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Medical tourism industry analysis using Porter\'s Five Forces Analysis.
Citation preview
May 2009
Porter’s 5 Forces Analysis
for
Medical Tourism Industry
in the U.S.
Factors Affecting Rivalry Among Existing Competitors
Characterization
(Current)Future Trend
Degree of seller concentration?
There are currently around 20 companies engaging in
medical tourism. Only maybe five companies are really
being active and could be considered serious players.
In the immediate future, one may expect some additional
players entering the industry during the next 1-3 years.
However, after that the weak players will exist, while the
stronger ones will go through consolidation by way of
mergers and acquisitions.
Rate of industry growth?
In 2007 750,000 Americans traveled abroad for treatments.
In 2010 as many as 6M Americans will have traveled for
medical treatments.
Economist estimates that number of American medical
tourism may reach 10M per year in 2012.
Significant cost differences among Firms?
Lack of economies of scale, economies of scope or capacity
utilization contribute no major effects to cost differences.
Use of similar medical facilities keep input prices similar for
every player. Only a handful of companies had enough
patients to move up on the learning curve.
Some players will eventually identify and sign smaller
medical facilities to reduce the cost of input. Economies of
scale will not play a major role, because the variable cost of
serving clients will still be high due to the nature of this
business. Economies of scope will increase in importance
and learning experiences will reduce costs of some
companies.
Excess capacity?
Medical Tourism companies are small firms (3-5 people
operations). Operations are rather lean and not much
overcapacity exists.
Since no major capital investments are required to operate in
this industry, there will always be little excess capacity.
Cost structure of firms: sensitivity of costs to
capacity utilization?
Sensitivity of costs to capacity utilization is low. Minimum
Efficient Scale (MES) is relatively small. At current average
industry margin of $1500, a firm needs to generate 200-300
clients per year to be self-sufficient.
Sensitivity of costs to capacity utilization will probably
remain low.
Degree of product differentiation among sellers?
Brand loyalty to existing sellers? Cross-price
elasticities of demand and competitors in
industry?
Degree of product differentiation is very small. All major
players offer a list of similar procedures from the same
medical facilities. No company has established a well-
recognized brand. Pricing of one company have no effects
on prices of other companies.
As the industry grows and attracts well-trained marketing
professionals, one should expect to see higher
differentiation. We suspect that within 3-5 years major
brands will emerge. Cross-price elasticities will be much
higher.
Factors Affecting Rivalry Among Existing Competitors
Buyer's costs of switching from one competitor
to another?
The cost of switching is relatively low today, since many
companies use the same treatment facilities.The costs of switching will remain relatively low.
Are prices and terms of sales transactions
observable?
Prices and terms of sales are observable and/or can be
estimated, especially for less costly procedures such as
dental implants.
Prices and terms of sales will be observable and/or can be
estimated. As more complicated procedures with higher
price differences are added to offerings, pricing information
may not be as apparent.
Can firms adjust prices quickly? Yes, firms are able to adjust prices quickly. Firms will be able to adjust prices quickly.
Large and/or infrequent sales orders?Services purchased by American patients will be infrequent
and may be large (e.g. hip replacement).
Services purchased by American patients will be infrequent
and may be large (e.g. hip replacement).
Use of "facilitating practices" (price leadership,
advance announcement of price changes?None of this taking place is this infant industry.
I presume some of these practices will occur in this industry
as well.
History of "cooperative" pricing?
There is no history of cooperative pricing. Competitors do
not exert, in a legal fashion, a great deal of energy on
determining prices of its competitors.
It is difficult to answer this question at this time.
Strength of exit barriers?
Exit barriers are low. Partnerships with medical facilities
can be disolved without major financial burdens.
Infrustructures can be easily dealth with.
As some player deside to vertically integrate, exit costs may
go up. However, the majority of players, since there are no
major capital investors their businesses, exit barriers will
remain relatively low.
Characterization
(Current)Future Trend
Factors Affecting the Threat of Entry
Characterization
(Current)Future Trend
Significant economies of scale? No significant economies of scale exist. No significant economies of scale exist.
Importance of reputation or established brand
loyalties in purchase decision?
Even though the importance of reputation is enormous, it is
not a major factor today, because none of the brands are
well recognized brands.
Reputation and brand loyalty will be of paramount
importance. A single mishandled case, and bad handling of
those incidients will ruin companies.
Entrants' access to distribution channels?
This is not a simple task. Evaluating and developing
relationships with reputable medical facilities takes time and
a great deal of knowledge. That's why most companies are
dealing with only a handful of centers in the world. Top
medical tourism centers are easily accessible. However,
the other facilities are not.
Identifying and accessing major medical facilities will
continue to be relatively easy. Developing relationships with
other centers will never be easy.
Entrants' access to raw materials?
This is not a major issue for medical tourism industry.
Webpage design, travel agency arrangements will always be
available to new entrants. However, working with insurance
companies may not be as simple.
This is not a major issue for medical tourism industry.
Webpage design, travel agency arrangements will always be
available to new entrants.
Entrants' access to technology/know-how?
Know proprietary technology for Medical Tourism has been
developed so far. This industry will always be high touch
point and only certain functions of the process can be
automated. Furthermore, process flows can be studies and
replicated, albeit not easily. Only exclusive contracts with
medical facitilies that possess a major know-how will prevent
access to technology/know-how. The number of players in
the value chain and number of processes that must be in
place create a significant learning curve. Entrants must be
comfortable nevigating through complex environment of
health care, insurance, and medical procedures.
Exclusive contracts will prevent certain entrants from
accessing know-hows posessed by certain world-reknowned
medical centers.
Factors Affecting the Threat of Entry
Characterization
(Current)Future Trend
Entrants' access to favorable locations?It appears that at this time all "favorable" locations do not
sign exclusive contracts with medical tourism facilitators.
Eventually, we may see a trend for major brands signing
exclusivity contracts with major favorable locations. In
addition, even smaller reputable medical facilities will
eventually be signed. Thus, access will continue to diminish
with time.
Experience-based advantages of incumbents? This is a factor but not a major one.This factor will be more important but will never be a major
one.
Network externalities: demand-side advantages
to incumbents from large installed base?
This is a major factor. Larger client based translates into
better reputation. Furthermore, word of mouth advertising
will play a major role in the introduction and growth stages of
PLC.
This will continue to be a major factor. Larger client based
translates into better reputation and brand name.
Government protection of incumbents? No such protections exist at this time.
As the industry grows and as number of poor treatment
incidents will rise, the government may start regulating
and/or governing this industry.
Perceptions of entrants about expected
retaliation of incumbents/reputations of
incumbents for "toughness"?
On the contrary, most competitors are quite cooperative,
because they realize that joint efforts will benefit everybody
in this growing industry.
It is hard to answer this question at this time, since we don't
know who will run companies.
Substitute Products and Support from Complements
Characterization
(Current)Future Trend
Availability of close substitutes?
Available domestic medical care is the closest substitute.
At this time the higher cost of this care will not make
domestic care a major threat. Arranging your treatments
and trips on your own is another possible substitute. The
importance of selecting a reputable clinic, evaluating it will
force most patients to rely on intermediaries.
Domestic care will continue to be the closest substitute.
Even if the US moves towards more national healthcare
system, the wait for treatments will make domestic medical
care still not a major factor. Self arrangements will continue
to be a threat. However, I presume most patients will want
the peace of mind of dealing with a US intermediary. And
many medical facilities will be in exclusive partnerships.
Price-value characteristics of substitutes?
The price value will be low, especially given the risk of
medical incidents stemming from lack of medical facility
evaluation.
The price value will be low. A well-run established medical
tourism facilitator will always provide better value.
Price elasticity of industry demand? Elastic Elastic with the exception of rare, unique procedures.
Availability of close complements?Travel industry is a great complement and will continue to
exert a favorable influence on medical tourism.
Travel industry is a great complement and will continue to
exert a favorable influence on medical tourism.
Price-value characteristics of complements? Price-value will depend on the destination. Price value will depend on the destination.
Factors Affecting or Reflecting Pressure from Substitute Products and Support from Complements
Factors Affecting or Reflecting Power of Input Suppliers
Characterization
(Current)Future Trend
Is supplier industry more concentrated than
industry it sells to?
The supplier industry is relatively concentrated than Medical
Tourism industry is, even though there is currently around
120 (2007 numbers) medical facilities worldwide which treat
the majority of medical tourism patients.
In the future as more smaller medical facilities enter the
market, the supplier industry is going to be less and less
concentrated.
Do firms in industry purchase relatively small
volumes relative to other customers of
suppliers? Is typical firm's purchase volume
small relatively to sales of typical supplier?
Typical firm's purchase volume is smaller relatively to sales
of typical supplier.
Some medical facilities may switch to entirely servicing
foreign clients. There will be very few of those. Hospital will
continue serve domestic and international clientele.
Few substitutes for suppliers' input?
There few substitutes for suppliers' input. All top notch
facilities have to hire well-trained, possibly foreign educated
doctors. In addition, equipment and processes come from a
relatively small number of manufacturers and teaching
facilities.
We don't foresee any changes in the foreseeable future.
Very few companies enter a relatively competitive medical
device market every year. Training of doctors has always
been a relatively controlled process.
Do firms in industry make relationship-specific
investments to support transactions with
specific suppliers?
Investments that firms in the industry make are travel
expenses, legal fees, and time. Travel expenses can range
from 2-3 thousand dollars per trip per person. Legal fees
associated with drafting contracts can be between 2 and 5
thousand dollars per contract. And the last investment is
time. Firms have to spend 20 to 30 hours of time on
selection and evaluation process.
It is possible that eventually the industry will see medical
treatments brokers, who will broker treatments based on
availability and requests. Otherwise, the specific
investments will remain relatively the same. Some
companies will develop software applications to integrate
with medical offices that deal with. In that case, integration
costs should be taken into account.
Do suppliers pose credible threat of forward
integration into the product market?
Lack of marketing skills and travel agency competencies in
countries outside their own may prevent many suppliers from
vertically integration. Travel agencies in the US do not
typically possess medical expertise. However, stiff
competition in the travel industry may prompt some
companies to consider entering this more profitable market.
Once major brands emerge, it will be harder for travel
industry companies to enter this market. Some medical
facilities may try to partner with or acquire other centers to
offer a wider range of geographic locations and enough
clients to vertically integrate.
Are suppliers able to price-discriminate among
prospective customers according to
ability/willingness to pay for input?
This practice is not currently observed. It is hard to predict these dynamics at this time.
Factors Affecting or Reflecting Power of Buyers
Characterization
(Current)Future Trend
Is buyers' industry more concentrated than
industry it purchases from?Patients' environment is not concentrated at all. We do not foresee any major changes in this area.
Do buyers purchase in large volumes? Does a
buyers' purchase volume represent large
fraction of typical seller's sales revenue?
Revenue coming from one single patient does not represent
a large fraction of company's sales revenue.
Even as the revenue per client will grow due to including
more expensive complex procedures into offering, a single
client will never present a large fraction of firm's revenue.
Can buyers find substitutes for industry's
products?
Yes, patients can certainly find alternatives to treatments
outside the US. However, these alternative will always be 30-
60 more expensive.
Even though the gap in prices may be reduced during the
next decade or two, medical tourism treatments will always
be less expensive alternatives to treatments in the developed
world.
Do firms in industry make relationship-specific
investments to support transactions with
specific buyers?
Since demand side of this industry is not concentrated,
relationship specific investments will not be common at all.WE don't anticipate any changes in this realm.
Is price elasticity of demand of buyer's product
high or low?
The price elasticity for patients' procedures will vary. Price
elasticity of demand for such treatments as hip or knee
replacement may be quite inelastic. The price elasticity of
demand for elective plastic surgery procedures is elastic.
Price elasticity of demand will continue to vary based on
medical procedures.
Do buyers pose credible threat of backward
integration?Buyers pose absolutely no threat of backward integration.
Buyers will not pose absolutely any threat of backward
integration.
Does product represent significant fraction of
cost in buyer's business?
Yes, medical procedures will represent even at a lower level
of $2-$3 thousand dollars a significant fraction of patient's
budget.
As procedures offered become more complex, the cost of
medical procedure will represent higher and higher fraction of
patient's family budget.
Are prices in the market negotiated between
buyers and sellers on each individual
transaction or do sellers post a "take-it-or-leave-
it" price that applies to all transactions?
Due to uniqueness of each medical case, prices are
typically negotiated on each individual transaction. Certain
plastic surgery procedures can qualify for "take-it-or-leave-it"
pricing strategy.
There won't be any significant changes in this area due to
uniqueness of each medical case.
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