Competitive Strategy | Empowering AI Leadership

Competitive Strategy Empowering AI Leadership

Introduction

No board can fulfil its oversight duties without considering artificial intelligence (AI) and its potential, when managed responsibly, to transform and disrupt strategy.

AI’s potential value is enormous. A study of 16 industries by Accenture found that AI has the capability to increase profitability rates by an average of 38% and add trillions of dollars in gross value by 2035.[1]

To reap that value, companies are starting to compete using AI by:

Disrupting industries with new business models: AI, combined with cloud and other digital technologies, is the force behind a new generation of competitors that rivals struggle to match. Digital giants using AI have already transformed how people get information, hail rides and make purchases. Digital upstarts are siphoning customers and profits by introducing business models built on new AI-enabled services and product innovation. For example, retail start-up Stitch Fix is pairing AI with fashion-loving personal consultants to provide a simple new way to shop. As AI evolves, more industries will be disrupted – think of the car industry, as autonomous vehicles become capable and common.[2]
Simultaneously raising and serving customer expectations: AI enables strategies based on speed, personalization and customer experiences that would otherwise not be possible. AI is helping mortgage lenders stand out in a crowded market by quickly analysing creditworthiness and approving loans. Streaming video providers and online retailers use AI to understand their customers’ interests and personalize recommendations. Companies that use AI to offer more attractive and trustworthy new offerings than competitors can improve profitability and even reverse their decline.[3]
Matching up with technically advanced ecosystem partners: Companies are competing to be desirable ecosystem partners by including AI capabilities in their services, connecting customers to niche companies with AI-enabled products and services, offering datasets for analysis and training machine-learning systems, and supporting open source and responsible AI initiatives that help all companies implement AI. Major technology companies are helping channel partners create their own AI offerings as well as providing AI-enabled products to their clients.[4]

But using AI responsibly is essential to long-term success. Scandals such as Cambridge Analytica have created a deepened resolve to hold management accountable for unethical uses of data and AI. By insisting that AI is fair, safe, reliable and secure, boards help companies build the trust needed to bond customers and partners.

This module will help board directors guide management in using AI to advance their company’s strategy in a responsible way. It provides directors with frameworks and questions to assess their own knowledge of AI and their company’s AI activities, independently evaluate management’s actions in response to AI’s competitive opportunities and challenges and prioritize the actions the board can take.

Directors must perform both an inward and outward evaluation: reviewing their own knowledge and their company’s activities, as well as appraising the use of AI beyond the walls of the boardroom and the company.

Examples

Media companies

Media companies increasingly use customer behaviour-pattern data to predict and recommend media content that customers will want to consume. This may be further optimized to meet a business imperative: What will enhance the likelihood of subscription renewal rather than short-term usage? For example, Netflix reduced customer churn by several percentage points using machine learning to provide personalized video recommendations – which helps provide significant competitive advantage against traditional forms of TV consumption.[5]

Stitch Fix

Stitch Fix, a US-based online styling service, selects products for customers based on surveys, descriptions, feedback and order history over time using collaborative filtering and mixed-effects modelling. They analyse style trends, body measurements, customer feedback and preferences to assist human stylists as they identify suitable products for each customer.[6]

ZestFinance

ZestFinance helps lenders better predict credit risk and expand financing to borrowers who might not ordinarily qualify. The company enables lenders to analyse thousands of data points on an applicant and apply cutting-edge AI technology to arrive at a yes-or-no decision. The loans are typically small with high interest rates. ZestFinance is able to explain how it makes its loan decisions.[7]

Responsibilities

Understanding the AI landscape and AI’s role in competitive strategy is an emerging area of focus under the board’s responsibilities for strategy oversight.

The G20/OECD Principles of Corporate Governance, a set of recommended guidelines, provides a framework for understanding the board’s oversight responsibilities for AI.[8]

1

Board members should act on a fully informed basis, in good faith, with due diligence and care, and in the best interest of the company and the shareholders. (Principle VI.A)

When considering questions about the company’s competitive strategy, board members must make efforts in good faith to be fully informed about:

Management’s use and plans for applying AI in its competitive strategy, including anticipated benefits, progress in achieving those benefits, alignment with core values and ethical standards, and ameliorating possible internal and external risks associated with such a strategy
Its competitors’ use of AI, and the competitive threat to the organization
How AI is changing competition in its markets and industries
Management’s plans and actions for ensuring AI is implemented ethically and responsibly.

2

The board should fulfil certain key functions, including reviewing and guiding corporate strategy, major plans of action, risk-management policies and procedures, annual budgets and business plans; setting performance objectives; monitoring implementation and corporate performance; and overseeing major capital expenditures, acquisitions and divestitures. (Principle VI.D.1)

AI-related topics that boards should review and guide may include:

Management’s approach to using AI within the company’s business and overall competitive strategy
Whether management’s plans of action involving the use of AI are consistent with the company’s ethical standards or introduce new ethical risks
The alignment with, and performance of, the company’s current use of AI to advance its strategy
The major actions and expenditures planned for using AI, and their progress towards successful implementation
Management’s awareness, plans and actions for ameliorating the risks: 1) of using AI in the organization’s strategy; and 2) from competitors’ use of AI
Whether, and how, AI should be factored into performance objectives for management
Whether the company’s acquisitions are strengthening or affecting its ability to use AI to advance its strategy, and whether they introduce new risks
Whether management anticipates compliance with upcoming laws and regulations, and possible impacts on individuals’ rights, society and ethical values.

3

In order to fulfill their responsibilities, board members should have access to accurate, relevant and timely information. (Principle VI.F)

To ensure access to information required to oversee AI’s application to competitive strategy:

Board members should be able to obtain the information needed to fulfil their oversight responsibilities relating to AI.
Board members should have access, at no cost to them, to timely advice from qualified advisers.

The analysis in this section is based on general principles of corporate governance, including the G20/OECD Principles of Corporate Governance, 2015. It does not constitute legal advice and is not intended to address the specific legal requirements of any jurisdiction or regulatory regime. Boards are encouraged to consult with their legal advisers in determining how best to apply the principles discussed in this module to their company.

Oversight

This section includes three tools to help directors oversee management’s competitive AI strategy.

The knowledge assessment tool helps board members rate whether they possess, or have access to, the knowledge required to independently judge management’s knowledge and leadership on AI and competitive strategy.

View Appendix 1 for the knowledge assessment tool here

The performance review tool consists of questions boards can ask management about their knowledge of AI and competitive strategy, and the progress and performance of their actions. It offers the SCEPTIC framework to help directors assess the answers they receive.

View Appendix 2 for the performance review tool here

The guidance tool offers possible suggestions for further action in an “if, then” format.

View Appendix 3 for the guidance tool here

Agenda

The 5A framework will help directors set the agenda for initial meetings, prepare for discussions and anticipate follow-ups.

Attention: Establish why AI is important for the company to retain industry leadership or remain competitive. Focus on industry-disrupting opportunities, emerging business models and competitors, and risks and ethics issues that could affect stock valuation, profitability and future growth. Gather information on activities by incumbent and emerging competitors, changing customer expectations and challenges to existing business models.
Alignment: Build the case for why AI warrants board attention. The Responsibility section explains why AI falls under the board’s oversight role.
Allies: Identify fellow board members, executives, internal experts and trusted partners who can credibly back the importance of AI, identify and overcome possible objections from other board members, and share ways to gain backing from undecided directors and executives. In addition to legal and technology heads, executives with competitive strategy formation roles such as the chief strategy officer and chief marketing officer can be potent allies.
Action: Think ahead about the desired outcomes from the board discussion. Initial discussions may lead to establishing a flow of information required to provide independent oversight or identifying issues that require action by management. Later meetings could focus on the progress of strategic AI initiatives, what has been achieved and metrics of success.
Assignment: Consider whether AI and competitive strategy should be discussed by the entire board or by a board committee such as the strategy or technology committees.

Ways to broaden the board’s mindset

Consider how using AI ethically and responsibly can advance strategy and minimize risk.
Emphasize reimagining the future over referencing the past.
Ask what we learned as well as how we can win.
Investigate and discuss potential pilots.
Create half- or full-day strategic workshops for board members.
Seek competitive signals from multidisciplinary teams, customers and employees and other external people.

Resources

(All links as of 23/7/19)

Books

Anastassia Lauterbach and Andrea Bonime-Blanc, The Artificial Intelligence Imperative: A Practical Roadmap for Business (Praeger, 2018).
Erik Brynjolfsson and Andrew McAfee, The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies (WW Norton and Company, 2014).
Kai-Fu Lee, AI Superpowers: China, Silicon Valley, and the New World Order (Houghton Mifflin, 2018).
Larry Downes and Paul Nunes, Big Bang Disruption: Strategy in the Age of Devastating Innovation (Portfolio/Penguin, 2014).

Reports and articles

Mark Purdy and Paul Daugherty, “How AI Boosts Industry Profits and Innovation”, Accenture 2017.
Michael Chui, James Manyika et al., “Notes from the AI Frontier: Applications and Value of Deep Learning”, McKinsey Global Institute, 2018.
Sam Ransbotham, David Kiron et al., “Reshaping Business with Artificial Intelligence: Closing the Gap Between Ambition and Action”, MIT Sloan Management Review in collaboration with Boston Consulting Group, 2017.

Executive education programmes

IESE, “Artificial Intelligence for Executives”, Barcelona, Spain.
University of California, Berkeley, “Artificial Intelligence Unlocked”, Berkeley, California.

Endnotes

(All links as of 23/7/19)

[1] Mark Purdy and Paul Daugherty, “How AI Boosts Industry Profits and Innovation”, Accenture, 2017.
[2] Paul R. Daugherty and H. James Wilson, Human + Machine: Reimagining Work in the Age of AI, Harvard Business School Press, 2018.
[3] Ibid.
[4] Examples include Microsoft, Fujitsu, and the Partnership for AI.
[5] Carlos A. Gomez-Uribe and Neil Hunt, “The Netflix Recommender System: Algorithms, Business Value and Innovation”, ACM Transactions on Management Information Systems, Volume 6, Issue 4, January 2016.
[6] Daugherty and Wilson, ibid.; Sharon Gaudin, “At Stitch Fix, Data Scientists and AI Become Personal Stylists”, Computerworld, 6 May, 2016.
[7] Daugherty and Wilson, Ibid.
[8] G20/OECD Principles of Corporate Governance, 2015.

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