The potential of “big data” and “artificial intelligence” to revolutionize business is routinely hailed by everyone from entrepreneurs to executives at established public companies. Many of these claims have elicited increasing skepticism from the public.
A provocative new book by two Harvard Business School professors, however, argues that the transformational effect of “the Age of A.I.,” if anything, has been underappreciated.
In “Competing in the Age of AI: Strategy and Leadership When Algorithms and Networks Run the World,” Marco Iansiti and Karim R. Lakhani suggest that the current era has been far more revolutionary than the Industrial Revolution.
The benefits that arose from mass production and specialization during that earlier period were constrained by two key factors, they argue.
First, the advantages of size are subject to practical limitations. Growth at traditional organizations eventually hits a point beyond which the firm will “suffer from diseconomies of scale, scope and learning.” By contrast, “algorithm-driven operating models” of the A.I. economy are “almost infinitely scalable.” Indeed, the “self-reinforcing loops” of network and learning effects that digital environments facilitate can actually accelerate returns with scale. They argue that the resulting economic impact is “many times as great” as the Industrial Revolution, leading to a “winner-take-all world.”
Second, while the efficiencies of the Industrial Revolution relied on the benefits of vertical specialization, the A.I. era thrives on breaking down what Mr. Iansiti and Mr. Lakhani view as now anachronistic silos. According to them, A.I. cuts horizontally across the organization, “fundamentally changing the core of the company by building a data-centric operating architecture.” As a result, “competitive advantage is shifting away from vertical capabilities toward universal capabilities in data sourcing, processing, analytics and algorithm development,” leading in their view “to the gradual demise of traditional specialization.”
The authors analyzed the A.I. capabilities of hundreds of firms, and some of the best parts of “Competing in the Age of AI” are those case studies. The discussion of Satya Nadella’s turnaround of Microsoft is particularly revealing. But their sweeping conclusions often feel overblown and sometimes inconsistent.
How is one to reconcile their argument that our economy is increasingly dominated by “a small number of digital superpowers” with the assertion that “the Age of AI has possibly created the greatest entrepreneurial opportunity in the history of civilization”? And the authors use Amazon as the poster child of a company for which “almost every human interaction is removed from the actual critical path in service delivery.” But that feels like a stretch given the company’s roughly 600,000 employees.
The use of software is not new. The core algorithms that underlie much of what Mr. Iansiti and Mr. Lakhani call artificial intelligence have been around for decades. There is no question that the increased availability of computing power and data has further empowered these technologies. But even so, the benefits of network and learning effects in many cases are subject to the same diminishing returns — or even diseconomies of scale — as traditional business models. Once Uber or Lyft have attracted enough drivers in a city to deliver a car in three minutes, there is no incremental benefit to attracting more drivers. And over the years, many social networks have collapsed because they attract too many of the wrong kind of members.
A more balanced view of the effect of the explosion of data and connections generated by the digital networks can be found in “The Business of Platforms: Strategy in the Age of Digital Competition, Innovation, and Power.” Michael A. Cusumano, Annabelle Gawer and David B. Yoffie — three business professors — examine a broad range of factors that impede most markets from becoming winner-take-all.
They argue that “digital technologies have been creating more opportunities across the board for network effects” and other valuable attributes not typically available to conventional businesses. But the overall effect varies greatly. That is because advances in digital technology have significantly lowered “the initial cost of market entry” and have made switching from one platform to another much easier. As a result, the digital revolution has “both lowered as well as raised entry barriers into many industries.” Thoughtful strategic analysis, in other words, requires an assessment of the net impact of these competing influences.
Despite their differences in perspective, both sets of professors share similar concerns regarding the ethical and regulatory implications of those digital platforms that come to dominate markets. “Competing in the Age of AI” suggests “collaborative structures and approaches” to regulation while “The Business of Platforms” emphasizes the need for “pre-emptive” self-regulation and curation. At least implicitly, both books suggest that the current crop of leaders has fallen short in their efforts to achieve growth without abusing market power. As a result, “a new kind of managerial wisdom” will be required to realize the full promise of this new technology.
“We need to choose a next generation of leaders,” the otherwise mild-mannered “Business of Platforms” concludes in reference to both corporate executives and politicians, “with a better understanding of how platforms and digital technologies can impact society and the global economy.”
Jonathan A. Knee is professor of professional practice at Columbia Business School and a senior adviser at Evercore. His latest book is “Class Clowns: How the Smartest Investors Lost Billions in Education.”