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Service Area Structural AnalysisHarvard’s Michael E. Porter developed a five forces framework for analyzing the external environment through an examination of the competitive nature of the industry. Service area structural analysis provides considerable insight into the attractiveness of an industry and provides a framework for understanding the competitive dynamics (the future viability of an industry). Porter’s five forces framework has been applied to industry analysis for many industries – however, because of the nature of competition in health care, it is more appropriate to apply the framework to the service category/service area. Use of Porter’s five forces in health care can be referred to as service area structural analysis. Porter suggested that the level of competitive intensity within the industry is the most critical factor in an organization’s environment. In Porter’s model, intensity is a function of the threat of new entrants to the market, the level of rivalry among existing organizations, the threat of substitute products and services, the bargaining power of buyers (customers), and the bargaining power of suppliers.18 The strength and impact of these five forces must be carefully monitored and assessed to determine the viability of the service category today and may be used to assess the changes likely to occur in the future. As illustrated in Exhibit 3–4, Porter’s industry structural analysis may be adapted to service areas to understand the competitive forces for health care organizations.THREAT OF NEW ENTRANTSNew entrants into a market are typically a threat to existing organizations because they increase the intensity of competition. New entrants may have substantial resources and often attempt to rapidly gain market share. Such actions may force prices and profits down. The threat of a new competitor entering into a market depends on the industry or service area barriers. If the barriers are substantial, the threat of entry is low. Porter identified several barriers to entry that may protect organizations already serving a market:
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