Porter's Five Forces on Private Healthcare industry in Malaysia

The model of pure competition implies that risk-adjusted rates of return should be constant across firms and industries. However, numerous economic studies have affirmed that different industries can sustain different levels of profitability; part of this difference is explained by industry structure.

Michael Porter provided a framework that models an industry as being influenced by five forces. The strategic business manager seeking to develop an edge over rival firms can use this model to better understand the industry context in which the firm operates.

Industry overview
The demand for health care has tremendously increased in Malaysia, one of the reasons being the ageing population, Malaysia is in the third stage of the demographic transition, in which the population a ageing due to a steady decline in its birth rate,. The number of older people in Malaysia has doubled in the past two decades to almost 1.4 million in 2000. The number is expected to double up to more than 3.4 million by 2020. The government has been the largest provider of the healthcare services to this group, with 60-70% being treated in public hospitals and health care centres. (UNESCAP.ORG RESEARCH,2003). In 2009, the government approved licences for a total of 42 new private hospitals, growing the number of beds at private hospitals by a third to 15,178. This surpassed the number of private hospitals which stood at 209 in 2008 to 254 with 11, 689 beds. In order to understand the health care industry dynamics we have chosen to use Porter’s five forces model to analyse one of the well known hospitals in Malaysia. Sime Darby Hospital.


1-Threat of New Entrants:

Basically, the barriers to entry into the private health sector is fairly high. For the biotechnology industry, the biggest barrier is the initial cash investment necessary for research and development (R&D). Firms should be willing to risk large amount of money with the likely possibility with no return. Regarding the insurance companies, the most significant barriers to entry are state regulatory requirements and the initial cash investment of establishing a physician network (Linda,2011) .
Furthermore, the threat of new entrants to the private healthcare sector depends heavily on the ability of the industry to establish entry barriers that exclude newcomers. To encourage competition to bring health-care costs down as well as to develop the country as a medical centre in the Asia Pacific region, the Government has brought in world-renowned specialists in order to to develop clinical treatment facilities for the care of patients with cancer, cardiovascular diseases and other illnesses ( Rowena, 2006)
Given this, the Threat of entrants to the healthcare private sector is considered as low becaue poeple wouldn’t go for treatments at unkown clinics or hospital . Hence, it’s very hard for any new entrant to enter and compete in the industry as it won’t gain any profit and will need to get the customer awareness.

2-Threat of Substitute products or services:

There are low risks of substitute of product as the private healthcare industry in Malaysia is growing. Sick patients will eventually have to go to specialists to cure their illness since the specialists are the ones who have the ability to cure the sickness of the patient. For instance, maternity could now be done in private clinic. Patient doesn’t have to give birth in hospital any more. It is the future of medical industry but for now, the threat is still low.
Moreover, there are some substitute threat for the private hospitals such as : massage , supplement products such as Monavia, Cango, and more. However, those substitutes are considered as threats but their impact is considered as low because people still give the trust to doctors (Austin, 2009).

3-Competitive Rivalry

(Den,2006) credited the private health sector, seeing it as increasingly playing an important role, before 1980 private hospitals were few and consisted mainly of hospitals which were community or philanthropic supported. Back then, private practice was primarily by way of general practice and there were a limited number of specialists in those none for profit institutions. But over the years, there have been key changes in healthcare industry structure since the 80s and recently, a few having occurred mainly for-profit oriented private hospitals mushroomed especially in major towns and growing cities.

the health sector has been the changing paradigms in Malaysian healthcare. As of end of March 20009, some 49 managed Care organizations were formed and registered in Malaysia. The spiralling growth of the MCOs attest to the life that Malaysia’s healthcare system is moving towards some great paradigm shift of which somehow benefits their existence. (Quek, 2000). The healthcare expenditure has reached critical masses, which the citizens must reckon with. Many entrepreneurs have now suddenly awakened and found a golden opportunity to take advantage of healthcare by patients as another tasty morsel for corporate dealings and wheeling. It appears that since the introduction of the organisations, a lot of entrepreneurs have chosen to invest in healthcare provisions such building hospitals and healthcare specialist centres, not really that the investors had any interest in the welfare of patient and but only to exploit them further thorough escalating prices of medical expenditure. This has led to growth in the industry and intense completion among the industry players. There has also been another reason for concern which has been the uncertain viability of the MCO model, most of the private hospitals in Malaysia have been posting marginal profits, with a sizeable number losing but kept afloat b y charitable trusts and philanthropy. Only a few star players have been profitable not even exceeding 10% (Queck,200).The factor has encouraged a competitive and aggressive marketing in healthcare industry. Queck has continued to mention that there is not denying that the size of healthcare spending is growing, and at about 1.5 billion ringgit annually, which certainly an attractive investment enough for to gamble on the prestige of adding a medical centre to their diversified interest.

Rivalry has also been seen to be significant private hospitals; approximately 30% of all patients would receive similar treatment in one of the 254 hospitals or same day facilities, taking considerate pressure off the public hospital system. Technology however, and medical advances and specialty services have been driving a strong trend towards private hospitals specializations with more of the industry players are developing a significant competition for niche areas of expertise such as coronary care, eye surgery, mental health care and maternity admissions. With patients having a freedom of choice to choose the hospital they want and to be seen by a specialist they trust based on records and reputation, some hospitals have found it to be fit to set up strategies that enable them to fend off competition they face and lure more patients to their clinics.

4-Bargaining Power of Suppliers

In terms of medical equipment and pharmaceutical products, supplier power is considered high. According to (KPJ Healthcare ,2011), holdings and the hospitals that they manage, are only focused on providing clinics, hiring medical staff, marketing and advertising. The supplier power as a variable has the potential to be most critical for members of the for profit private hospital in managing viable hospital units. As mentioned before, private hospital relies on key supply companies for their quality of supplies and timely services and products to their various hospitals location. The supplier power is also considered to be high regarding the credible forward integration by suppliers of the equipment and medical suppliers.

-Forward Integration.

To analyse the Supplier power furthermore, each of the main supply components has been summarized below;
-Medical Practitioners – the Malaysian Nurses Association and Doctor’s association are fundamental prerequisites to viability and success of the Hospital. Non-support of doctor and nurse groups can lead to serious under performances of both the individual hospitals and companies under the company in this industry. The nurses and doctors’ groups are well organized in Malaysia in terms of union representation and enjoy a strong positive image with the press and the public ( MNA.org.2010). There two groups therefore have strong collective bargaining power with the private hospitals groups, hence they are in a strong position to negotiate conditions and pay structures.
-Medical Equipment – over the years the private health industry has become increasingly dependent on advancing technology by way of high capital costs equipment which is used for diagnostics and treatment of medical conditions, with limited suppliers, creating limited opportunity for competitive buying. The impact of suppliers on Pantai Private hospital can be negative or completely damaging, Suppliers hold latent power that they can use in negotiation conditions of supplying their equipment to the private hospital.

5-Bargaining power of buyers

Regarding the role of patients in isolation to other influencing factors, it can be said that their ability to impact on industry players in a negative or damaging way to shareholders interests or assets and returns is relatively low. Hence, this element is favourable to industry members. It is also favourable to private hospital. However, the patients can easily find some alternatives to change their hospitals and doctors because of the many medical centres around that make switching cost low. This is gives buyers higher power, for is instance, a patient can easily shift from one specific private hospital to other Medical centre or any other hospitals. There are some reasons that will drive customers away from the specific private hospital , escalating medical expenses are just one of the reasons of why customers will opt for cheaper hospitals but yet with better services.

To combat this problem, the formation of 45 MCO, has enabled the industry players to form a stronger partnership with the insurance companies. They can easily get information about customer demands and new developments in health care industry.


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