3.4 Porters Five Forces of CompetitionThecompetition within Amgen’s field of operations can be analyzed using thePorters Five forces model (see Appendix 6 – Figure 4). This method is used to rate a specificindustry regarding its profitability and attractiveness. The pharmaceuticalindustry, in this case, is analyzed regarding 5 aspects: the threat frompotential new entrants, buyers, suppliers, substitutes products and competitiverivalry. Furthermore, whether there are substitutes that can cause a threat toAmgen’s business.The Porter’s five forces analysis has beensummarized with a schematic tab to have a more general and clear overview (seeAppendix 7 – Table 1). A graphic representation of the result of the analysisis also available (see Appendix 8 – Figure 5).
Threat of new entrantsWithin thepharmaceutical industry the threat of new entrants is very low due to the highbarriers to new and small businesses. For instance, the major activity thatrequires capital investment is R. Furthermore, extensive regulations inthe testing and manufacturing process make it difficult to thrive the industry.This does not only affect Amgen’s operations, but also enable it to avoidfacing many competitors. Buyer Power Hospitals andpharmacies can be considered the main buyers within the pharmaceuticalindustry. Medications tend to have an inelastic demand compared to other goods.This consequentially decrease the power of the buyers within the industry,including Amgen’s ones.
The contractual power matters as well, it mainlyrelates to the size of the size and resources of the two parties. Reputationand competitive advantages influence also the power of buyers.Threat of substitutes The threat of substitutes within the pharmaceuticalindustry is present. Although tend to stay moderate or even low due to theright to protect the companies’ intellectual property with patents. However,once the patent is expired, other companies could develop similar products orgeneric version for a lower price.
Although, Amgen’s products have a fewsubstitutes and the switching cost for the customers are generally high. Thisdecrease the threat of substitutes for Amgen Inc., at least on the short-term (S. Musters,personal communication, October 31, 2017, see Appendix 1).Power of the suppliersThe power of thesuppliers within the pharmaceutical industry is low. This is due to thestandardized contract implemented by the companies, such as Amgen, which makesit harder for suppliers to back out of it once they accept the terms andconditions.
Suppliers, within the industry tend to abide to big companies sincethe amount of raw material order is generally consistent. Indeed, large companysuch as Amgen has a lot of bargaining power which enables them to have a betterfoothold throughout the supply chain. Power of suppliers can then be considereda low threat.
Competitive rivalryThe threat ofcompetitive rivalry is fairly high due to abnormal amounts of pressure on theresearch and development department within the industry. When a blockbusterdrug is developed (over $1bn in turnover), it completely changes a company’s financialposition positively. Extensive international regulatory initiatives restrainpharmaceutical companies from over-pricing their medicine which in returnincreases public accessibility. This leaves research and development as thebiggest threat for companies such as Amgen (Babar, 2016).
ConclusionWe can deducethat the industry, in which Amgen is operating in, is highly profitable. Thecombination of high bargaining power throughout the supply chain, limitednumber of rivals, high entry barriers and inelasticity of demand create theperfect environment to operate in. Despite the threat of competitive rivalrybeing fairly high, Amgen is able to get an edge over their competitors by themeans of their vast knowledge and understanding while continuously investing inresearch and development.