Porter’s Five Forces
The Five Forces of Competition Model
Threat of New Entrants
For online English education market:
- English language learning represents one of the most attractive and promising sectors in China’s education market. The rising acceptance level for online education, enhanced online service payment willingness and improvement in the online learning experience and effects drive the steady growth of the online education market, and make the online English language learning an attractive market.
- The aim of the government's industrial policy for the education industry generally is to encourage and regulate the development of the industry. There are no significant entry barriers.
- China’s education market is still very fragmented with even the largest companies in the sector still having a small market share. No fierce retaliation from the industry giants would be expected for the new entrants.
Huge market potential, loose regulatory environment, and existing competitors have not yet formed strong barriers to entry, all these factors have attracted many new entrants.
For AIEd market:
- In most cases, AI technology itself is not an entry barrier to the AIED market because it’s obtainable from the AI platforms, such as Google AI.
- The industry entry barrier to the AIEd market is a cumulative significant/sufficient amount of learning data. Big data helps the company in analyzing their existing user data and in drawing meaningful insights from the same.
- Based on the learning data, the competitor is able to integrate AI technologies with the language learning curriculum design and learning science, to develop a core competence.
- Competing in a new industry, AIEd market requires a firm to have sufficient financial resources and capital investment to deploy and develop AI technologies. Furthermore, a new entrant is unlikely to quickly generate the level of demand for its product that in turn would allow it to develop economies of scale.
Therefore, compared to the online language training market, there are certain entry barriers to AIEd market.
Threat of Substitute Products
Substitute products are these alternatives from outside the AIEd market that perform similarly or the same functions as a product that the industry produces. In our case, the substitute products are:
- Learning software (i.e. RosettaStone) or online learning programs(includes MOOCs): Learning softwares and online programs are both easy to use and inexpensive, but learners cannot get personalized learning experiences and timely feedback.
- English learning programs provided by the traditional English training institutions (EF or Wall Street English): Learners can get personal guidance and have opportunities to fully interact with the teachers. However, these programs are costly because of the limited supply of high-quality teachers.
- Online real-time one-on-one tutoring (i.e. VIPKID or 51talk): It is more convenient, and also cheaper than the offline one-on-one tutoring. However, this educational solution is still limited by the shortage of quality teachers, thus cannot be popularized.
Bargaining Power of Supplier
In the English training industry, suppliers are people or organizations that provide resources for training activities.
- Learners: As consumers, they are buyers of educational products. While as a learner, their learning process has produced a lot of learning data which is very essentials to an AIEd company. In this sense, they are also suppliers of AIEd competitors.
- Teachers: For cost saving purpose, most English training institutions are employing part-time college students who major in English in China. On the other hand, the market has a large demand for high-quality teachers and foreign teachers, and they are under-supplied. Comparing to their part-time peers, these teachers have strong bargaining power in the labour market. However, for AIEd market, the demand for quality teachers is relatively low.
- Vendors of curriculum: In China, most of English training institutions purchase the core curriculum from the providers such as Pearson and National Geographic Learning. They further develop their own online courses based on the purchased contents. These quality curriculums are widely recognized by parents and learners in China and have always been a scarce core educational resource that all educational companies compete for.
- AI technology suppliers: There are only a finite number of technological providers (Tencent and Baidu in China) are able to offer AI technologies, ranging from speech recognition, natural speech processing to speech synthesis. Training institutions do not have much ability to bargain with these internet giants.
Bargaining Power of Buyers
The major buyers in the English learning market are the learners themselves or their parents. The portion of central purchasing from the governments, schools, or corporates is relatively small. The highly substitutable and homogenized training contents provided by a large number of English training institutions has intensified market competition. As the learners have many choices and the switching cost is low, it gives the learners a strong bargaining power.
In some segments that is dominated by a few monopoly giants, such as the exam preparation training or the emerging AIEd, consumers have relatively few choices.
Rivalry among Competing Firms
China's online education industry is highly fragmented and has many competitors. The top 4 education companies (including top 2 listing education companies, New Oriental and TAL) share a market share of 6.5% with low market concentration. Relatively, AIEd is a new niche market and there are not many players in the market. The main competitors of Liulishuo are Baicizan and Shanbay in the AIEd and oral English segments.
With the public listing of Liulishuo and the gradual popularization of AI technology, more and more education companies are considering launching their own AI education products, and AIEd has gradually become the new "blue ocean". Once these companies with capital, technology and learning data join the competition, a big impact and realignment of the competitive landscape is expected.