Module 2- Business Perspectives 501A - Porter's Five forces and Healthcare

Module 2- Business Perspectives 501A

           During week 2 of Business Perspectives 501A/Module 2, we focused on concepts regarding the external and industry environments and how to analyze the industry. We learned that the general environment is uncontrollable (how a society impacts a company, typically future-focused).  External analysis focuses on the firm's core competencies to enhance and achieve goals.  Competitor analysis looks at competitors and future companies, including rival behavior strategies.  Finally, we focused mainly on the industry environment and how this looks at direct influences on a firm (Porter’s Five Forces).   When a firm can master general, industry, and competitor analysis, the firm should be operating at top performance. 

            One type of framework used in analyzing a firm is Porter’s Five Forces.  “Michael E. Porter’s Five Forces framework is one of the most widely regarded business strategy tools. This framework offers organizations a systematic approach to assessing their competitive environment and making strategic decisions that can influence their long-term success” (Danao, 2024).  

What are Porter’s Five Forces?

1.      Competitive Rivalry

2.      Supplier Power

3.      Buyer Power

4.      Threat of Substitution

5.      Threat of New Entrants

 

            Competitive Rivalry is concerned with the intensity of the competition, focusing on competitors.  Within this phase, one can review competitive firms, analyzing competitors' products, including product differentiation and price points. The growth of the industry should also be considered.  “Rivalry competition is higher when only a few businesses sell a product, the industry is growing, and consumers can switch to a competitor” (Marin, 2023). When reviewing competitive rivalry, profitability can be analyzed.  Typically, when you have higher rivalry, one tends to have lower profit margins due to price competition. When analyzing other firms in the context of competitive rivalry, you can then take the feedback back to the company to differentiate your products, find a niche market, and build brand loyalty. 

            Supplier Power reviews the supplier's ability to influence prices, contracts/terms, and quality in the industry.  When there are fewer suppliers and the supplies are specialized or niche, the supplier tends to have greater influence.  This would also be true if it were costly for the firm to switch suppliers.  When the suppliers have higher influence, they can negotiate higher prices, better terms for themselves, and even adjust quality without much say from the firm.  The firm would need to be cautious and develop partnerships with the supplier or attempt to diversify suppliers.  “Finding reliable suppliers and securing favorable terms is vital to success” (Danao, 2024).

            Buyer Power defines the ability of the customer to influence pricing and quality, making firms compete for their business.  When there are fewer buyers for a product, buyer power tends to be high, as the buyer is typically well informed and knowledgeable about that product.  Buyer power is also high if the products are easily substituted.  “The electronics industry provides a compelling example of buyer power. Price comparisons are easily accessible online, so finding the best deals and discounts is easy” (Danao, 2024).   When buyer power is high, typically prices for the product are lower, and the customer can demand better quality.  Again, if the firm is looking to lower buyer power, they would need to differentiate their product, find a niche market, and build brand loyalty, just as in competitive rivalry, to avoid being forced to accept the lower profit margins.

            Threat of Substitution looks at the risk of losing customers to substitute/similar products.  The threat of substitution is highest when the substitute good is a lower price, better quality, or easier to obtain for the consumer.  When the substitution risk is higher, profit margins tend to be lower for companies as the demand is reduced. “Threat of substitution examines the number of competitors, how their prices and quality compare with the business being examined, and how much of a profit those competitors are earning, which, in turn, would determine if they can lower their costs even more” (Marin, 2023).   The company would need to combat the substitute by adjusting their product to consumer demands, adjusting pricing, or again differentiating the good. 

    Threat of New Entrants defines how easy it is for new companies to enter and fully join the industry.  Established companies would see new companies competing in the same market as a threat due to increased competition.  The increased competition would lead to decreased profit margins.  The threat of new entrants is higher when the entry barriers are low (start-up costs).  When customers have little to no brand loyalty, the threat of new entrants is also higher.  Online stores face a high threat of new entrants as it is “easy to set up an online store, meaning there’s a lower barrier to entry in the retail sector. Platforms such as Shopify allow new small businesses to attract customers and establish themselves quickly” (Danao, 2024).

            Porter’s Five Forces offers an analytical approach to reviewing the firm's competitive strategies.  Typically, one reviews a product-producing business; however, Porter’s Five Forces can also be utilized regarding healthcare.  I was pleased to find an article from the Wall Street Journal stating that Porter spent several years in the broken healthcare industry analyzing and reviewing.  He even wrote a book, “Redefining Health Care: Creating Value-Based Competition on Results” which I will look into. Porter’s analysis transitioned from the typical business world into the healthcare business world, helping to reshape the industry, focusing on value-based outcome measurements, encouraging competition based on quality metrics and results.

Porter found that the predominant issue with the focus of health care is the emphasis on volume rather than quality metrics.  He stated, “The real problem in health care is a lack of good information on quality and outcomes. And without that information, any effort to drive down costs through competition will backfire. People might try to save money by avoiding cost-effective drugs or preventive treatments, while spending money on costly but ineffective procedures. Price information without quality information just leaves us in the same mess we are in today," (Murray, 2006).  I found this quote to still be applicable today.  He argued that there needs to be publicly reported standard quality metrics and encouraged government regulations.  The journal states, “the problem is that without good measurement of those results, the system doesn't drive others to follow the industry leaders.  US healthcare competes on the wrong things” (Murray, 2006).  Porter stated that providers should compete to improve outcomes at a reduced cost.  He emphasized value-based competition around medical conditions.  Porter not only redefined the “typical” business world but also transformed the healthcare business as well. Pushing for measured quality outcomes at lower total costs rather than volume.  Essentially, this is a typical supply-driven model shifting to a patient-centered model.   The United States is currently utilizing this model today. 

            As a nurse manager over utilization review, I deal with overutilization of services, excess days, avoidable days, delays, inappropriate admissions, and denials every day. Porter's key concepts of value-based competition and measuring outcomes and costs are also part of my daily life. 

References

Danao, M. (2024). Porter's five forces: definition and how to use the model. Forbes. Retrieved June 10, 2025, from https://www.forbes.com/advisor/business/porters-five-forces/

Marin, M. (2023). How Porter's five forces can help small businesses analyze the competition. Business news Daily. Retrieved June 10, 2025, from https://www.businessnewsdaily.com/5446-porters-five-forces.html

Murray, A. (2006). Health-care fixes should focus on quality. Wall Street Journal. Retrieved June 11, 2025, from https://www.wsj.com/articles/SB113875374948661567?gaa_at=eafs&gaa_n=ASWzDAgvuhTk1RR3Wc0dovgRlHcUs8KdHfCgvYTloLwRlmuCnqZ20kBEBcMtFiC22wQ%3D&gaa_ts=684a2af6&gaa_sig=QxUwp_HWW19PRmaJhQ1wf4PSzwTffhXCMdGs1qGGBR2Xhc6dZggtF2KVQBvJJR6XX8KCaprDIJmtQm6fupueTg%3D%3D