The AI apocalypse is all around us. Research institutes, top corporates, educational institutions, and states around the world are competing and collaborating to get to the Holy Grail. AI startups are registering exponential growth and so is the VC funding for them.

While Russell Kirsch digitised the image of son Walden in 1957 through his invention of the world’s first digital scanner, it was not until 1975 that Steven Sasson’s Kodak digital camera arrived as one of the first-era digitisation products to make it big.

Breakthrough technologies lead to a world of rampant possibilities with exponential innovation. The world is witnessing an accelerating pace of change. While the first agricultural revolution and industrial revolution were spaced out by 8,000 years, the human genome was sequenced barely nine years after the arrival of the World Wide Web. Combine this with the exponential growth in computing power which is now progressing more each hour than it did in its entire first 90 years.

Once a product or service is digitised into ones and zeros, it can be copied and shared at near-zero marginal cost, thus making it get on to an exponential curve. Such disruptive growth leads to dematerialisation and demonetisationas it happened in the case of photographymaking it available to billions of users in a digital world.

In the experience economy, we have come a long way from extracting the humble coffee bean as a commodity, to making packaged coffee powder as a product, to delivering the service of a ready-made coffee, to a staged experience in a café. The progression of economic value has seen the competitive position shift from undifferentiated to differentiated while pricing has moved from base levels to premium. In money terms, this has meant a factor of 500x from 1-2 cents per cup for coffee beans to $2-$5 per cup in the experience economy.

In the modern-day hub economy, it is a cloud-first, mobile-first, and AI-first world where all industries are connected into a large ecosystem. Algorithms are leading to network effects in a platform economy which unleashes a lethal business model where the more the number of users, the more the value of the firm. Once the platform is successfully created, AI enables the scope of services offered to be increased dramatically.

AI explained

Human intelligence typically manifests itself across visual perception, audible cognition, decision-making, and translation between languages. When computer systems do that, it is called artificial intelligence. Examples of weak AI abound in search, maps, voice assistants, and chatbots. Strong AI refers to “machines that can think and act in a way that matches or surpasses human intelligence”, as Karim R. Lakhani, professor at Harvard Business School, puts it.

Through digital learning, AI can take the same data to enlarge the scope of services across several new market opportunities at zero marginal cost, thus leading to a digital domino effect. For example, Ant Financial is one firm that uses AI across all its operations.

An AI factory is at the heart of all modern enterprises. To the extent that they deal with data, algorithms, software, computation, all AI factories look the same whether it is for a fintech company or a social media company or a content streaming company.

AI has been successfully used today for eliminating pig insurance fraud in China, for creating art masterpieces, in robotic customer fulfilment centres around the world, and retail operations, besides others.

The business imperative

Peter F. Drucker, the father of management, said that business exists to create a customer. And Philip Kotler alluded to the customer being the king and customer value proposition being at the heart of marketing. Value creation, value capture, and value extraction are what the business model game is all about.

The operating model, on the other hand, concerns itself with scale, scope, and learning. Scale could come from volume, complexity, and number of customers. Think Honda. Scope refers to variety and range. Think Amazon. While learning is about R&D and constant improvement. Think P&G. These traditional operating performance drivers end up constraining the value of the firm and yield diminishing returns as the scale and scope increases. So as the numbers increase, the value of the traditional firm starts to drop.

In a digital world in an AI factory, scale, scope, and learning are all achieved through three drivers: greater access to more data, cheap and more computing power, and advanced algorithms. Digital operating models having near-zero marginal costs (remember baby Walden) generate network and learning effects, thereby improving the value of the firm further. Scale comes at zero marginal cost, think cloud computing. Scope comes with aggregation and modularity across markets, think Amazon. And learning is through constant innovation in an AI environment, think Facebook.

AI helps remove traditional constraints of scale, scope, and learning and so get formed behemoths like Google, Apple, Microsoft, Alibaba, and Tencent. In such a world, the more the users and usage, the more the firm’s value. All modern-day platforms like Apple, Amazon, Uber, Airbnb, Facebook, and Netflix enjoy disproportionately more valuations than legacy businesses for the same reason.

Digital connectivity leading to network evolution is resulting in hub formation. Perpetual disruption is leading to a volatile, uncertain, complex, and ambiguous world. There is no decoupling in a connected world, so everyone is impacted. Economic power is converging into a few key hubs. As AI can help create bias at scale, the issue of ethics, privacy, cybersecurity, and inclusiveness are becoming even larger.

In an algorithmic world, nothing is an original any more. AI-enabled digital transformation and platform revolution is disrupting industries everywhere. Adapting quickly to change to embrace digital and becoming an active part of the ecosystem is essential. Collaborative co-creation to unleash the power of networks and communities to drive digital transformation is the key.

Industrial Revolution 4.0 with the fusion of technologies across physical, digital, and biological spaces allows reinventing the firm around data, connectivity, analytics, and AI, which removes conventional limitations of scale, scope, and learning, thereby making strategy a whole new game.

AI combined with increased connectivity, computing, and data is the kosher game changer. Now is the right time to board the AI bus.

Views are personal. The author is Executive-in-Residence at ISB and at UCLA, and a global CEO coach and a C-Suite + Start-up advisor.

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