AI and the future of strategic management

These are very interesting times. The advents of new technologies such as machine learning fuelled by big data is transforming customers and businesses and have resulted in many new opportunities for firms. In part, this has been driven by the potential to understand that changes in how consumers access and consume products or services which has undergone a drastic change from about a decade back.

Consider a few recent changes. News is now consumed digitally on devices such as cell phones, and so is shopping, dinner or entertainment. Using machine learning, managers now have the ability to acquire insights from terabytes of data that was hitherto unavailable to them. Machine learning fuelled by big data also promises the potential to transform decision-making by providing more intelligence to managers who were relying on gut feel, frameworks, or heuristics while making important decisions on behalf of their respective firms. Yet, despite these opportunities, several experts such as David Autor, an MIT economist, noted that the slew of technological changes and the fundamental technological shift will also likely increase market concentration by making a vast majority “winner take most” markets that are dominated by just a handful of a few superstar firms.

As information becomes the glue that links several markets and consumers, and as tools to accumulate and analyse information become ubiquitous, are managers and strategists keeping pace with these recent advances? How can one even explain the apparent shrinkage of competition when the opportunities to pursue new opportunities have increased? Which precise set of strategies would enable firms to achieve a sustainable competitive advantage? What can strategists and managers do to safeguard their fortresses and what should entrepreneurs do to breach them and become a superstar firm? Perhaps more importantly what can managers and strategists do to safeguard their tribe and prevent themselves from extinction?

At a first glance, some of the signs do indeed appear to be ominous. IBM, for instance, uses algorithms to evaluate potential targets for acquisition which is a corporate strategists’ function. Netflix uses predictive analytics to decide which types of TV programmes to produce, which is a product managers’ function. Venture capital firms such as Correlation Ventures might still source deals through its human connections, but it uses big data and sophisticated analytics to evaluate investment opportunities which is one of the most important decisions of a venture capitalist. Eventually, would machines replace managers? In the context of the dichotomy highlighted above, how will these advances influence competition or market concentration? Given that the scarcer a capability is, the more likely that it is a source of competitive advantage, strategists would argue that the recent growing ubiquity of technology may not necessarily align with the fact that a few superstar firms account for the lion’s share of the market in many industries. If technology-enabled decision-making does indeed become ubiquitous, why would it increase market concentration?

To the extent that the new technologies are not just not about automation, the adoption of these technologies may not by itself guarantee a competitive advantage. It would certainly by no means increase the dominance of a few superstar firms. As was true of many earlier technological breakthroughs such as electricity, or the Internet, a business might take several decades to utilise machine learning and big data to their fullest potential, because they might need to organise themselves or come up with newer business models to leverage them. To the extent that newer business models and other managerial capabilities are the keys to success, it is quite plausible that only a few superstar firms that possess these rare capabilities can somehow accentuate the value of these new technologies and reap disproportionately high rewards when they adopt these new technologies. Thus, the advent of these new technologies could increase both the extent of competition but also the market concentration of only a few superstar firms that somehow have these managerial capabilities.

What would that imply for the role of managers and strategists? First, if anything, the advent of new technologies and its ubiquity should increase the importance of strategic thinking, especially the ability to devise newer business models that substantially increase the return to the adoption of such technologies. Given that managers and strategists, in general, are the creators and implementers of new business models, their role in transforming organisations around these technologies will likely become more important. Simply put, paradoxically, the increasing ubiquity of technologies like machine learning will shift the source of competitive advantage from technology to other managerial and strategic capabilities that would increase the returns from their adoption. Second, because these data-driven algorithmic approaches to decision-making rely on decision-making rules for its effectiveness, managers and strategies would now need to a develop a better understanding of the cause and effect relationship between managerial decisions and outcomes. Surprisingly, although many may believe that mere robust correlations may be enough, a deeper understanding of the mechanisms and the boundary conditions would become crucial for coming up with robust rules on which algorithms are based in the first place that can form the basis for subsequent learning. Just in case any of you were wondering if your MBAs are still valuable, it will likely be even more valuable in the future!

The author is an associate professor of strategy at the Indian School of Business. Views expressed here are entirely personal.