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Value Chain Essay

1150 words - 5 pages

Porter’s Five Force Analysis of Spectrum Pharmaceutical

Porter’s five force analysis is used to analyze Spectrum Pharmaceutical in the pharmaceutical industry. Porter’s five forces analysis is a method of analyzing an industry and a company’s business strategy. It uses five fundamental forces that determine competition within an industry and how a company functions within that industry. These five forces involve market forces and pricing power of the business, suppliers and customers.
The first force that a company must deal with is the bargaining power of customers. In relation to Spectrum Pharmaceutical, the customers have very little power to bargain prices with the company. The ...view middle of the document...

There are usually several alternative products on the market that Spectrum can use to manufacture the necessary goods. Due to the lack of concentration of suppliers, they have little leverage to negotiate higher prices which would squeeze the profits of Spectrum. In addition, the cost of inputs in the price of Spectrum’s products is very low compared to the final cost of the product. The regulatory process is a much more expensive input to the final cost of goods than the raw material inputs. All these reasons combined give suppliers little force to raise prices to Spectrum, and have little influence on the price to the consumer.
The next force in the analysis is the threat of substitute products. Several different substitute products allow the consumer to switch to other products and lower price products. This price elasticity keeps prices lower for the consumer and limits the ability of the company to raise prices. There are few substitute products for drugs that Spectrum manufactures. Consumers have little alternative choices for Spectrum products. This reduces the ability of the consumer switch to lower cost products. This keeps the product prices high and reduces the leverage of the consumer has to keep prices lower. All these reasons combined, keep reduce the force of the consumer to exert little ability to keep prices low and allow Spectrum to charge higher prices for its products.
The next force in the analysis is the threat of new entrants into the market. If it was easy to enter the market with new and competing products, the ability to keep prices high would be reduced. This however, is not the case with Spectrum. It is extremely expensive for new entrants to get into the pharmaceutical market. It is costly in both money and time to get new drugs to market. The regulatory process insures that new products to the market have been tested at several levels. This testing is expensive in time, money and expertise. It takes several years to get new products through the regulatory process and new products to market. This high cost limits the number of new entrants into the market. There are many barriers to entry into the market. In addition, Spectrum holds patents that limit market competition for several years. Even though the pharmaceutical business is highly profitable, there are few competitors in the marketplace due to the high entrance costs and other barriers. The capital costs to enter the marketplace limit the number of competitors in the marketplace. The high capital, labor...

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