Porter�s Five Forces Analysis of the Large Established Biotech Firms by 761BJA


  Industry Analysis Assignment

         Prepared By:

       Phil Pearson
       Alen Siefert
        Adam Taylor

           Dr. Meilich
            BUS 444
        T-R 11:00 - 12:50
                  PRODUCT VALUE CHAIN
      Venture Capital and Investment

Research Supplies        Research Instruments              FDA Approval


           Research/Development                Marketing


    Advertising               BIOTECHNOLOGYNOLOGY


     Farmers                 Veterinarian                  Pharmacies/Hospitals

                             Animals                             Patient
                                   Define the industry

        The biotechnologynology industry as described by the Standard and Poor’s is
both a product and a service. Their category includes biotechnology drug developers
and marketers, diagnostic companies, firms in agricultural biotechnologynology and
animal health, entities that produce instruments, suppliers for drug research and global
biotechnology issues trading on U.S. stock markets. Biotechnologynology is focused
under the “biochemical science to large-scale production, for the purpose of modifying
human health, food supplies, or the environment.” The biotechnologynology industry
involves alteration of genetic material. Biotechnologynology’s larger focus involves
production of medication and research that involves new and improved drugs. The
industry itself can be very profitable but as you will discover there are many factors that
involve becoming a major player.

Product Value Chain
        The biotechnologynology industry has many raw material suppliers that function
within the industry but also marketers and research companies as well. Research and
development is critical to the success of a drug developer. In 2000, Ernst and Young
estimated that the public firms spent 10.2 billion dollars on research and development.
Research can be done on or off-site for the drug developers. Once a drug has been
approved by the FDA, companies such as Scios, which was recently bought out by
Johnson and Johnson, will market the new product. In some cases, developers of new
medications or biological advancements utilize outside companies to market for them so
that to concentrate resources elsewhere.

Industry Scope Chart
         The scope for the biotechnologynology industry is biochemical science for
improvements in a variety of categories that I previously mentioned. The narrow scope
of this industry is the agricultural, pharmaceutical and animal health sectors which are the
main focus of biotechnologynology. The mid-range scope involves products offered
within the industry sectors. Lastly, the broad range focuses on specific substitutes to the
products and services offered in the biotechnologynology industry. As the chart reveals,
there are many alternatives to modern medicine. All pose a fraction of threat to the
survivability of the biotechnology firms, but as sales have shown, it is nothing significant.
The substitutes pose more of a threat to smaller companies that don’t have as high of
sales as the top ten do.
                                   Identify the players

       The rivals in biotechnologynology are the 330 publicly traded firms that the
Standard and Poor analysis has mentioned. The top five companies are the big rivals to
each other in the drug-development sector.

Buyers, Suppliers, Substitutes and Complementors
        The direct buyers are the distributors, pharmacies and hospitals and the final
buyers are patients and farmers. The suppliers to the biotechnologynology industry are
vast and include, research, labor, marketers, instruments, chemicals, venture capital,
research supplies, and advertising. Substitutes consist of generic brands, forms of
therapy, natural medicine, hypnosis, vitamins, religion, organic farming and holistic
medicine. Complementors are instruments that administer drugs such as saline solution,
injection needles and other specialized equipment. Farming equipment and special tools
used for genetic engineering are also complementors.

Strategic Group Map and Mobility Barriers
        We have chosen our strategic groups to be up and coming smaller firms and the
five largest firms within the biotechnologynology industry. The top five companies
controlled forty-one percent of the industry last year, equating to 15.1 billion dollars in
sales. This creates a big mobility barrier for smaller companies to enter their territory.
Without entering the industry with an economy of scale it would be almost impossible to
compete with these larger companies. If a new medication is released onto the market by
a small firm then the sales better increase rapidly otherwise they will most likely be
bought out. Other mobility barriers that don’t allow the smaller companies to take mor
market is because they don’t receive enough venture capital for extensive research and
development. Without large amounts of money it becomes a major challenge for the
other 325 firms to be innovative and advance ahead of the others. The top five firms
choose not to enter the other markets because it’s not worth their time when they can
instead buy them out and not have to worry. The bottom line is without heavy investing,
a biotechnologynology firm will either be bought out or go out of business.
                                 Macro Environment

         The governments including the FDA and many other organizations directly affect
and continue to enact laws that shape the industry. In specific, the government has
allocated money for certain companies to develop vaccines and medication for protection
against bio-terrorism. This has equated to hundreds of millions of dollars. The FDA has
been slow to approve new medications by an average of 15 months. This is a number
that is unacceptable to the new head of the FDA, Mark McClellan, and he hopes to
establish initiative that will expedite the process of approval. The longer it takes to
approve a medication, the more money drug developers have to pay and the longer it
takes for the medication to reach sick patients. The new head of the FDA wants to save
the biotechnologynology firms more money so that they can invest more money into
research and development.
         The technological aspect of the industry is extremely advanced and continues to
develop year after year. Advancements had improved the health of our world and the
quality of drugs produced by biotechnologynology firms. Without continuous
improvements and new methods, the industry would be close to inexistent.
         Demographic trends such as the concentration of diseased people and certain
areas around the world which experience more susceptibility to infection than others have
allowed firms to concentrate efforts in these specific areas. These trends help
government in dispersing money and funding to the correct companies and causes that
make improvements in health, such as HIV/AIDS.
         The FDA has established relationships with the larger firms so it becomes a lot
easier for them to get new approval for medication. If there is a new up and coming firm
trying to get approval, the process may be delayed longer in a reliability issue. The FDA
doesn’t know if the company is reliable and advanced enough to develop a medication
suited for human intake so they must run longer and more prolonged testing. It creates a
threat to the smaller firms survivability because if they only have one medication being
tested by the FDA and it takes them a year and a half or longer to approve, the company
could go bankrupt before it reaches the market. This allows the larger firms to step in
and buy them out before they make one sale. The FDA process is critical to how quick a
new medication reaches the market.
  Porter’s Five Forces Analysis of the Established Biotechnology Strategic Group

Threat of New Entrants (Into the established biotechnology strategic group)

        Economies of scale are high in the established biotechnology strategic group.
Since research and development is such a large part of biotechnology spending, it is
difficult for a small biotechnology firm to invest enough in R&D to develop products as
effectively as an established firm. The cost to develop a new drug is very high and
cannot usually be handled by smaller firms unless they form a partnership with a large
firm that has an interest in the smaller firm. The strength of this item, therefore, is high.

        Product differentiation in this strategic group is high because every drug produced
by the industry has a different effect. The production of a new drug that has the same or
similar effect to a previous drug would not be in the interest of a biotechnology firm
because of the cost of R&D and time requirements. Therefore, any new entry into the
established biotechnology strategic group would need to have completely new and
innovative products that are unlike any already in existence.

        Capital requirements in the established biotechnology strategic group are very
high because it takes a great deal of equipment and funding to start and maintain an R&D
program in the industry. The smaller biotechnology companies can achieve the capital
for smaller R&D programs, but only with a partnership with a large biotechnology
company or pharmaceutical company. The large company would then request marketing
rights for the smaller firm’s product once it is released.

        The large biotechnology firms’ control of distribution channels is high because
their products are purchased by pharmaceutical companies and distributed only after
extensive testing and approval by the FDA. New entrants are less likely to be able to get
approval for their products than a larger company that has released products in the past.

        Switching costs for customers are high because most products from the industry
are researched and designed with very specific intent. A certain drug, for example, will
serve a purpose better than any other drug and customers will have no reason to switch to
a drug that is less effective. If there is only one drug for a certain illness, switching costs
for a customer may be very high because the only alternative may be to not be treated.

        Proprietary knowledge in the large biotechnology industry is very high because
most products are patented. This means that smaller firms will have to develop truly
unique products by using only their own expertise. Access to raw materials most likely
is high, but is not of significant importance. Securing a favorable location is not of
significant importance. Access to government subsidies is high, but not of significant
importance. Experience curve effects are high for large biotechnology because it
sometimes takes 10-13 years to develop a product and firms that have released products
in the past have a significant advantage over newer, smaller firms.
        Government regulation on the biotechnology industry is very high. Products
produced in the biotechnology industry must undergo very lengthy testing processes.
Firms that are established and have produced successful products in the past are more
likely to pass the testing processes than new firms. This is a large entry barrier because
firms that produce products that to not pass the stringent testing phase will not be able to
become established biotechnology firms.

        Expected retaliation would probably be high, as the large biotechnology firms will
likely buy successful new entrants, eliminating them from any competition.

       Each of the items that determine the threat of new entrants into the established
biotechnology strategic group show that the threat of new entrants is low. The most
important items are economies of scale, capital requirements, switching costs, and
government regulation. Each of these items is high, preventing new entrants from
becoming established biotechnology firms.

Intensity of Rivalry

        The number of competitors in the large biotechnology strategic group is medium.
Their size and power varies with Amgen being the most powerful. The diversity of the
competitors is fairly low in terms of mentality differences because they all spend a large
percentage of their revenue on R&D, have a similar drug development process and have
the same regulations.

        The industry growth rate is high because they are continuously making new
discoveries and breakthroughs in areas of research such as DNA. Genetic engineering is
a very large part of the industry’s research and is just beginning to produce marketable
results. The large amount of spending on R&D in the industry shows that they place a
great importance on discoveries being made because these are what fuel the industry’s
growth. This is one of the largest determinants of the intensity of rivalry in the big
biotechnology strategic group.

       Fixed costs are high because a large investment is initially needed for equipment
and R&D. This item is not very important in determining intensity of rivalry, however,
because competitors will most likely be marketing to customers with a different problem
or ailment.

        Storage costs are medium-high because some ingredients, drugs and products
from the industry are probably perishable. This, however, is not of great importance in
the intensity of rivalry in the industry.

       Product differentiation is very high in the industry because drugs, for example, are
usually completely unique in each firm. Firms are investing more in developing
improved versions of existing drugs, which will ultimately result in the less effective drug
becoming obsolete. Customers who require a certain treatment will usually purchase
only the best product that is designed specifically for their problem. This item is also a
large determinant of intensity of rivalry.

        Switching costs for customers are medium. This is because it is relatively easy
for a customer to stop using a certain drug and begin using a different one, but the
medical effects of doing so may or may not be severe for the customer. This depends
largely on the problem for which the industry products in question are designed.

       Capacity increases are in increments that are small-medium. This is because to
produce more, the industry basically just needs to purchase more ingredients for their
products. This, however, is not of great importance in determining intensity of rivalry.

        Strategic stakes in the industry are high because there are many opportunies to
develop a breakthrough product. Firms are willing to take high risks by spending a large
percentage of revenues and years on R&D. The risks of reaching a dead-end in R&D or
producing a product that does not get approved always exist. The possibility reaching a
breakthrough in treatment of a large-scale problem, such as cancer, drives the industry to
take these risks.

        Exit barriers in the established biotechnology strategic group are medium-high.
This is because assets are specialized, there is a high cost of exit because usually there are
R&D efforts on-going, strategic inter-relationships are relatively high, emotional barriers
may or may not be high, and government/social restrictions are high. This item is of
medium importance in determining intensity of rivalry.

        The overall strength of the intensity of rivalry force is medium-low. Many items
that determine the strength of the force are conflicting, but the high industry growth rate
and high product differentiation are the main items that push the strength of the force
more to the low side. The industry growth rate is very high and is expected to continue,
and firms are generally not competing for the same customer base. There are some life-
threatening diseases, such as AIDS and cancer, for which many biotechnology firms are
researching treatments, but the growth rate of the industry and large amount of customers
mean that the intensity of rivalry is still limited. The intensity of rivalry trend is that it is
staying the same at medium-low.

Power of Buyers

        The concentration of buyers relative to the industry is low. There is a very high
demand for treatments to life-threatening diseases and other ailments, and a large number
of customers. The baby-boomer generation will require an increasing amount of
biotechnology drugs as it ages and develops more health problems. Many life-
threatening diseases still have an unmet demand for treatments, vaccines, and cures.

         The volume of purchase is high because biotechnology therapeutics are usually
bought in large quantities. When the product of a biotechnology firm is a treatment for a
life-threatening disease, which it often is, the completed product will be purchased in
large quantities so that it can be distributed to as many customers as possible as quickly
as possible.

        The percentage of total buyer’s cost spent on the industry’s input is medium-high.
This is because the products are bought in large quantities at a time usually as soon as the
product development is finished.

        Product differentiation of the industry is very high because most products
produced by the industry are unique due to the long development cycle and patent
protections. A customer with a life-threatening disease will want only the best treatment
available and will pay a very high price if the only treatment is a biotechnology drug.
This is one of the most important determinants of buyer power.

       Buyer’s switching costs are high because there may be no other treatment
available for a certain ailment. In the case of a life-threatening disease, one of the
switching costs may be death if there are no other similar treatments. This is another
important item in determining buyer power.

        The extent of buyer’s profits is medium but does not necessarily apply to buyers
from the biotechnology industry. This is because direct buyers are clinics and hospitals
that are not necessarily for-profit organizations.

        Threat of backward integration by buyers is low and almost non-existent. This is
because it takes a great deal of capital and expertise to research and develop
biotechnology products. When buyers are clinics and hospitals, it is extremely unlikely
that these organizations will integrate backwards to include biotechnology research and
development efforts.

        Cost savings from the industry’s product are low, but this does not significantly
affect the industry because customers will be willing to pay a very high price for
biotechnology products.

        The importance of the industry’s input to the quality of the buyer’s final product
is high because it is very important that the treatment that the industry produces works
well in treating the ailment for which it was designed. If the biotechnology treatment
works better than other types of treatments, the buyer will be willing to pay more for the
industry’s product.

       The buyer’s knowledge of the industry’s cost structure is medium-low. These is
because buyers generally know that the biotechnology industry spends a large percentage
of revenue on R&D, but are not knowledgeable on how costs are distributed throughout
R&D and on other efforts.

       The overall power of buyers is low, mainly due to high product differentiation,
high switching costs, and the high importance of the industry’s input to the quality of the
buyer’s final product. The trend is that the power of buyers will remain low for a period
of time, but will eventually start to climb slowly as they become more knowledgeable
about the biotechnology industry. As they gain understanding of the way biotechnology
products work and how they are priced, they will be in a better position to determine
what to buy and what not to buy.

Power of Suppliers

       The concentration of suppliers relative to the biotechnology industry is medium-
low. This is because there are many suppliers for some requirements of the industry and
fewer suppliers for others. Suppliers of equipment and components may be many and
suppliers of some rare raw materials, few.

       The availability of substitute supplies is medium. This is because some substitute
supplies are widely available, but others are not, such as certain ingredients to drugs that
cannot be easily found.

       The importance of the industry to the supplier is medium. Most supplies to the
biotechnology industry are from suppliers whose products have a wide range of uses,
however the biotechnology industry may be a large buyer of these products.

       Differentiation of the supplier’s products/services is low because their products
and services may have a wide range of uses of which biotechnology is just one. These
supplies are products such as water, chemicals, and laboratory supplies. These products
are very similar from different suppliers.

       Switching costs of the industry are low because the products supplied to the
biotechnology industry are basic products such as water, chemicals, and laboratory
supplies. It would not cost the industry much to switch to different suppliers of these

        The threat of forward integration by the supplier is extremely low due to the
equipment, expertise, and time required in the biotechnology industry. It would be very
difficult for a supplier of materials and equipment to gain understanding of biotechnology
products, purchase the required capital, hire the expertise, and spend the development
time to produce a biotechnology product.

       The overall power of suppliers is low. Most of the items that determine power of
suppliers were based on assumptions, but low differentiation and low switching costs will
most likely be the main items that determine the low power of suppliers.

Power of Substitutes

       The rate of improvement in price performance of substitutes is low because the
main substitute to biotechnology products is pharmaceutical products. These products
will improve, meet growing demand, and command higher prices along with
biotechnology therapeutics.
       The profitability of the substitute’s industry is medium-high. This is because the
main substitute to the biotechnology industry is the pharmaceutical industry, which is
almost as profitable as the biotechnology industry.

        The overall power of substitutes is medium-low. This is because for ailments
such as life-threatening diseases, biotechnology products are more effective than
substitutes such as pharmaceutical drugs.
         Porter’s 5-Forces Analysis of Up and Coming Biotechnology Firms

Threat of New Entrants
    In the Biotechnology Industry, while analyzing the Up and Coming or Smaller
biotechnology firms, new entrants isn’t a major issue. Due to the fact that the overall
factors that create an environment where the threat of new entrants is high, does not exist.
    Economies of scale are very high since the ability to survive in this industry takes
large amounts of up front money to finance research and development of a new product.
     Product differentiation is also very high. All drugs that are created are more or less
for very different reasons. Once that need is met by a drug, the consumer will tend to be
fairly brand loyal.
    Capital requirements are also very high. To financial needs of producing a new
product in the research and development end, as well as surviving during the testing
phases by the FDA force a company to have large amounts of available money in order to
maintain itself. A smaller biotechnology company can also have major issues with trying
to survive during a period where one of its products does not pass the testing.
    Government regulations on the biotechnology industry have also hindered the
possibility of new entrants. The FDA and other government regulatory comities have
such strict policies on the practices and methods of a biotechnology industry, that it
hinders the possibility of new entrants.
    Other factors which are likely to dissuade a new entrant, would be the fact that access
to financing and subsidies is minimal due to the large amounts of funding required to
start a biotechnology firm. Also the experience curve effects are very high as well. The
established firms with large amounts of money to spend on research and development
will dwarf the abilities of a smaller company trying to break into the market.

Intensity of Rivalry
    The intensity of rivalry in this industry is very high. There are 330 publicly traded
firms. Among these firms, there are five companies that dominate the market, but
amongst the up and coming firms, the rivalry to survive is intense.
    Since the up and coming firms number at about 325 firms, the number of companies
competing is relatively high. With all these companies competing to survive in an
industry where a limited amount of funding is going to be available, it is difficult for
them to survive for long, unless they are able to quickly develop something that will
bring in money. On average a small company needs to have three years of capital to
support operating expenses.
    Each of these 325 smaller companies, most of them are of equal size and power. With
this equal distribution of strength, there is a increased sense of rivalry among the firms.
Costs such as fixed and storage costs are also a major factor in increased rivalry. With
chemicals and developed products having a limited shelf life, it makes it more likely for
these firms to be more competitive in the market. With the fixed costs of keeping experts
in the field on staff, and the company running being so high, if you are not competitive
and successful you will not last long.
   To increase capacity in increments in this field requires large outputs financially, so if
a company does decide to do this, it needs to be willing and able to compete more
aggressively. And finally, government regulations on the market being so strong, plays a
roll once again in the forces of business, but this time in rivalry. Such restrictions placed
on the firm’s forces them to operate in a more similar pattern as one another, and also in a
more set to standard time scale. This similarity of operations forces an increase in rivalry
amongst the firms.

Power of Buyers
    The power of buyers in the up and coming, or smaller firms of the industry is the same
as that of the larger firms mentioned before. Since buyers for the larger firms are also
buying from any of the smaller firms that are successful. Some things that may be
slightly altered is that the potential for buyers to be even more powerful with the smaller
firms, may be an issue. The smaller companies are less likely to be able to put up a battle
of any kind with the buyers due to their lack of financial stability when it comes time to
product dump.

Power of Suppliers
   Like the power of buyers, the powers of suppliers for the smaller fish in the
biotechnology pond have a similar level as that for the bigger more powerful companies.
Due to the commonality of the products that are supplied to this industry, and that the
expertise of the biotechnology industry is so specialized suppliers can be easily replaced,
and are unable to integrate forward.

Power of Substitutes
    The substitutes to the biotechnology field are fairly medial currently, but growing. As
far as the agriculture aspect of this market, substitutes would be organic foods and natural
preservatives. With these becoming more popular as time goes on, power of substitutes
is also increasing.
    On the pharmaceutical end, this is also the case. As natural medicines and alternative
medicines are increasing in popularity, pharmaceuticals are having to improve as well.
As diseases and illnesses change and become more and more powerful, people are
looking for more effective drugs, as well as looking to alternative medicines. There will
always be a demand for the products of the biotechnology field, but as times change so
do the demands for alternatives.
Attractiveness and Trends of Established Biotechnology Strategic Group

   The established biotechnology industry is attractive based on the Porter’s five forces
model. Every force in the model was determined to be either low or medium-low. This
means that established segment of the industry is in a good position to maintain a high
profit potential. The industry currently does not have any forces that are truly
threatening; however some have the potential to rise in the future.
    The intensity of rivalry and the threat of new entrants may grow in strength in the
future as the industry begins to mature. Once the industry growth rate slows down,
rivalry between firms in the industry segment will begin to intensify. There is also the
chance that one of the many small new entrants to the biotechnology industry will
develop a breakthrough product that will accelerate its size and ability to close to that of
the established firms. This will raise the threat of new entrants to the established
biotechnology segment.

Attractiveness and Trends of Up and Coming Biotechnology Strategic Group

   The industry of the up and coming firms is fairly attractive and profitable. The major
force of concern in the industry is the threat of rivals. However, the threat of new
entrants is low, power of buyers is low, and power of suppliers is low, as is power of
substitutes. The major hindrance to the market is the need of large amounts of capital to
survive as a smaller biotechnology firm.
   Currently the threat of rivalry is high in this market and will increase as more firms
enter. The power of substitutes is a force that is most likely to increase over time. As
these threats increases the market will become less attractive. The power of the larger
firms in the industry also makes this economy less attractive.

Industry Attractiveness, as a whole

    The industry as a whole is only attractive for those involved. The smaller companies,
if they survive can make large amounts of money, or be bought up by the bigger
companies. The large established firms are controlling the market and able to gain large
amounts of profit. Overall, those firms in the market are going to be likely to stay.
                                    General Lessons

    The general lessons learned from this industry analysis are that by doing a five forces
model and the different charts, we have determined that this is a classic industry that is
currently in its growth stages. Porter’s five forces are fairly low, and the overall
attractiveness of the industry is high. This analysis has shown that in this field, without
money and the availability of research and development, it is virtually impossible to enter
the market.


   This industry has similar attributes to the economy of the beer and cigarette industry.
All three of these industries have large established companies, as smaller up and coming
companies. They are different however because the cigarette and beer industries have
matured, and are not growing at the same rate as the biotechnology field. This will create
an environment where the five forces have less of an effect on the biotechnology
industry, relative to the beer and cigarette industry.

To top