This week, let’s focus on an activity that will then drive a discussion among our classmates. Chapter 2 talks about five environmental threats to the profitability of firms in an industry (also known as Porter’s Five Forces). This is such a good tool for a manager and I want you to become familiar with applying it. It is a tool you can use when we start looking at cases.
You can get a better of idea of how the 5 Forces work by watching how Michael Porter explains them.
So, let’s practice applying the five forces. I want you to complete #2.9 in the Problem Set on page 58.
2.9-perform an analysis of the profit potential on the following two industries: (page 58)
The pharmaceutical industry
The pharmaceutical industry consists of firms that develop, patent, and distribute drugs. Although this industry does not have significant production economies, it does have important economies in research and development. Product differentiation exists as well, because firms often sell branded products. Firms compete in research and development. However, once a product is developed and patented, competition is significantly reduced. Recently, the increased availability of generic, non-branded drugs has threatened the profitability of some drug lines. Once an effective drug is developed, few, if any, alternatives to that drug are available. Drugs are manufactured from commodity chemicals that are available from numerous suppliers. Major customers include doctors and patients. Recently, increased costs have led the federal government and insurance companies to pressure drug companies to reduce their prices.
The Textile Industry
The textile industry consists of firms that manufacture and distribute fabrics for use in clothing, furniture, carpeting, and so forth. Several firms have invested heavily in sophisticated manufacturing technology, and many lower-cost firms located in Asia have begun fabric production. Textiles are not branded products. Recently, tariffs on some imported textiles have been implemented. The industry has numerous firms; the largest have less than 10 percent market share. Traditional fabric materials (such as cotton and wool) have recently been threatened by the development of alternative chemical-based materials (such as nylon and rayon), although many textile companies have begun manufacturing with these new materials as well. Most raw materials are widely available, although some synthetic products may be periodically in short supply. There are numerous textile customers, but textile costs are usually a large percentage of their final product’s total costs. Many users shop around the world for the low prices on textiles.
Apply the five environmental threats (the 5 Forces) to either the pharmaceuticals industry or the textile industry. Write a brief analysis on either pharmaceuticals or textiles using the information in the problem.
After you post your analysis, read and comment on how other students answered the question as well. (400-450 words, with 3 citations)