 Hello everyone. My name is Nikola. I'm a Program Manager at Weymo and today I will be talking about Porter's five forces Five forces are a framework defined by Michael Porter in the 80s that is aimed to help you analyze and look at a specific market and identify what are the key factors that regulate profitability and competition And there are five forces and we're going to look into them find some examples and then try to apply to a specific case study So let's dive in The first force that we're going to look at is the threats of new entrants Which basically helps you understand how easy or difficult is for new competitors to enter an industry and begin offering a product or service to consumers so When you think about it the key factors here are like the capital requirements the learning curve So how expensive is to get into this industry? How hard and how much do I need to learn before I am able to get in? What are the legal barriers? Are there like any specific economy or scale that need to be concerned off? how important is the brand and so on and The reason here that we look at this specific factor is that the lower the bar the more competitors will the more player My enter a specific sector and so the more competitive the specific sector becomes at the risk of Commoditize your product and which will eventually erode your margins and profits So some example here the upland manufacturing industry So Boeing or Airbus for example has very high capital requirements very steep learning curve Legal bar into getting a regulatory approval Which makes it fairly hard for new players to get in and that's why the cut the sector is actually an oligopoly And it's very low threats of new entrants on the opposite side if we take like coffee shops You know very low capital requirements compared to Boeing of course easy of learn in Learning the squeal the skills and how much it might take you to learn those The product differentiation is fairly low like low brand loyalty as well whether Starbucks Dunkin Donuts a local coffee shop This makes the sector Very easy for players to get in has like fairly high threats of new entrants and low barrier of entry When we move to our second force then we have supplier bargaining we'll see supplier bargaining power and Buyer bargaining power. They're the same type of concept but on different sides on the supplier side The idea is to see how much influence on cost availability and quality of inputs a specific supplier might have on the player operating in this industry, so The key factor that we want to look here is like how important volume is to supplier How much pull through there is from and customers and we'll see what it means whether there is a threat of forward integration So whether there is a risk of the supplier to actually forward integrated enter the specific sector We're looking at the switching cost from one supplier to another availability of substitute and so on and You know the bigger the supplier Leverage they might have on on a specific sector the higher the risk that you're going to soon a little But it'll lose your margins on your profit and they're going to move through the suppliers side Some example here, you know in the aerospace industry Rolls-Royce have a very strong Bargain and power over the manufacturer. That's why there is Low availability of substitutes not that many other companies provide the same product or Rolls-Royce do for Aviation high differentiation and high switching cost is very hard for Boeing to switch from Rolls-Royce to another Provider without having to reimagine a lot of their supply chain And also a high legal barrier to get regulatory approval, which makes them fairly strong in Being the one supplier that is kind of authorized In in providing some services The other side the construction industry Sorry, if you think about it like cement wood Any type of construction material has very low differentiation any type of cement will likely do very low switching cost, you know builders can kind of work the way around any type of Changes and so that makes it like very low bargain in power So when there is a deal that needs to be negotiated on the supply side, there's very low bargain in power towards the buyer side Now the other side of the spectrum is the buyers bargain in power So this means basically like how much power your end Consulate customers have over your product like how much they are able to influence your supply your margins and so on right and so a Few key factors here is like the importance of the volume like if I have very few customers And so they represent the majority of my market of my Output in my sales. They're gonna have a very strong impact on my ability to set price But if I have many customers, then I'm gonna be able to Not carry that much if one customer is not willing to pay a specific price And so that's one a way threat of backward integration is like What is the chances of like this specific customers to come into my space and like kind of get rid of my of my input on their side? And so some of the you know switching cost is always there buyers information like how aware are they of potential Alternatives how much they are aware of like the actual cost they could pay and so on There's some example here food retail industry. So like big food distributor like Walmart, you know I have a high purchase volume over the supply side. They're very low switching cost They can probably like, you know change the type of suppliers from one side to another and a lot of availability of alternatives You can buy fruit and meat from different type of producers. So they have a very high bargain in power Like seller wants to be in Walmart. So they have very strong So Walmart has a very strong bargain and power over them Of course, that doesn't always work like Coca-Cola, for example Has a very strong pull through from customers like customer wants to buy Coca-Cola So Walmart will need to negotiate in different terms with Coca-Cola because if Coca-Cola pulls out of Walmart Walmart will lose a material amount of customers The opposite side is like small retail industry like fashion boutiques, you know If you can think of like a small shop when they go and try to buy Products and items from like fashion manufacturer. They have very low purchase volume So they this products have very high impact on their ability to reach customers. They're very low market control So they will be unable to Deal to make like specific advantage advantageous deal with manufacturer Another force is the threat of substitute. So fourth force So what are the chances that there is another product or service that is Service that is going to provide the same type of Output that your product does at a comparable price, right? So key factors He is basically like availability of substitutes. How much do they cost? Do they perform at the same level? What are the switching cost? What is the willingness to switch? Right. So industry where there is a high risk of substitutes Offering like comparable or better performance at a lower similar price have lower long-term profit margins, right? Because there is a higher chance that customers will just kind of jump from one to another Some example Pfizer and the pharmaceutical pharmaceutical industry has very low sensitive to substitutes. So highly developed drugs are Regulated so it's unlikely that there is going to be something similar They have very product high product differentiation So they will tackle different type of Problems and there is fairly low willingness to substitutes because you're looking for a specific effect from a drug And because of that the threats of substitute is fairly low. Of course, we're not talking about like the very Come over the counter Drugs but more of like highly and research developed drugs the taxi industry on the other side There is very low switching cost like you can move from one cap to another every day You cap of course cap company If comparable price like they generally price very similarly Performances are generally similar you go from A to B product differentiation is low brand loyalty is low So you're fairly high sensitive to substitutes if there is another company coming in that offers like taxi services Chances of like customers moving to them. It's high if of course like the Price is comparable And then last one is the rivalry among existing competitors so the idea here is to try to estimate like how competitive and Strong might be the rivalry among existing players like how much are they gonna try to fight for the same part of the market versus? They're gonna go ahead and look for different Either different markets or try to Look at different segments on the market So one important element here is the growth rate of the market the stronger the growth rate So how much is it expanding the lower the chances that players will start competing amongst each other versus like just go and try to focus on specific segments Switching cost like if a player has very high switching cost then It's gonna be hard for them to say. Okay. I'm gonna just move to another market, right? So exit barriers and strategic stake like how important is this market to this player? And so if it becomes an existential threat like if a market if a player is gonna kind of Stop business if it lose that market, it's gonna fight very hard But if that specific player has another opportunity and can just move easily from one side to another It's not gonna fight as hard. Uh, and and so that kind of plays into Understanding like how strong is competition and you know, the stronger the competition means like price wars advertising battles And you need for continuous innovation investment in rd, which eventually will erode your ability to to have profits and margins So some example here like the fast food industry Very strong rivalry, right? Like so you have a high number of players Uh from like global players to local chains If low product diversity low switching cost Ease of product comparison like it's very easy to just like compare like different products and see which one you want High volume and low margins. So this means that like scale is very important So basically if you were a player in the fast food industry, you were trying to get as much As much of the market you can To grow your profits because your margins are as small But at the same time you're going to have a hard time into differentiating yourself from other players. And so you're going to have to Very hardly fight over segments Either through like price reduction, which will reduce your margins or like to different type of brand identity and marketing And so on if you take like other industry like electricity distribution is very highly regulated The buyer to enter is very high and once you're in it's kind of like You definitely definitely don't have that same type of pressure from new players coming in And so there is generally low rivalry through different entities in those sector So now we're going to try to look at these five forces that we analyzed. So again threats of new entrants supplier bargaining powers buyer bargaining powers risk of Alternative products and rivalry And we're going to try to apply this concept to the us mutual found industry and understand like what are the key factors that Drive competition and like profitability as well as like how appealing might be to enter this sector so Just as a definition a mutual found is an investment fund that pulls money from like many investors to purchase securities For securities, we mean like equities bonds commodities real estate or the financial instrument And you know the customers on on this industry are either large investors like pension funds Or retail investors like many small players individual entities, right? And so that's the customer side and the supply side instead is for the most part like financial data an analysis services, so like what are the kind of What's the material on services that the us mutual found has to purchase to operate So they need like financial data. They need it Some human management and of course like legal and compliance services So that's kind of the very rough level and high level the supply chain So when we think about threats of new entrants, right like then we can split into like what is problematic Like what is actually something that increase the threats of new entrants? And the things that comes to mind here is like technology advancement So rise of fintech and you know different type of products like etf robot visor user-friendly investment platform like robin hood are probably like pulling oxygen and customers from the us mutual found sector So someone might be more into so might might be Interested in to say like i'm just going to buy an etf instead of like a mutual found For different reasons that we look into so that increase the threats of new entrants Like entities that are going to come into the sector and kind of disrupt the the status quo On the other side on the beneficial is you really need a lot of capital to enter this market Your brand needs to be very strong to acquire customers and there is a very strong economy of scale and learning like it's not that easy to understand what works and whatnot And you need large scale to actually generate profits. You can't operate a very local level And so this reduced the threats of new entrants at the same time And the supplier bargain in power. It's very little problematic in my opinion You know Low threats of forward integration like it's unlikely that someone that provides it support or like You know financial that is going to enter and start providing us mutual mutual funds And so there is low concentration as well. There is no single group The old significant influence over mutual fund companies like the services are purchased from different entities the switching costs are not as high So as a player in the mutual fund industry, you don't have That much fear from suppliers And also pulled through from end customers, you know some you can consider like The so from the supply side the human management side like so basically your employees There are some brand manager fund managers that might be very attractive But overall you don't have that much of a power in their hands And on the buyer side You find a fairly similar situation with a small exception Like there is very low differentiation among products So that Increase a little bit of the buyer power But the information available for buyers is despite The amount being high very low in terms of like buyers being able to process those information and extract directional inputs And the switching cost for mutual for individual investors are not that high But for institutional clients, they're very high So pension found and in both cases there's a lot of research and transition and learning that are necessary to do that so Customers generally tend to stick around when you pick mutual fund And then of course like another thing that is important like the cost of the product is fairly low Like if you think about a mutual fund and a pension fund that is buying billions of dollars of securities The cost that a mutual fund mutual fund might charge them for is very minimal And so you are not that interested into Changing mutual fund for saving, you know as more percentage of that already small Cost compared to your total investment Threats of substitutes we touched this already Probably one of the most problematic areas. There's a lot of substitutes coming out, you know from etf CDs edge funds all type of products that offer similar performances at a comparable price, right? And Again, like what probably is limiting the Big shift from consumer side is the high switching cost That are needed to kind of move from one product to another And of course one one thing that is also worth mentioning is like this type of forces Variate also depending on other factors like economical and market trends like we've in a market where Interesters are very high then, you know cds becomes a much more appealing compared to mutual funds But in market with low interest then that's not has appealed so mutual funds becomes more appealing in their ability to generate profits and returns So forces are not Change and and my vary depending on like the geopolitical economical and market conditions Lastly the rivalry among existing competitors so There's a lot of firms operating in this industry and each of them has Very strategic stakes. It's very hard for a firm operating in the mutual fund to just change sectors and offer a different Product so there's a very strong investment in staying into this market, which means they'll fight very hard to to not be defeated and on top of that Is strong economic scale, which means that Players need and are looking to increase the market share so that they can increase profits Without increasing has much their cost because there's big scale So big players will try to fight to get much and more and more and more market share all the time The market is fairly mature has a slow growth, which also intensify competition Uh, products are fairly similar. Uh, you know segmentation is you know, split it between institutional segments and and like, um regional investment in the investors And on the beneficial side, you know, you can think about brand importance So firms like vanguard and fidelity have a strong brand recognition Which mitigate the rivalry to some extent because they don't need to fight them much Um, and also like the switching cost on the consumer side Makes it so that like fighting is not has productive because consumers will not change that easily So, uh, that kind of mitigate something that otherwise would be a much more intense aspect of the industry Just to have a recap, right? We talk about five forces Threats of new entrants supplier bargaining powers buyer powers threats of substitutes and industry rivalry And how these forces can be used to understand how without the dynamics and the powers that regulate a specific market in particularly with an eye of How competitive it is and what are the profit margins both in the short term and the long term? Uh, and then we try to apply this concept to the mutual fund industry Uh, where we see that while mature and like fairly competitive The mutual fund industry probably has still more, uh, attract it's more attractive than repellent from, um profitability and and and and And perspective, uh, you know key challenges here are probably like the ability to maintain a differentiated product between ETFs and other emerging, uh, services Um, so that was it. Uh, I hope you uh found this useful and please let me know in any comments if there's question I'll be the follow up