In the 1980s, the Chicago area hospital market was thriving with many independent hospitals and fierce competition between them due to excess capacity and stagnant demand. However, managed care organizations began negotiating contracts with hospitals, giving them power over prices and driving some consolidation. While barriers to entry into the hospital market were historically high, innovations allowed niche hospitals to enter. The document analyzes the five competitive forces facing hospitals in Chicago in the 1980s versus more recently using various templates to structure the comparison.

1. Applying the Five Forces by Wesley Shu, text by D. Besanko et al.

12. Overview Medium Low Buyer power Medium Medium Supplier power High Medium Substitutes and complements Medium but growing Low Entry High but falling Low Internal rivalry Threat to Profit, today Threat to Profit, 1980s Force

13. Pentagonal Analysis

15. Template – Internal Rivalry Buyers’ switching costs? Degree of product differentiation among sellers? Brand loyalty to existing sellers? Cross-price elasticities of demand among competitors in industry? Cost structure of firms: sensitivity of costs to capacity utilization? Excess capacity? Significant cost differences among firms? Rate of industry growth? Degree of seller concentration? Future Current

16. Template – Internal Rivalry Strength of exit barriers? History of “cooperative” pricing? Use of ”facilitating practices”? Large and/or infrequent sales orders? Can firms adjust prices quickly? Are prices and terms of sales transactions observable? Future Current

17. Template – Threat of Entry Experience-based advantages of incumbents Entrants’ access to favorable locations Entrants’ access to technology/know-how Entrants’ access to raw materials Entrants’ access to distribution channels Importance of reputation or established brand loyalties in purchase decision Significant economies of scale Future Current

18. Template – Threat of Entry Perception of entrants about expected retaliation of incumbents/reputations of incumbents for ‘toughness’ Government protection of incumbents Network externalities Future Current

19. Template – Substitutes & Complements Price elasticity of industry demand Availability of close complements Price-value characteristics of complements Price-value characteristics of substitutes Availability of close substitutes Future Current

20. Template – Suppliers Do suppliers pose credible threat of forward integration into the product market? Few substitutes for suppliers’ input Do firms in industry make relationship-specific investments to support transactions with specific suppliers? Are suppliers able to price-discriminate among prospective customers according to ability/willingness to pay for input? Do firms in industry purchase small volumes relative to other customers of suppliers? Is typical firm’s purchase volume small relative to sales of typical suppliers? Is supplier industry more concentrated than industry it sells to? Future Current

21. Template – Buyers Is price elasticity of demand of buyer’s product high? Can buyers find substitutes for industry’s product? Do firms in industry make relationship-specific investments to support transactions with specific buyers? Do buyers purchase in large volumes? Does a buyer’s purchase volume represent large fraction of typical seller’s sales revenue? Is buyers’ industry more concentrated than industry it purchases from? Future Current

22. Template – Buyers 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 transaction? Does product represent significant fraction of cost in buyer’s business? Do buyers pose credible threat of backward integration? Future Current