Industry Analysis – Porter’s Five Forces

While studying your lecturers most likely told you that if you want to open a practice you need to look at the area where you want to start the practice and then they might have rattled off a few things that you need research before opening your practice. Some might have gone as far to say that you need to write a business plan. Others might have made you write some sort of plan. Most schools try to lay some sort of groundwork for private practices – unfortunately the way the health professions and private practices are evolving most of the old ways of doing things are being questioned. As technology levels the playing field and the barriers to entry are removed more and more health professionals are taking the leap into the unknown by starting their own practices. This is good – competition fosters innovation and we desperately need that in South Africa.

I believe that while new technologies will change patient care drastically over the next 10 years, the biggest gap for change currently is in the form of innovative new business models and ideas in the healthcare arena. Entrepreneurs will solve the world’s problems. But how will you as a health professional do this? How will you know if you should start your own practice? Is it feasible? Are there risks? To this end I will be going over a few basic analysis tools over the next few days which you can use to analyse your current or potential competition. For today I’m going to give you an overview of Porter’s 5 Forces. This is quite an old model for strategic analysis – but with some adaptation it can help you identify possible threats before you run into them, and this might make all the difference between success and failure.

Porter’s five forces looks at five different variables in a market which hold potential risk for a new or established entry. These five forces are: the threat of new entrants, the bargaining power of suppliers, the bargaining power of buyers, threat of substitution and competition among rival firms.

Threat of new entrants:

Any new entry into your own market cuts into your potential market share. This threat depends on two main factors: 1) are there barriers to entry into the market? And 2) is there a risk of retaliation from established practices?
Barriers of entry into the market can be anything that makes it more difficult for a competitor to start their practice. At the least this would mean registration with HPCSA and BHF. For others this would mean high capital costs for equipment – this is especially important for professionals like dentists that require these high capital outlays to be able to start the practice. Keep in mind that you can attempt to create barriers to local entry for new entrants into your local market – but that other practices can do the same to you if you are the new entrant into the market.
The risk of retaliation is the risk that the established practices retaliate to the entry of a new practice. A new practice might cut into your market share but in terms of the health professions there are ethical considerations that you need to take into account before you retaliate. Make sure that any action you plan is legal and ethical. When planning for retaliation make sure you prepare for any counters – be they ethical or not.

Bargaining power of buyers:

In the South African healthcare market this is a bit more complicated. The buyers of your services will mostly be the medical aids, who will pay for treatment for their members. But this may also be your patients themselves as they have a choice where they want to be treated. If you plan on seeing Injury on Duty clients your buyer might be Rand Mutual Assurance or the IOD Commissioner. Depending on your funding model this might also be other companies, clubs or organisations. The risk from this force comes in that the buyers of your service are not obligated to use your service and if they are not happy with the quality of your work they may switch to a substitute.

Bargaining power of suppliers:
Usually suppliers are any companies or people from which you need to obtain a material or resource which you need to perform your service. In terms of health practices in South Africa this will be the source from which you obtain the majority of your referrals. This will depend on the type of practice you have. If you are a General Practitioner this might be a medical centre or a local casualty. This might also be another health professional (usually casualty or a GP). Your marketing could also be your source of clients (this will depend on your business model). This force also takes into account suppliers of materials and goods that you use to perform your service. This could be medicines, materials and orders made to specification – this could be Botox, dentures, training equipment and so on.

Threat of substitute products:
Substitute services or products are those products that will deliver a similar service to the one you are offering. This counts across disciplines as well as outside the health professions. For example a client with lower back pain might choose to go to the General Practitioner or Physiotherapist. How easy is it for your clients to switch to a different supplier of a similar service? The easier it is for someone to switch to another professional of similar quality the higher the risk from this force is.

Rivalry among competing practices:
This is usually the largest force to take into account. Practices all compete for a piece of the same market. This is a market that is by definition difficult to expand upon (you cannot manufacture more illness) and you are restricted in the ways you are able to retaliate with regards the ethical moves you can execute. Your business strategy will be your main weapon against the rivalry of other practices.

Once you have identified the forces in play in your own environment you will be better equipped to anticipate problems (or opportunities) that may arise. This will help to inform your business strategy and plan for possible scenarios. You should take the time to analyse your market to identify possible risks in the short-, medium- and long-term. Remember that if you are not actively setting the direction for your business your only move will be to respond to the moves of others.