AI And The Economy: Business Models Will Change Rapidly

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 Artificial intelligence will impact pretty much all business activity in the economy. Some functions will be less impacted by the current crop of large language models, such as Chat GPT, Bard, and Claude, but even the lightly affected companies will change some of their operating procedures to take advantage of new capabilities.Biologists know there are always new species evolving and others going extinct. But sometimes there is an explosion of new species and extinctions. A change in vegetation, for example, changes which animals will thrive, which will die off, and which will evolve. Similarly, technological change leads to new businesses springing up and others dying off while the survivors adapt to the new conditions.“At the dawn of the automobile industry, two thousand firms were operating in the United States. Around 1 percent of them survived…. What is striking about the market system is not how few failures there are, but how ubiquitous failure is even in the most vibrant growth industries.” That description comes from Tim Harford’s excellent book, Adapt: Why Success Always Starts With Failure. I summarized his book in my Forbes review: “… we do not achieve success by using the smartest experts to design the best product, service, or system. Instead, success comes from a wide variety of efforts operating in a highly competitive environment. The process weeds out those approaches which do not work, leaving us with the most valuable method of achieving our aim.”AI may impact all of the critical decisions that business leaders must make, including what products to sell, whether to merge with other companies, make or buy inputs, and how much emphasis on innovation. Let’s explore how AI may impact these key strategic questions.What product to sell is the most basic business question, involving both physical goods as well as services and intellectual property. Leaders always feel the tension between sticking to one’s knitting and applying existing skills to markets that look similar. AI will improve productivity and the ability to learn about other markets. That will probably lead some companies to become more confident about expansion.However, the value of artificial intelligence in some applications depends on the quantity of data available to the models. Maybe the incumbent companies will use their internal data to clobber new competitors.The value of data may also lead to mergers. The company that does a larger volume of business can feed its AI models a richer diet of data, giving it an advantage over smaller competitors. Mergers may produce economies of scale, enabling larger companies to operate at lower costs. We see this in some industries. But diseconomies of scale also exist. They come from the cost of coordinating different parts of the company and aligning the incentives of local managers with corporate goals. The result of the tension between economies of scale and diseconomies of scale leads us to see only a few airplane manufacturers but plenty of independent restaurants. AI will likely shift the balance in some industries. We will see some areas where mergers work well for both companies and consumers and other cases where small companies out-compete big business.The make-or-buy decision is critical to most businesses, and AI may well change the practices that work best. On the service side, AI may lead businesses to bring in-house activities such as accounting, legal advice, and marketing. If that happens it will be difficult for the independent companies which have provided the services, and it will also change the whole ecosystem for the broader sector.Manufacturers see the make-or-buy decision with the components they need, and AI may also change that calculation.The approach to innovation differentiates many companies. Some earn a reputation for cutting-edge products or production methods, while others focus on small improvements to tried and true products.Within all of these dimensions of corporate strategy, there is some change. The pace is sometimes slow, but other times fast. With the rapid development of artificial intelligence, look for extremely rapid change. Some businesses will find a competitive advantage from the application of AI, and their competitors will have to adapt quickly or face extinction. Other companies will learn that what always worked in the past no longer works in a world of AI.Figuring out all of the fundamental business decisions described above will require testing, trials, and evaluations. And this testing will sometimes drive an old company—or a startup—out of business.In a world of rapid change in business processes, agility must be the watchword for corporate strategy. Although agility must include the use of artificial intelligence tools, the need will extend to all aspects of the company. For example, AI may lead to greater variation of product offerings, with each variation selling in smaller quantities. If this happens, then the entire supply chain must be ready to place smaller orders, for a greater variety of input parts. Similarly, functions such as sales and finance will have to be ready for this shift.I cannot tell which companies will survive, but I’m sure who will fail: a company with a leader who is absolutely certain about the best way forward in a world of AI.More By This Author:Banks Making Fewer Business Loans Because Of Recession Fears
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