When it comes to AI, businesses think ambitiously. Nearly 85% of executives believe AI will allow their company to obtain or sustain a competitive advantage in the marketplace. Contrastingly, just one in five companies have incorporated AI into their organization and less than 39% of companies have an AI strategy.

Exactly why is AI so disruptive to traditional business models and traditional notions of industry competition? A useful way to analyse the situation is by looking at Porter’s model of the five forces of industry competition and exploring how artificial intelligence is impacting each of the various forces.

According to Michael E. Porter, in one of his landmark books, titled Competitive Strategy, “In any industry, whether it is domestic or international or produces a product or a service, the rules of competition are embodied in five competitive forces: the entry of new competitors, the threat of substitutes, the bargaining power of buyers, the bargaining power of suppliers, and the rivalry among the existing competitors.”

Figure 1: Porter’s Five Forces

Let’s look at each of these five forces and examine the role and impact of AI:

The entry of new competitors

There’s no doubt that AI is changing the nature of competition. Today, it’s not just traditional industry competitors you need to worry about, but new entrants from outside your industry, equipped with new AI based business models and value propositions.

This is often tech giants and startups that have envisioned and built a new business model from the ground up, powered by a new platform ecosystem for AI. They’re leveraging the familiar social, mobile, analytics and cloud technologies, but are often adding in personas and context, intelligent automation, chatbots and the Internet of Things, to further enhance the value proposition of their platform.

Why can new entrants move in so easily? Digital business changes the rules by lowering the traditional barriers to entry. A digitally based business model requires far less capital and can bring large economies of scale for example. Read more about how AI Startups are creating disruptive competition here.

The threat of substitutes

The threat of substitutes is high in many industries since switching costs are low and buyer propensity to substitute is high. For example, In the taxi services, customers can easily switch from traditional models to the new digital app based taxi services, employing AI routines to create differential pricing and intelligent route mapping to increase margin as well as decrease price for the customers. Propensity to switch from the traditional model is high due to consumer wait times for taxis, lack of visibility into taxi location and so on.

In case of BPO industry, the advent of AI has been extremely disruptive, with their clients completely substituting their services with building in-house automation offerings and circumventing their need, sometimes completely. Read more in detail about the disruption of BPO/BPM by AI here.

The bargaining power of buyers

Perhaps the strongest of the five forces impacting industry competition is the bargaining power of buyers since the biggest driver of AI and digital business comes from the needs and expectations of consumers and customers themselves.

This bargaining power lays out a new set of expectations for the AI and digital customer experience and necessitates continual corporate innovation across business models, processes, operations, products and services.

For example, the most used instances of chatbots are through customer support, and now they are heading in the direction of changing the retail sector altogether. The expectations of the Millennials are directing the course of this new technology. This is why chatbots have the burden to exceed the expectations in the retail sector.

Also, in another example, in the customer facing marketing aspect, AI is causing circular rise in customer expectations as rise of expectations, mostly from millennials, has forced the companies to adopt an AI solution to the problem, which further has emboldened their expectations. Amazon, the company that wants to eat everyone’s lunch, is already driving a third of its business from a AI-powered function: its recommended purchases. Read more about how AI is accentuating customer experience to address rising expectations Here.

The bargaining power of suppliers

Suppliers can accelerate or slow down the adoption of a AI based business model based upon how it impacts their own situation. Those pursuing AI models themselves, such as the use of APIs to streamline their ability to form new partnerships and manage existing ones, may help accelerate your own model.

Those who are suppliers to the traditional models, and who question or are still determining their new role in the digital equivalent, may use their bargaining power to slow down or dispute the validity or legality of the new model.

Good examples are the legal and business issues surfacing around the digital-sharing economy (i.e. ride-sharing, room-sharing etc.) where suppliers and other constituents work to ensure the AI based business model and process innovations (like route optimization, or deep customer behaviour analysis using private data) still adhere to established rules, regulations, privacy, security and safety. This is a positive and needed development since, coupled with bargaining power of buyers, it can help to keep new models “honest” in terms of how they operate.

The rivalry among the existing competitors

A lot of organisations are in exploratory stages as they realise that their strategy and customer engagement needs to get smarter. The combination of optimism and fear that clients today have shows that for them it is a competitive necessity to adopt AI and digital technologies.

In 20 years, probably every job will be touched by AI. The technology is growing universally. WhatsApp and Facebook — everything is driven by AI. And what this means is that on the job front, there may be blood. Once AI, ML, and virtual and augmented reality go mainstream, these technologies will prove to be a huge job creator.

But currently, the most competitive space in AI adoption is in the implementation of chatbots across industries and functions. While we might see chatbots starting to appear through the likes of Facebook Messenger and WhatsApp platforms in the coming 12 months, and will be dedicating teams of engineers to train the platforms, rather than relying on the general public. Read more about the competitive atmosphere and underlying need to better customer experience using chatbot here.

How AI will transform Strategic Planning Process

How can managers — from the front lines to the C-suite — thrive in the age of AI? In many ways, the lack of understanding when it comes to AI is due to the variety of ways AI can be implemented as a part of strategic planning for a business. Different industries, or even different companies within the same industry, may use AI in different ways. Ping An, which employs 110 data scientists, has launched about 30 CEO-sponsored AI initiatives that support, in part, its vision – that technology will be the key driver to deliver top-line growth for the company in the years to come. Yet in sharp contrast, elsewhere in the insurance industry, other large companies’ AI initiatives are limited to experimenting with chatbots. Obviously, integrating AI is not going to be simple. There will be a massive learning curve for organizations before they’re able to start implementing AI effectively. But the core shift in strategic planning will happen in the following ways:

AI will take over almost all Administrative Tasks

According to an HBR report, managers across all levels spend more than half of their time on administrative coordination and control tasks. (For instance, a typical store manager or a lead nurse at a nursing home must constantly juggle shift schedules because of staff members’ illnesses, vacations, or sudden departures.) These are the very responsibilities that the same managers expect to see AI affecting the most. And they are correct: AI will automate many of these tasks.

Figure 2: Source –  HBR (How Artificial Intelligence Will Redefine Management)

For example, in case of report writing The Associated Press expanded its quarterly earnings reporting from approximately 300 stories to 4,400 with the help of AI-powered software robots. In doing so, technology freed up journalists to conduct more investigative and interpretive reporting.

Strategy Managers will focus more on Judgement-oriented Creative Thinking Work

The human factor, which AI still cannot permeate – the application of experience, expertise and a capacity to improvise, to critical business decisions and practices – need to be focused on by strategy managers. Many decisions require insight beyond what artificial intelligence can squeeze from data alone. Managers use their knowledge of organizational history and culture, as well as empathy and ethical reflection. Managers we surveyed have a sense of a shift in this direction and identify the creative thinking skills and experimentation, data analysis and interpretation, and strategy development as three of the four top new skills that will be required to succeed in the future. And since the potential of machine learning is the ability to help make decisions, the AI technology would be better placed as an assisting hand than administrative mind.

Think of AI not as Machines, but Colleagues

Managers who view AI as a kind of colleague will recognize that there’s no need to “race against a machine.” While human judgment is unlikely to be automated, intelligent machines can add enormously to this type of work, assisting in decision support and data-driven simulations as well as search and discovery activities. In fact, 78% of the surveyed managers believe that they will trust the advice of intelligent systems in making business decisions in the future.

Not only will AI augment managers’ work, but it will also enable managers to interact with intelligent machines in collegial ways, through conversation or other intuitive interfaces.

For example, Kensho Technologies, a provider of next-generation investment analytics, allows investment managers to ask investment-related questions in plain English, such as, “What sectors and industries perform best three months before and after a rate hike?” and get answers within minutes.

Design Thinking needs to be adopted both ways – Managers & AI

While managers’ own creative abilities are vital, perhaps even more important is their ability to harness others’ creativity. Manager-designers bring together diverse ideas into integrated, workable, and appealing solutions. Creative thinking and experimentation is a key skill area that managers need to learn to stay successful as AI increasingly takes over administrative work. ‘Collaborative Creativity’ is the operating word here.

But this doesn’t mean that design thinking necessarily need to become a forte exclusive to managers. Even though AI engines may not have reached radical thinking and improvisation as humans, AI algorithms should be viewed as cognitive tools capable of augmenting human capabilities and integrated into systems designed to go with the grain of human—and organizational—psychology. This calls for Divergence from More Powerful Intelligence To More Creative Intelligence in AI.

To make design thinking meaningful for consumers, companies can benefit from carefully selecting use cases and the information they feed into AI technologies. In determining which available data is likely to generate desired results, enterprises can start by focusing on their individual problems and business cases, create cognitive centres of excellence, adopt common platforms to digest and analyze data, enforce strong data governance practices, and crowdsource ideas from employees and customers alike. Read more about Design Thinking in AI here.

Create New Business Processes manifested from Augmented Working Strategy

Simply put, my recommendation is to adopt AI in order to automate administration and to augment but not replace human judgment. If the current shortage of analytical talent is any indication, organizations can ill afford to wait and see whether their managers are equipped to work alongside AI. This calls for change in business processes, and the way they are implemented itself. To navigate in an uncertain future, managers must explore early, and experiment with AI and apply their insights to the next cycle of experiments.

AI augmentation will drive the adoption of new key performance indicators. AI will bring new criteria for success: collaboration capabilities, information sharing, experimentation, learning and decision-making effectiveness, and the ability to reach beyond the organization for insights.

Accordingly, organizations need to develop training and recruitment strategies for creativity, collaboration, empathy, and judgment skills. Leaders should develop a diverse workforce and team of managers that balance experience with creative and social intelligence — each side complementing the other to support sound collective judgment.

Final Word

While oncoming AI disruptions in Management Principles and Strategic Planning space won’t arrive all at once, the pace of development is faster and the implications more far-reaching than most executives and managers realize. Those managers capable of assessing what the workforce of the future will look like can prepare themselves for the arrival of AI.