threat of
power of Substitute
Suppliers Rivalry Products
among
existing
Competitors
 Through this model, Porter classifies five main competitive forces that affect any market and
all industries. These forces that determine how much competition will exist in a market and also
the profitability and attractiveness of this market for a business. With the help of dynamic
corporate policies and strategic management, a business will aim to shape these forces to its
advantage to strengthen the organizations position in the particular sector i.e. Pharma.

With the help of above model, the analysis for the Pharmaceutical sector Business is as follows:-

1) Bargaining Power of Buyers:

It refers to the extent buyers are able to put pressure on the business, which is major factor
of the customer’s ability to react to price changes and influence the sale of the business.
In pharma sector, end consumers are patients who don’t have bargaining power in their
hands as it is an basic need for life to get medical facility. Here, bargaining power or the
capacity to show influence lies in the hands of the ‘Doctor’. It is the important and special
feature of pharma sector is that the end user of the product is patient but the influencer is
doctor. Consumer has to buy what doctor suggests him; hence brand awareness remains with
the doctor only. Therefore, when we see buyer’s bargaining power; we have to consider
influence on the price of the product.
In this sector, buyers are scattered and less or no power lies in the hands for pricing of the
products. Also, government framed policies and rules plays vital role in deciding pricing
through the NPPA (National Pharmaceutical Pricing Authority).

2) Bargaining Power of Suppliers:

It refers to the extent suppliers are able to put pressure on the business, when charging for
the raw materials or products that they give to it.
Pharmaceutical sector depends upon various organic chemicals. The chemical sector also
has huge competition. The supplier has very low bargaining power and companies in the
pharma sector can easily switch from their suppliers without carrying a very high cost. Due to
this low bargaining power of suppliers, pharma companies generally don’t face a lot of pressure
on their profit margins due to decreased pressure on the price of raw materials.
Also, it may happen that supplier can go for becoming a pharma company. Eg. Orchid
Pharma was chemical supplier, later on it became pharmaceutical company.

3) Rivalry among Existing Competitors:

As the factor suggests, an industry with high rivalry among existing competitors is one
which is characterized by consistent price wars, high degrees of innovation, increased
marketing attempts and service improvements.
Pharmaceutical industry is the biggest sector in India where huge competition exists with
more than 8-9 thousand different players. The rivalry in the sector can be measure from the fact
that top players in pharma i.e. Cipla, Dr. Reddy’s Lab, Sun pharma, Divi’s Lab, Torrent pharma,
Lupic , glenmark has only 6-7% market share, hence concentration ratio is very low. High
growth prospects make it attractive for new players to enter into the sector.
Many small players who have focused area and region, strategic distribution channel and
tactics, have more chance to sustain in the market. Pharma industry shows stable growth rate
almost 1.2 times average in India. In this sector, Product differentiation is not the rivalry point
but cost and price is competitive.

4) Threat of Substitute products:

A substitute product nearly performs the same function as the industry’s product and
service but by different means. A company operating in an industry with high threat of
substitute products suffers as they have to put a price ceiling to their offering. This, in turn
affects an industry’s profitability.
But, in pharma sector having substitute products is the great advantage. In any worst
economic condition like pandemic or war or anything else, demand for this sector remains
constant and stable. As medical requirements, is one the basic needs of living beings, demand
never stop. Pharma sector is like a going concern, whatever happens it goes on and remains
unaffected. Due to this special factor, this industry has infinite future.

5) Threat of New Entrants:

As the factor indicates, it refers to an industry where the barriers to entry are low. In India,
from entrepreneur’s point of view, pharma sector can be easily accessible. The main 3 required
factor for the business – Land, Labor, Capital is very less. If an entrepreneur is operating in
Indian territories, to create a distributional channel is easy as compared to go for globally.
To create awareness about brand in the market especially among doctors is the one of
important and toughest task for long term existence of the company. With this, one has to
follow rules and regulations of the government, quality standards and policies of patents which
act as a barrier in front of new commerce.

Conclusion:

Porter’s Five Forces Model gives fair idea about the sector in which business operates and
how 5 forces namely; Bargaining power of Buyers, Bargaining power of Suppliers, Rivalry
among existing competitors, Threats of Substitute Product, Threat of New Entrants influence on
the same.

Here, in Pharmaceutical sector bargaining power lies in hands of the influencer (doctor) and
not in end consumer’s hand (patient). Also, bargaining power of suppliers is low which leads to
good profit margin for the company. Even Supplier Company can itself become a new leading
pharma company with good networking. Competition is there in the market as large numbers
are involved. Top players will survive in long run with their dynamic strategies, brand
awareness and updated technologies; But small companies need to work for awareness of their
existence otherwise they won’t be able to stay in the market for long run. Substitute acts as an
key factor to the pharma industry, where as price is competitive factor. Also, there is less
restrictions on new entries but survival is hard.

Economies of scale will play an important part too. Last but not the least, in a vast country
likes India, government will also play a vital role.