Environmental strategic management
The general environment contains many potential significant opportunities and threats and that an important part of strategic management is identifying these and developing or adjusting strategies accordingly. But a through environmental analysis must go beyond a consideration of the general environment to include an analysis of the competitive environment facing an organization. The essence strategy formulation is coping with competition. The state of competition in an industry depends on five basic forces.
The collective strength of these forces determines the ultimate profit potential of an industry. Hence an attempt has been made to find out the forces governing health care industry which is becoming very challenging day by day. The Health care industry is facing tough challenges from various corners, so a strategy has also been suggested to cope with the changing scenario of market. The healthcare industry continues to face intense challenges including rising costs, declining profitability and widespread inefficiency. Meanwhile, a fast-changing regulatory environment and pressure to improve quality, safety, and access are driving an extraordinary set of transformations across the industry. The way information is created, stored and shared within the healthcare industry today limits the ability of doctors, nurses, clinicians and administrators to effectively collaborate.
Five Forces Model of competition
The competitive environment refers to the situation facing an organization within its specific competitive arena. This arena may be an industry or it may be what is referred to as a strategic group within an industry. The competitive environment combine forces that is particularly relevant to a farms strategy, including competitions, customers and suppliers. The five forces model provides an analytical tool to examine the competitive environment and broaden thinking about how forces in the competitive environment shape strategies and affect performance. Whatever their collective strength, the corporate strategists goal is to find a position in the industry where the company can best defend itself against these forces or can influence them in its favor. The collective strength of these forces may be painfully apparent to the entire antagonist; but to cope with them, the strategist must delve below the surface and analyst the sources of each. The health industry is going through a rough phase and it is essential to access the nuts and bolts of the industry. This model is used as an analytical method to analyze the various forces governing industry and how the industry must formulate strategy to cope with these forces.
Threat of Entry
New entrants to an industry bring new capacity, the desire to gain market share and often substantial resources. It represents a competitive threat to the established firms, sometimes called the incumbents. Companies diversifying through acquisition into the industry from other market often leverage their resources to cause a shake-up. To reduce the threat of new entrants, managers of established firms depend on what we call barriers to entry. If barriers to entry are high, a newcomer can expect sharp retaliation from competitors. Newcomers will not pose a serious threat if the major entry barriers include.
(i) Economics of scale: These exist whenever large volume firms most likely the established firms rather than new entrants enjoy significantly lower production costs per unit than smaller volume operator do. It forces the new player to come in on a larger scale or to accept a cost disadvantage. To enter into the health care industry needs a huge upfront capital in establishing laboratory, housing equipments and other basic amenities for health care system. The firms which already have a huge network and access to high profile doctors enjoy a broad advantage in the market. However given the opportunities new entrants will enter into the industry with a long term vision. However new players will face serious challenges from established firms having established laboratory facilities strong credentials and strong network and one to one relationship with patients. But it is equally important patients not only go for low cost treatment but result oriented treatment.
(ii) Product differentiation: If differences in physical or perceived characteristics make an incumbent’s product unique in the eyes of the consumer new entrants must overcome the resulting brand royalty. Health care industry does not involve only with treating patients and eliminating diseases. The kind of hospitality received by the patient is key element for the success of the firm. Established firms have already developed a uniqueness about themselves among patients. They establish long-term relationships with patients just like Airlines and the hotel industry. So it is difficult for new entrant to attract those customers. But the uniqueness and quality of services can be replicated by a new firm and they can attract those loyal customers over a period of time.
(iii) Cost disadvantage independent of scale: Established competitors may have cost advantages even when the new entrant has comparable economies of scale. The established players in health industry have favorable location which is a crucial element to deter any new player to set up its units there. The established players have access to top notch physicians which new entrants will find difficult to get access to initially. New entrants will find it tough to compete with incumbents that enjoy such cost advantage.
(iv) Capital Expenditure: The need to invest large financial resources in order to compete creates a barrier to entry, particularly if the capital is required for unrecoverable expenditures in setting up. A health care unit needs investment in housing, laboratory, equipments, advertising and others. Huge amount of funds are required to set up a research and development unit. New players need high financial resources to enter into the industry and absorb start up losses. But health care is not an overnight business for any player. New entrants come with a large amount of funds to invest in capital expenditures which may not be recovered in a short period. It is the attractiveness and prospects o the industry that brings out new entrants into the market.
(v) Access to distribution: Costs or other restrictions associated with developing a means to distribute a product or service may make it difficult for a new entrant to move its product to or through the market. Established players in the industry have large number of well-known branches in various locations. These units tap the potential customers (patients) but with central management system. But a new player having small number of units may not be able to provide to all customers and in due course fail to meet the health care needs of patients.
(vi) Government Policy: The government can limit or even foreclose entry to industry. Health comes under the remit of government all over the world. There are stringent rules and regulations that need to be met by new players to a set up a health care unit. The government can also play a direct role by setting up a huge hospital near a private firm and controlling health care standards and safety regulations.
Tags: competitive environment, intense challenges, regulatory environment, strategic management, strategy formulation
