The Bargaining Power Of Customers Or Buyers Marketing Essay

Published Date: 23 Mar 2015

Over the past few years, the pharmaceutical industry is in a state of impressive changeover. There have also been many interesting prospects happening in the pharmaceutical industry such as innovative advancement in the field of information technology and the evolution of markets (Cooper & Hoff, 1988). The pharmaceutical industry comprises of business that creates medicines and then patent and gives out the drugs to customers. Pharmaceutical firms spent a lot of money on development and produce products which are very creative. After 1970s, pharmaceutical industry has shown greater rate of growth and the industry can be mainly divided in to five categories including ethical, generic, biotech, and OTC and vaccine companies (Botttazzi & Secchi, 2005). International pharmaceutical market is dominated by Johnson & Johnson, Pfizer, Glaxo SmithKline, Sanofi-Aventis and Novartis. Pharmaceutical companies have created huge impacts on global health sectors by providing many drugs which were effective to prevent many diseases and health supporting services which improvised the health conditions of many patients all around the world, but basically it is an industry which runs for profit. For years many pharmaceutical companies lost their license to produce their product because they couldn't keep the public safety regulations and many drugs have been banned from the market due to the same reason. After all these incidents and its sensitive business nature, pharmaceutical companies are strictly scrutinized by government based regulation agencies.

Douglas Pharmaceuticals:

Douglas pharmaceutical is a New Zealand based company with its headquarters located in Auckland. They have developed a systematic perception of its proposed generic drug market space and are acknowledged as a leading pharmaceutical company in Australasia. As a result of constant success in the local markets, the company is now concentrated on exporting to the European Union and the United States of America. In the recent years they have made agreements on distribution and manufacturing and several marketing alliances with many large international companies and are considered to be a significant growth in the world wide export market (douglas pharmaceuticals, 2013).

Porter's five forces:

Porter's five forces analysis is a frame work which is used for evaluating or understanding an industry in which a company or an organization functions; and also to find out how to get success over their competitors as well as to verify how is it for the new entrants. Porter's Five Forces are: 1) Threats of new entrants; 2) competitive rivalry within an industry; 3) bargaining power of customers or buyers; 4) bargaining power of suppliers and 5) threat of substitute products or services (Porter, 2008). In this case study, we focus on how Michael Porter's five external environmental forces influence the pharmaceutical industry.

1. Threat of new entrants

While analyzing the competition in the pharmaceutical industry, emergence of new firms which influences the competitive dynamics have to be considered. These firms bring new ideas, assets and competency with an aspiration to have their say in the market share. They have to face many obstacles made by the existing competitors to put off their market entry and to stunt their growth.

In the pharmaceutical sector the barriers to entry are relatively high. The newcomers will have to face many obstacles to enter the market; mainly in the form of retaliation from well established players in the market, high investment cost and production cost related with R&D and strict government laws. Companies or firms having large production units will have patents to guard their product from cheap replications and their marketing budgets will be particularly high in order to protect their brand name (Hasson & Johnson, 2009). Research and development in the pharmaceutical industry will need billions of money per year and on an average it will take twelve to thirteen years to introduce a new drug in the market.

Another important factor which affects the entry of new entrants in to the market is because of the large economies of scale and the industries demand of high amount of capital. In addition, the possibility of many risks related with effectiveness of an established company such as work relevant experience, third party relationships and the development of new patents, which may have been established years back and cause a problem to the new entrants (Case, 2010).

Furthermore, other such barriers which affect the entry of new entrants in the pharmaceutical industry would be the distinctiveness of products and the complexity in accessing to the right channels of distribution. All the major pharmaceutical companies brand identity will be actively related with client's loyalty and choices in the drugs brand name. However, the new entrants will not be able to create a brand name easily, as the process of creating a brand name will be both a lengthy and costly process. Besides this, even established pharmaceutical companies need to face strict rules and regulations and will need government approvals with reference to creating and delivering their pharmaceutical products. So clearly in this context, the new entrants will find it very discouraging to enter the market.

2. Competitive rivalry within an industry

Pharmaceutical industry in a global market is very competitive and dynamic. Moreover, pharmaceutical companies possess high competitive nature to hold significant market share in order to dominate the whole industry. International market is a very dynamic place where companies are forced to invest huge sum of money in R&D to manufacture and deliver new products to remain active and attractive in this dynamic business (Giaccotto, Santerre, & Ver, 2005). Currently, strict and rapidly changing government regulations and public awareness programs are also producing several major challenges in pharmaceutical industry.

Inventions and innovations can change the pharmaceutical industry at any time. An intervention of a new product or drug can easily provide great attention to a new company and produce severe damage on an already established company's successful market. Therefore, fighting for patents among huge companies has turned out to be very common. Intellectual property rights and patents protect pharmaceutical firms from competition but once the patent gets expired, the company will lose their competitive advantages. Many pharmaceutical companies produce same drugs and products specialized in different classes of drugs, but brand name plays a major competitive advantage. Once the competition is high, many companies try to produce and store high amount of their products resulting in high fixed and storage costs (Smith, 2008). In order to avoid these additional costs, a manufacturer should find a way to sell their products as soon as it manufactured. If a company couldn't keep their products continuously in the market, it will eventually lose its customers.

Pharmaceutical companies need to invest a huge amount of money in R&D and other product promotions at the beginning stages. Once the company made these huge initial investments, it is hard to give up even if it is not successful and less profitable. So, it is important to use different strategies and action plans to become competitive and strong to find out new opportunities and to improve their position in this challenging market place (Alina Mihaela Dima, 2010). Usually these strategies include price competition, promotional encounters and new product launch. Before evaluating the competitive nature of the market, companies should analyze the intensity of these competition and its impacts on their profit. After analyzing these crucial factors a firm should evaluate its strength and weakness in a global market scenario and its ability to survive with other established competitors.

While comparing with other industries, pharmaceutical industry does not have significantly high rivalry because each company produce their own unique products and all patent rights keep them strong in their specific competitive field. Entry of new companies is comparatively less largely because of the higher barriers to entry specially, huge investment in production, R&D and marketing.

3. Bargaining power of customers or buyers

The pharmaceutical industry is a very vast industry and includes many buyers in the form of patients and their family members, Pharmaceutical Benefits Advisory Committee (PBAC), Pharmaceutical Benefits Pricing Authority (PBPA) ,departments of finance, hospital boards and other such buyers with regard to various situations and specialized businesses. In a pharmaceutical industry buyers can influence the business by trying to reduce the price, demanding better quality and improved service. A buyer can become a powerful factor especially in conditions when they buy in large quantity, or they choose other suppliers to buy your products or they are aware of the industry and make demands based on their awareness (Carey & Barrett, 2004).

Patients can be considered as the vital consumers but usually doesn't have much choices on their drugs prescribed by doctors. Most of the patients may not have the knowledge or education to understand the chemical nature of the drugs or its consequences (Herxheimer, 2003). They are basically forced to buy what their physician prescribes. These conditions limit the influence of the ultimate buyers on the pharmaceutical industry. Moreover, in many cases medical costs are covered by health insurance companies and patients are not much bothered about the price rate. In a pharmaceutical market place, a buyer has many options to choose his priority among a variety of products because many of the pharmaceutical companies produce same drugs in different brand names. Furthermore, he can choose generic medicines instead of branded medicines which are comparatively cheap. In short, individual patients buy considerably fewer amounts of products and the bargaining power which they hold is significantly lower than that of hospitals and drug stores. Hospitals and drug stores purchase large and their bargaining power will always remain high because they can switch from one company to another on the basis of their demands.

However, recent changes in the international health care system allow the patient participation more effectively. This consumer awareness creates the industry more price sensitive. Price competition in the non prescribed drugs category is high because patients are usually able to choose these drugs by their own choice. Pharmaceutical companies should give more attention towards consumer based marketing strategies in order to face these new public movements. In a healthcare sector, doctors play an important role to promote or sell a product and successful direct marketing relationships with doctors are significantly important to introduce a new product or promote existing products (Grande, Shea, & Armstrong, 2012). But many countries have recently increased their regulatory procedures to control the influence of pharmaceutical companies on their health sectors. More focused approaches and sales strategies are essential to overcome these challenges.

4. Bargaining power of suppliers

Pharmaceutical industry operates very large scale production, packaging and distribution of large varieties of products. Pharmaceutical companies usually have to depend on wide range of suppliers who usually provide raw materials, chemical components, intermediate products and other essential industrial requirements. Many of these suppliers are biotechnology firms, chemical companies, manufacturing plants and local marketing partners (Kirytopoulos & Voulgaridou, 2008). Pharmaceutical companies greatly depend on the suppliers who are providing basic raw material for company's production process such as for the packaging process of drugs foils are essential to cover the tablets of capsule. But these suppliers don't have much bargaining power on the pharmaceutical companies because these pharmaceutical industries are essential for them to sell their products and survive. Most of the pharmaceutical companies have their own manufacturing plants to manufacture their basic components and therefore the supplier's power is negligible.

Overseas head offices, local marketing partners and third party suppliers who are supplying the products in the market can have more bargaining power than the other raw material suppliers. Because they control the supply chain and any damages on these supply chain can produce negative effects in the market place. These suppliers can bargain with the company by threatening to raise price or to reduce the quality of goods and service. These middle suppliers may have significant influence in the market and they can use these influences to bargain. It is not easy for an established company to change their suppliers when the suppliers start to bargain.

Currently pharmaceutical companies are largely dependent on biotechnology companies and other private medical research firms (Abelson, 1996). Biotechnology companies provide their new technologies and compounds to the well established pharmaceutical companies and use their large and extensive marketing channels and sales forces. This is considered as mutual relationship at the beginning stages but many of these biotechnology firms may already have an intention to become independent pharmaceutical companies. For pharmaceutical companies, these alliances with biotechnology companies are important to introduce new products in the market and use their patents.

5. Threat of substitute products or services

One of the main attractive features of the pharmaceutical industry is that it doesn't have much threat from the substitute products in the market. Usually consumers do not search for an alternative prescribed drug. However, one of the basic substitutes for prescribed drugs is the generic medicines. Generic medicines are the copies of formerly patented medicines and which is similar to branded names. Many of the patients chose generic medicines because they are comparatively cheaper than the original medicines (Brems, Seville, & Baeyens, 2011). But generic medicines are seldom available as replacements due to the patent protection. Once the patent expires, company lose their monopoly of their medicines and the companies which produce generic medicines do not have to invest the initial cost of R&D which allows them to reduce the product price. But large pharmaceutical companies are able to control their market and are capable of challenging these substitute generic drugs.

Recently pharmaceutical companies are facing threats from other companies which are producing natural remedies using herbs and other traditional products. Many new companies have generated natural pharmaceutical products such as creams, body lotions, cough syrups, gastrointestinal problem relieving capsules etc. New markets based on natural healthiness programs are becoming very popular especially in the treatment of obesity, cholesterol, piles and other life style diseases. Natural drugs are mainly focused on fewer side effects and provide permanent remedy and these traditional based medicines have got huge attention among consumers.

Conclusion:

After evaluating the impact of these competitive forces, suppliers can bargain with the company by threatening to withhold supply, which can result in delaying the regulatory submission process. At the same time buyers can demand for high quality products with low prices. Government based regulatory agency can produce many barriers in the production and distribution of the products. Once a product is rejected by regulatory agency, it cannot enter into the market and also the government policies will be strictly regulated throughout the operations of the pharmaceutical companies. Patent protection can save the monopoly of a company for a limited time period but generic and natural medicines creates the current pharmaceutical industry as a tough industry to be in. Well established and popular drugs cannot be eliminated from the market even with the arrival of a new entrant or a product. These challenges don't make the pharmaceutical industry less attractive because there are continuous studies and researches that are progressing to find out the effective drugs to treat many diseases which have no available medicines.