Porter’s Five Forces Analysis of OpenAI

Porter’s Five Forces Analysis of OpenAI

OpenAI is at the forefront of some of the most important developments in artificial intelligence. It is responsible for developing some of the largest AI models in the world and for introducing practical applications of natural language processing and large language models with the launch of services like ChatGPT and DALL-E. However, despite its apparent leadership, it is important to note that there are also other companies and even nonprofit organizations that are making significant contributions in the field and threatening the foothold of OpenAI. This article explores and analyzes the industry and competitive positions of the company using the Five Forces Framework of Michael E. Porter.

Analyzing and Understanding the Industry and Competitive Positions of OpenAI Using Porter’s Five Forces Framework

1. Industry or Competitive Rivalry

The industry involved in developing and deploying AI is new. However, based on the most recent trends in the past decade, it is shaped and driven by incumbents in the tech sector, academic institutions, prominent computer scientists and researchers, and deep-pocketed investors. Establishing an AI company can be capital-intensive.

Most of the costs associated with running an organization dedicated to developing and deploying AI applications come from the needed technological infrastructure or computational requirements and workforce capabilities. Tech resources and human resources are essential to developing specific AI algorithms and training AI models.

Prominent tech companies like Google, Meta, and Amazon have made significant investments in building the capabilities needed to launch AI-related products or solutions. Nevertheless, despite its capital intensiveness, other AI models and AI applications have been developed and deployed by smaller organizations and unaffiliated individuals.

The intensity of competitive rivalry can be considered a strong force for OpenAI because of the aforementioned. The company competes against other tech companies for tech resources and talent. Some of its technologies and products have now counterparts from bigger competitors and even seeming new market entrants.

Below are the factors that explain why the intensity of competitive rivalry is a strong force for OpenAI:

• High Level of Firm-to-Customer Concentration Ratio, Moderate Level of Capital Requirement, and Moderate Level of Entry Barriers

• High Importance of Branding and Brand Awareness Through Marketing, High Importance of Product Differentiation

• High Level of Competition for Talents in the Labor Market and High Importance of Research and Development or Tech Capabilities

2. Threat of Substitutes

Understanding the substitutes for AI models and specific end-use AI applications or products can be tricky. Consider an AI-powered chatbot like ChatGPT or Google Bard as an example. The traditional substitutes for this application include human-powered chat support services, search engines, and online knowledgebases and websites.

However, considering the fact that different companies use different AI algorithms and AI models, it can also be considered that these algorithms and models are substitutes for one another. For example, considering ChatGPT from OpenAI, the substitute would be Google Bard. Both are based on transformer algorithms but are based on different large language models.

The threat of substitutes is another strong force for OpenAI because of the presence of non-AI applications or processes and the growing availability of other AI algorithms and AI models that compete against its portfolio of technologies and products. The company deals with this threat through further research and development pursuits aimed at differentiation.

Below are the factors that explain why the threat of substitutes is a strong force for OpenAI:

• Moderate to High Level of Substitutes, Low Switching Costs, and High Availability of Market Information

• High Importance of Differentiation and High Propensity of Buyers or Users to Switch to Substitute Products

3. Threat of New Entrants

Remember that establishing and running an AI company can be capital-intensive because of the required technological infrastructure and workforce capabilities. Computational resources and human resources are important barriers to entry. Large tech companies have demonstrated that these barriers are negligible because of their existing resources.

Google has demonstrated that it can develop AI models and launch AI-based products. Nvidia Corporation has also ventured into developing and deploying foundational models for artificial intelligence. Meta has also been developing its AI models. These companies have access to capital requirements, tech infrastructure, and human resources.

It is also important to reiterate the fact that even smaller organizations and unaffiliated individuals can develop AI models and deploy specific AI applications. Computational resources can be outsourced while the knowledge requirement that typically comes from human resources or the workforce can be obtained from open-source communities.

Nevertheless, in consideration of the aforementioned, the threat of new entrants is a moderate force for OpenAI. Established companies can be considered as new entrants. Smaller organizations have demonstrated that the barriers to entry are doable. The company manages this force through continuous innovation, differentiation, and aggressive marketing.

Below are the factors that explain why the threat of new entrants is a moderate force for OpenAI:

• Moderate Level of Capital Requirement, High Relevance of Technological Capabilities, and High Importance of Talent

• High Importance of Brand Awareness and Marketing, Moderate Cost of Marketing Promotions, Low Cost of Product Distribution

• High Availability of Technological Requirements, High Access to Knowledge Requirements, and Moderate Cost of Knowledge Acquisition

4. Bargaining Power of Buyers

The fact that there are substitutes to OpenAI technologies and products, in addition to existing competitors, and the threat of new entrants, means that the bargaining power of buyers or customers is a strong force for the company. This prevents the company from increasing its prices and compels it to spend more on product development and marketing.

It is important to note that ChatGPT is a free AI chatbot with a subscription option that allows subscribers to access an advanced language model. DALL-E is also a free AI-powered image generator with paid options. The AI models of OpenAI can be used using an API license that charges users or customers on a metered pricing model.

There are alternatives to the aforementioned. Google Bard is free. Microsoft Bing Chat, which uses the same GPT large language model from OpenAI, is also free. Microsoft Image Generator is another free service that is based on DALL-E. There are also AI models from open-source communities that are accessible and available for free.

It is also worth mentioning that the customer base of companies like OpenAI is expansive and diverse. This specifically ranges from end-user individual customers to organizational customers like other AI or tech companies and business organizations that require AI models to run AI-based enterprise applications and solutions.

Below are the factors that explain why the bargaining power of buyers is a strong force for OpenAI:

• High Buyer-to-Firm Concentration Ratio, Moderate to High Level of Alternatives and Substitutes, and High Availability of Market Information

• High Level of Product Differentiation or Unique Value Propositions, High Sensitivity to Prices, Low Buyer Switching Cost

5. Bargaining Power of Suppliers

Remember that companies involved in developing and developing AI models and practical AI applications depend on technological infrastructures to build and even expand further their computational capabilities. Training and running AI models require computational prowess using graphics processors or GPUs, data processing units, and other accelerators.

The aforesaid hardware components are not only critical in AI. They are also used in data centers of tech companies and cloud computing services providers, in blockchain operations, and other consumer electronic products like personal computers and workstations. An AI company competes for supplies against other companies in different sectors and industries.

Data can also be considered a supply. AI companies use data obtained from various sources to train their artificial intelligence models. Most of these data are free and can be obtained from public repositories but there are also critical data that are held in private as part of compliance with privacy laws or because they form part of trade secrets.

Nevertheless, based on the aforementioned, the bargaining power of suppliers is a moderate to strong force for OpenAI. The company was forced to pay a premium for GPUs in 2019 due to the high demand. It also had to halt the training of AI models for healthcare applications in 2020 due to its failure to access required training data.

Below are the factors that explain why the bargaining power of suppliers is a moderate to strong force for OpenAI:

• Low Supplier-to-Firm Concentration Ratio, High Switching Cost for the Firm, and Low Switching Cost for the Supplier

• High Impact of Inputs on Operations, Low Availability of Alternatives and Substitutes, and Low Level of Vertical Integration

Posted in Articles, Business and Economics and tagged , , , .