Strategic Management of Health Care Organizations

Porter’s Five Forces Model helps managers understand the competitive dynamics in specific service area. Strategic managers can use this analysis to determine if this specific service area is worth entering or remaining if the organization is already in it. The model helps us understand how hard it is for an enterprise to compete in such a service area. It does this by identifying the forces that drive competition.

New entrants to a service area are a threat to the existing service providers. They can increase the overall competitive intensity in the service area. When they enter the service area they often force lower prices for services or increase the cost to operate because of enhancement that are required to retain customers. Porter identifies a number of barriers that make it hard for new organizations to enter the market. Even though the potential new entrants can be limited by these barriers, any new entrant can increase the competitive intensity of the service area.

Bargaining powers of Suppliers and Buyers can also increase the competitive intensity of a service area. Buyers (i.e.: patients, MD groups that provide the patients or third party payers) seek the least costly service and/or the service with the most enhancement. A limited number of buyers have strong bargaining power. They can force lower prices and enhancements that increase cost. Suppliers want the highest possible prices for the goods and services that they provide. When there are a limited number of suppliers, their bargaining power is enhanced. As a result the organizations may compete with each other for patients by lowering prices. They may compete with enhancements that are seen in the supplies and extra service offered. This means that they have to agree to pay more for the better supplies and extra service, which increase the cost to operate. These factors increase the intensity of competition in this service area.

The impact of substitutes can be a significant force in the service areas’ competitive dynamics. Substitutes compete for customers and create a problem for the existing organizations. The existing organizations do not offer the same service and often find that the substitute has a lower price and/or better perceived quality. The existing providers must find a way to offset this advantage. They will lower price and/or offer other services to try to retain their customers. These additional services increase the cost to operate in this service area... These actions increase the competitive intensity or a service area.

These factors are the fuel for the fifth force – the competitive intensity of the service area. The rivalry between competitors can be identified by the prices they charge, the additional service they provide and other enhancements. The greater the intensity of competition, the lower the price and/or extra service built into the existing price. This analysis helps manager understand if a particular service area is desirable.

The Poughkeepsie service area is not very desirable for nursing homes. There are too many nursing homes in the marketing competing for too few potential patients. The substitutes also negatively impact the availability of potential patients. The bargaining power of supplier and buyers is very strong since they are limited. As a result the cost to operate in this market is high and the price is likely low. Given this structure, I would not want to enter this service area