Porter Five Forces Analysis Essay

One of the most effective ways to measure the level of attractiveness of medical device industry is Porter Five Forces Analysis. According to porter (2008), there are five forces that influence the level of profitability of any industry; therefore, companies must obtain sustainable competitive advantage in order to survive. These forces are rivalry, threat of substitutes, threats of new entrants, supplier power, and buyer power. (Porter, para 3) Rivalry The medical device industry is one of the most competitive industries in the US.

There are many small firms that produce or outsource medical technologies, which make the industry pure competition. According to Holtzman (2012), “This industry has traditionally had a low level of industry concentration, with no one firm dominating. Small companies are common and typically specialize in developing niche technology, while larger players frequently seek to acquire these firms to expand their product range or gain access to a particular technology. ” (Holtzman, para 3) Thus, low industry concentration indicates that it is not very profitable market due to the high competitiveness level.

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Moreover, medical device companies in China and Brazil are considered another threat to US companies. Chinese, Brazilian, and Indian markets are growing steadily and attracting more consumers than the US market. According to Holtzman, (2012), “With the combined economies of Brazil, India, and China predicted to be larger than those of the G6 countries (United States, Canada, the United Kingdom, Germany, France, and Japan) in less than 40 years, these markets could fuel the medical device industry for the next 50 years. ” (Holtzman, para 15) Threat of Substitutes

Substitutes are products from other industries that cause threat to products sold in the medical device industry. The large number of substitutes offered decreases the prices of medical devices, which cause a fall in profits. As more alternatives are available, medical devices tend to be more elastic toward substitutes price change. Due to the large number of substitutes such as drug therapies, preventative healthcare and genetic screening, MD industry is considered less profitable than other industries. For example, drug therapy is considered one of the biggest threats to the MD industry.

One of the reasons for that is because it is highly profitable. According to the World Health Organization (2012), “The global pharmaceuticals market is worth US$300 billion a year, a figure expected to rise to US$400 billion within three years. The 10 largest drugs companies control over one-third of this market, several with sales of more than US$10 billion a year and profit margins of about 30%. Six are based in the United States and four in Europe. ” (WHO, para 1) Power of Buyer The power of buyer is the influence that costumers can make on medical device producers in order to reduce the prices.

Some of these buyers are hospitals, specialty clinics, and medical equipment distributers. (See Figure 1) It turned out to be that buyers are weak due to two reasons. First, the switching cost is very high. Buyers find it difficult to switch between products because most of the equipment is not standardized. In other word, each device performs special task that it is hard to find an alternative that performs the same task. Second, buyers (hospitals, clinics, etc. ) are fragmented, which means they have no power on products or prices. Power of supplier

The power of suppliers is the influence manufacturers of medical devices have over other retailers and distributers. The suppliers in MD industry have a great influence on the prices of the components used to produce medical devices due to the fact that more than 31% of sales of medical devices are concentrated in three companies. Medtronic Inc. , General Electric Company (GE) and St. Jude Medical Inc. control 14. 8%, 12. 9%, 4. 2% of the market shares on medical devices, respectively. (See Table 1) The main sources of revenue for these companies are Cardiac rhythm management devices and diagnostic imaging technologies.

According to Zhong (2012), “Cardiac rhythm management devices (defibrillators, pacemakers, etc. ) are the largest source of revenue for both Medtronic and St. Jude whereas GE focuses on the manufacturing of diagnostic imaging technologies like CT and MRI machines and parts. ” (American Action Forum, para 8) Threat of New Entrants and Entry Barriers Conclusion Figure 1: Major Market Segmentation Source: American Action Forum Table 1: 2010 US Sales Statistics for Top Three Medical Device Companies Source: American Action Forum