Porter's "Five Forces Model"

Michael Porter's "Five Forces" can be used to analyze the attractiveness of an industry for any entrepreneur thinking about entering an industry. There are five factors that an entrepreneur must look at before entering the industry: bargaining power of suppliers, bargaining power of buyers, threats of substitutes, barriers to entry, and rivalry among existing competitors. Suppose I, a budding entrepreneur, wanted to enter the pharmaceuticals industry. This is a general industry term, and can be further segmented into other parts of this giant industry. Pharmaceutical firms manufacture and market their products well; Biotech firms are behind the research that supplies the manufactures. While some biotech firms have grown to the point where they could manufacture themselves, others have been rolled up by "Big Pharma" firms. According to the PhRMA, there are over only 100 companies in the pharmaceutical industry compared to over 300 publicly traded biotech firms, and hundreds private firms. The pharmaceutical industry is the fifth most profitable industry in the U.S. "Big Pharma", top ten U.S pharmaceutical companies made up over 60 percent in retail sales in 2003, according to IMS Health, Inc. North America, Europe, and Japan comprise 78 percent of the 600 billion dollar global market. The U.S leads the world in consumption. Emerging markets in Brazil, China, et al promise growth for the maturing markets in the top three regions. Without the pricing controls in the U.S. that foreign companies must deal with (Europe,Japan), these companies have higher profit margins allowing them to take over as industry leaders from the European companies, who lost their competitive edge.
"Big Pharma" has manufactured and sold various pharmaceutical products (drugs), but now has the research in-house to develop new products. These companies control their suppliers (biotech firms) buying buying them up as they become bigger. These biotech firms do not have the human nor financial resources to compete in the market against the industry giants. Any serious threat is absorbed immediately preventing other firms from entering the industry.
The buyers do not have much say either. Without pricing controls, and with the patent time allotted in the market, these companies are free to charge what they want, and customers pay. These companies sell to Medicade, and the government willingness to keep its citizens healthy. A potential threat is creeping in from Congress which have been pushing legislation for better negotiating terms for Medicade and these companies in terms of prices.
There are high barriers to entry for any new competitors entering the pharmaceutical industry. If you want to mass produce, and most importantly market your product, you will need a high amount of start-up capital. Also alot of the research is screened before any new drug can make it onto the market. Many drugs fail in the Screening phase done by the FDA. These are expenses that these companies must absorb until their "blockbuster" becomes an option. "Blockbusters" are drugs that revenue over 1 billion dollars per year.
For an entrepreneur, this industry would be difficult to enter and succeed in. But, a ray of hope might exist. The biggest threat facing pharmaceutical firms is the expiration of patent protected drugs. Competition is creeping in from generic drug makers.Once "Big Pharma"'s patent ends, the generics are free to duplicate and offer lower prices to customers, effectively ending the monopoly the firm had on prices, the market, and on customers. To make matters worse for competitors, many of these firms have merged and consolidated, combining research and development to protect themselves from potential rivals.
The industry does have opportunities. According to Hoover's, people over sixty will increase to 20 percent of the global population, and drug spending will triple between 2005 and 2015 by 55-74 year old. There is hope for drug makers and generics, but for an entrepreneur, the industry is very unattractive, and would probably not be a wise decision to start a firm.