The Better Business Analysis Institute Presence the Better
Business Analysis Podcast with Hindman Walsh.
Hi everybody and welcome back to the Better Business Analysis
podcast with Benjamin Walsh. Now this week we're going to
dive into take two of our BA Unleashed series.
This is where we dive into topics, tools that you can apply
practically to any company that you know or the organization you
work for. Now last week, kicking off the
series, we talked about SWOT analysis and we're starting at
the beginning of the delivery journey, the Better Business
analysis, delivery journey in the strategic and enterprise
analysis space. So today, we're going to be
talking about what's called the Porters 5 forces and how they
work this model, this technique works with a SWOT analysis.
So they're both strategic management tools used to analyze
the company organizations competitive advantage in the
world and in the market and they can complement each other.
So whereas the spot analysis focuses on focuses on the
strength, weaknesses and opportunities and threats you
know both internal and external, the Five forces model is
specifically talking about the competitive forces within the
industry. So it focuses on the external
environment and helps us assess the attractiveness and
profitability of a specific industry and whether or not we
want to dip our toes into it or just having a bit of a baseline
about where we think we're at in the industry that we operate in.
So if we start with what is the Porters 5 Forces model and then
we'll get into our practical example and we're going to be
doing the Porters 5 Forces model applied to ChatGPT.
OK. So where do we start?
What is the Porters 5 Forces model?
It's a framework developed by a guy called Michael Porter, hence
the the name at the front. And the whole point was this
model was used to analyze the competitive forces within an
industry. So again, I think I just touched
on the fact that it helps us assess whether or not this
industry is attractive and profitable.
So and he used five factors, five factors or forces if you
like, that would allow us to determine that before we entered
into it or even to give us a bit of an idea about where we're at
now. So I'm going to list through
what those five areas are. I'm going to give a little bit
of a description about those five areas and then we'll move
on to how do we actually carry out one of these models and
apply it to our case study, which will be chat, GB T OK.
So number one, we talk about the threat of new entrants into the
market. OK.
So this force evaluates what are the barriers to entry for
competitors. So if you're already in the
industry, what is the threat of other people entering into that
industry? Or from the flip side, if you're
looking to enter the industry, how hard is it?
What are the barriers? So it considers factors such as
economies of scale. And if you don't know what
economies of scale are, it means that as you get bigger, your
buying power becomes a superior. When you're bigger, you can
usually make more things more effective, and so bigger
companies have a an advantage over small companies that don't
have as much money and can't buy in bulk.
It talks about brand loyalty, capital requirements, how much
does it cost to even set up and government regulations.
A high threat of new entrants can reduce profitability for
existing players. OK.
So what that means is that if it's easy to enter that market
or that area and then it provides what, what that means
is in the long term, those people that are playing in that
industry are going to have more competition and it will reduce
their profitability over time unless they, you know, they do
something different or they expand into other markets.
So that's number one threat of new entrants, very important #2.
The this is the bargaining power of buyers and this needs a bit
of explaining. So this force examines the power
of customers. So the people buying from your
company or from this company we're focusing on, it's the
power of customers to negotiate prices and terms.
So if you have factors like the concentration of buyers, their
price sensitivity, the available of availability, sorry of
substitute products that can influence buyers power.
So strong buyers power, so the buyers power being the consumer
can limit the profitability of industry participants.
So those companies that operate within this industry that you're
focusing on. So if you think about that in a
housing market, it might be the fact that the bargaining power
of buyers might be high when there's lots of options, lots of
houses that are all priced the same or in the same area.
So, and the bank maybe for example, we have low interest
rates, could be an example at some time it could allow the
buyer to have more power. So bar the number two being the
bargaining power of buyers is how much of A say does consumers
have or buyers, because it could be a business, another business,
how much power do they hold in this relationship #3 is the flip
side of that. So what is the bargaining power
of suppliers? So this force assesses the power
of suppliers to influence power in sorry prices.
In terms factors like supplier concentration, availability of
substituted inputs to your product and the importance of
supplies products to the industry affects supplier power.
Strong supplier power can reduce the profitability for industry
players, OK. So you're selling a good that
you put together and involves different parts or components,
OK. If those parts and components
are rare or if you are limited in terms of how you can source
those components, then your supplier, the supplier of that
industry has power, OK. They have.
If they have strong power in this relationship then that can
reduce profitability for you. So if you can only source your
product from you know you you you've got a unique component,
maybe it's a a unique metal or you're reselling a good that's
only from you know one supplier. They have power in that
relationship and you have less power, okay.
And so they can increase. They know that they've got a
scarce product or scarce component, and in order to
produce your product, they hold the power in that relationship.
There's #3 that's the bargaining power of the supplier, #4 is the
threat of substitutes. OK, so this is different to the
threat of new entrants and people can get confused about
this. So I'll explain what number four
is. Threat of substitute.
This force considers the availability of alternative
products or services that can fulfill the same customer needs.
This is not necessarily a direct copy of what you're providing,
right? So you could say in the example
where we have cash sharing, so for example, Uber, you could
say, well, Ola is a is a threat of substitute.
Definitely. There's competition there.
So all I could definitely be a a threat because it's providing
the same service and that you know, that has an influence,
that's a that's a threat, that's a substitute.
But they're also a competitor. Now it's not just the rideshare.
A taxi service for example, or people's own vehicles and
driving their own vehicles and taking public transport are
substitutes in the greatest sense of the word.
They're not just direct, you know, it's it's still fulfilling
the need of getting from A to B, OK.
So factors such as price performance, trade-offs,
switching costs and the customers loyalty impact, the
threat of substitutes and a high threat of substitutes can limit
industry profitability. OK.
So if there are a lot of options for a consumer, then your
consumer could be price conscience conscious that if you
put your prices up to a certain point then they'll start using
alternatives. So petrol prices, Sorry, if the
price to catch the train goes up quite a lot, then people might
start driving their own automobile to get to work
because you've now priced yourself out of the market and
the substitute which is completely different, service
driving yourself becomes more attractive.
Also. For example in New Zealand,
anyway the electricity industry is quite quite competitive.
There are a lot of options if you want to switch providers.
So it's it's quite easy for you to switch.
And so those companies focus on loyalty by providing, I don't
know air points or fuel vouchers or what it or some money to stay
with them for a while. Try and sign you up for a longer
period. Because the threat of substitute
is actually quite high and that reduces the overall margins for
the players in the market. And #5 not to be confused with
what we've just covered off, which was the number four threat
of substitutes. #5 is around the rivalry of competitive of
competitors. So another way of saying that #5
is competitive rivalry. This force examines the
intensity of competition among existing players.
OK, and every industry is quite different.
I just read an article, for example on LinkedIn around the
fact that Microsoft is now going to be the kind of back end for a
lot of Oracle services. And a few years ago there was
quite a heated number of years ago, there was quite a heated
battle between Oracle and and Microsoft and the database
space. And now that competition, even
though they are competitors is less so because they're starting
to like, you know, have partnerships.
So you can look at each industry and see how do the how do the
players within the industry model play together?
Are they allowing that person to have that market share and that
person to have that market share or are they at each other's
throats? So to write competitive rivalry
factors like the number of competitors in the market, high
in electricity in New Zealand, what is the industry growth
rate, How many, how many new players dropped into the
industry over the last year? Is there much difference between
the product itself or are we talking about what we call a
commodity product where everyone's producing basically
the same thing? Again, electricity being a
commodity, there's not much difference between the product
differentiation. However, if you have electricity
and you provide, I don't know, Internet services and smart
charges for cars, you can make your product a little bit
different. And what is the exit barriers
that influence competitive rivalry?
Okay. So are there any barriers for
exiting? You know, are they low, are they
low barriers for for just dropping out and so people will
drop out and if there's high rivalry within the industry or
there's going to be then that can lead to price wars and
reduce profitability. So as I said, if there's lots of
competition and it and you don't have much difference of of
product, your product is pretty much the same, then you will
have price wars. And then for example, unless
there's some dodgy goings and like price fixing going on, when
you're selling a commodity good like petrol and electricity,
then you end up having price wars in certain regions and that
reduces your overall profitability.
OK. So just just to recap, those
five forces are one threat of new entrants, 2 bargaining power
of buyers, 3 bargaining power of suppliers, 4 threat of
substitutes and five, competitive rivalry.
They are the five forces. So the Porters 5 Forces model is
used to analyze the competitive dynamics of an industry and
identify the key factors that impact profitability and helps
businesses understand the industry's attractiveness,
assess competitive threats and develop strategies to develop a
competitive advantage. It is a, it is commonly used in
strategic planning, market analysis and decision making.
OK. So hopefully you know not now
know what Porter 5 Forces is all about.
And as a business, unless you can help carry out the five
forces to kind of give your business an idea of the
competitive landscape of where they're in and informed
decisions Okay. And so this five forces as well
as the SWOT analysis, SWOT analysis probably would come
after this in sequence. If you're doing both, then you
could then lead onto a SWOT analysis that you know and and
this information, these insights could feed into there and look
at different areas that you might want to focus on.
Sometimes investors will perform 5 port of five forces to work
out whether or not they want to invest in your company.
Obviously consultants do that, but market researchers also look
at this, and government and regulatory bodies could, for
example, figure out whether or not an industry is competitive
enough. If there's a monopoly or some
antitrust issues within a market, then they might perform
a 5 Forces to suggest that they need to regulate or allow other
players into the market. So the porters 5 Forces model
and analysis is fantastic for any BA to do.
And the good thing about it is that again, you can apply it to
any company you know, the company you work for, a company
that's on the news, a friend's company, and you could start to
do this model quite easily. All you need again is an A3 or a
four piece of paper and you're drawing in this case just five
different lines. You they, they they're not like
quadrants, like the SWOT analysis.
They're definitely just five bullet points and you can write
down these headers as I've talked about and then you can
put at the top of your piece of paper the company name and you
could start going through this model, right.
So I'm going to take a breather for 30 for you know 30 seconds
and I'm going to and we're going to jump onto 5 porters, 5 forces
applied to ChatGPT. If you don't know what ChatGPT
is, ChatGPT is, it's actually a product, but it's a quite a big
product that people sometimes talk about as a company.
It is owned by Open AI and it is what you know has really pushed
or been the the label for the AI large language model revolution
that we've seen. So I would suggest to pause the
podcast right now and Google ChatGPT if you do not know what
it is, but if you do, let's get started #1 and you can play
along at home as well by maybe having a go.
And I'll give you some time to maybe think about what you think
in terms of some of these categories as we go through.
So number one is threat of new entrants.
So it's kind of the entry barriers for new players.
For me, the threat of new entrants for ChatGPT is
relatively high. The AI industry is kind of
booming and growing and there are many tech companies who are
investing in AI research and development creating a large
language model which sits behind ChatGPT.
It's kind of the mechanics of ChatGPT requires significant
resources and expertise and access to large information.
So in even though there are large investments going on in in
AI, I think that the threat of new entrants to the level of
chat GB T is kind of low to moderate Chat GB T has a
significant advantage as the early mover in the market.
So it was able to scrape and access a lot of information
before other companies called onto it that were in the open
public domain. And now they're starting, for
example, Twitter. And now those sources are
starting to realize that they are, they've got a lot more
information that they could use to create their own models and
they're starting to turn off access.
So ChatGPT has already trained its model on that.
So it's got an advantage that might not be there in the
future. What I will say is some of the
bigger companies like the Microsoft Googles and probably X
or Twitter X in the in the future we'll start to catch up
to chat DBT and you will find that in the future that we may
have more competition, but right now I would say probably
moderate when it comes to chat. DBT #2 is the bargaining power
of supplies. And this is a good, good example
because we're applying this to, as opposed to a product that you
put together, a physical product, we're applying it to
kind of an IT product. So it makes us think, you know
really carefully about this. So in the context of ChatGPT
supplies could be considered the data providers or the
researchers and engineers who contributed to its development.
Their bargaining power is moderate where while there are
many sources for data, the quality and the diversity of
data are critical for CHAT DBT. So as I said before, chat DBT
scraped or accessed like Twitter, like anything on
Twitter that was posted publicly for example.
Free online Wikipedia for example, other data sources and
and these AI models get better as they trend on new information
in different context. But you you, you know if you've
already got one context down kind of pat and a lot of
different variables in that area, you need to kind of expose
it to other different types of information for it to grow.
So I guess there was in some ways the supplies were those
data providers and they started to be locked down a bit.
So even though and and and a I models need to continue to
learn. So even though they've got an
advantage here I think that they kind of those data providers
kind of have limited bargaining power here.
A open A I who owns J GB T may now use their competitive
advantage to even pay for access to public information or build
strong partnerships saying, look, if we could take your
information, Twitter or in the future keep taking your
information, I know Elon Musk has stopped that, then maybe we
could give you a kickback or pay you for that or give them a
kickback or, you know, a percentage of of profits or
something. So I think the bargaining power
of supplies in this case has been low and I think it may
change in the future. But I think Chad Deputy is well
aware that there's a big risk for them in terms of their
growth and they're starting to build partnerships in terms of
the bargaining power of buyers. So these are the people that use
chat BGBT, which is generally businesses and consumers.
I would say that buyers have a high bargaining power here
because I think that there are several other AI models and chat
box available in the market. Bing has just put out Microsoft
Bing have put out their own chat product.
They actually source their information.
They've got a strategic partnership with Chat GB T,
which is actually the model that they use behind the scenes, and
I'm sure there's some commercials behind that.
However, there are a lot of models who are built either on
top of Chat GB T, so Chat GB C not being the interface, but the
engine behind the scene they use.
They've got an API that you can use.
So you know you're not directly going on to the chat GB T
product or they are just other ones that are just free and so
therefore paying for the Chat GB C service may not feel like
something that people want to do.
So I would say overall in terms of the bargaining power of
buyers, that's that's ours. And with the fact that
everyone's gone mental and crazy about a I development, I do
think that it's about moderate in terms of how much bargaining
power we have as a consumer. And that's probably because
ChatGPT had these advanced capabilities and and the kind
of, you know, ahead of the curve, if you like, right now.
So as of today, I'd say moderate, but in the future,
buyers may have more power #4, the threat of substitutes or
services. I think the threat of
substitutes and services is high, even though ChatGPT had a
competitive advantage to start off with.
I think that the reason why it's getting moderate to high right
now is that chat bot services are definitely where people have
spent their time and energy and chat GB T actually has an
advanced natural language processing machine learning
capabilities. However, a lot of the new
entrants aren't looking to have a hugely wide, hugely smart
model, they're looking at a specific model.
So for example asking for a chatbot that's really good at
answering IT support questions is quite limited.
So therefore in order to provide that product, which is generally
what consumers are looking for, a very point pointed solution to
fix a problem. The the amount of information
and the amount of data that that chat model needs.
The very cut down one I'm talking about it doesn't need as
much information. So it can be trained on an open
source model and you can and you can feed it IT requests from
people's companies. And so there are a lot of like
many alternatives if you like many chat GB T's out there And
so I think that those new entrants are able to come in
quite cheaply and provide more competition for chat GB T So I
think that the I think moderate to high and there is quite a
threat of substitutes right now. And again the fact is I can use
if I'm just a consumer who's asking a few questions I can use
Bing for free or the Google alternative.
But I can use those two for free to give me some quick answers
that are kind of built into Google Now and built into
Microsoft so I don't have to click away to ChatGPT.
I'm going to use those unless I need some advanced capability.
So now Chap. GBT as being the only player
starts becoming the kind of second second tier advanced
model at the moment and finally the rival among competitors.
I would say that the rivalry amount among competitors in the
AI space is high. I think major tech companies
like Google, Amazon, Microsoft all have their own AI models and
they're looking at consistent ways of improving them.
And unlike Open A I and Chat GB T, those other companies make
their money through data centers and through productivity apps.
And so therefore they can almost sell a I products at a loss to
get you on their core product which is hosting services or you
know, buying more data or buying one of their products.
So they're all, you know, selling advertising to you.
Whereas Chet GBT doesn't have that model, Open AI doesn't have
that model. It is purely providing you with
an AI brand if you like, quite an advanced one, but these other
products could probably come in and lower their prices and just
to just to kind of get ahead and then start to get their market.
Also, most people when you use a computer, you're using a
Microsoft product or a Google product or maybe an Apple
product and Apple isn't in this market.
However, if you're loading up a spreadsheet on Apple, you're
using probably Microsoft Office and that's got AI built into it
now. So naturally you're using their
interface. I also think the chat bot market
is competitive, offering several services in that area And now
you see that like everyone's putting out like whatever their
core product is and pay extra for AI credits or pay extra for
this AI bits and pieces. It's continuous.
There's continuous innovation in the space and I have seen right
now some talk about what happens if people just compete and then
we start to do something that could almost harm humanity.
So we've given away a I tools that can allow a terrorist to,
you know, a potential terrorist to learn how to make a bomb or
find out where you know a person of interest is at.
And so there has been a meeting yesterday as I speak at Congress
in America where a lot of A I leaders in the Microsoft,
Amazon, Google space, Bill Gates, Elon Musk.
We're there to kind of suggest that America starts to produce
some regulatory wrappers around the A I industry so it doesn't
fall into the wrong hands and that may have an effect on
competition. So I think that's important to
play out. That would probably come up in
our slot analysis in terms of threats, not threats from
competitors necessary, but threats from regulation in terms
of not being what that not sure what that looks like, but yes,
but in terms of rivalry around competitions, it still remains
very high. And even though these players
have gone to Congress together, they're all competing with one
another, not all friends. Right.
So what did you get? We just applied the five forces
model to Chat GB T and I'll just remind you just what those areas
were and where I thought chat GB T landed and then you can tell
me or you can write in if you like or you can think about
whether or not you got different things.
So in terms of the threat of new entrants, I would say that it's
low to moderate when it comes to Chat GB T in terms of its core
business, in terms of its the size of Chat GB T, the fact that
it had its early, kind of early advantage by getting into the
market early and has also got a huge amount of information and
that takes time to collect and process.
In terms of bargaining power of supplies #2, I think that the
supplies of Chip GB T is kind of low.
A Chip GB T is basically deciding what sources it wants
to connect to and it might create partnerships with them.
In terms of the bargaining power of buyers, I think it's probably
moderate to high as in the consumer, the businesses and and
ourselves. I think there are plenty of
other models that you could use that are specific to a use case
that you're trying to solve. And so Chat GB T isn't
necessarily where you would want to go as your preference right
now that these competitors have come to the market.
Unless you wanted advanced capabilities in terms of threat
of substitutes, I think the threat is moderate to high.
I think again I think there are alternatives you could use and
in this space and this is this is going to, it's moderate now
and it's going to get higher as people start to generate more
advancement And because people are investing in anything with
the word AI on the moment ChatGPT is going to see their
market share diminish #5. The rivalry among competitors
I'd say is high, it's not just medium, it is high or super
high. And the Microsoft Google space,
Chet GBT, Amazon are all competing to have the best large
language model and to have the best advanced language model.
So Chet GBT has a bit of a problem in regards to that.
The other thing that there has been some suggestions that
Microsoft, Google, Amazon can for example sell II at its cost
price, whereas ChatGPT it's that's its only source of income
and it needs to potentially needs more money than it's
getting at the moment and it's not really in a profitable
position. So that's my 5 Forces porters 5
force model for Jet GBT. I hope you learned something
today. I hope you've learned how SWOT
analysis and five forces can work together.
We're gonna be covering off a couple more strategic and
enterprise business analysis techniques in the coming weeks
and then we'll move on to the next step.
I will see you next time.