AI Won’t Give You a New Sustainable Advantage

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AI Won’t Give You a New Sustainable Advantage

By Jay B. Barney and Martin Reeves | Harvard Business Review Magazine | September–October 2024 Issue

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History has shown that technological innovation can profoundly change how business is conducted. The steam engine in the 1700s, the electric motor in the 1800s, the personal computer in the 1970s—each transformed many sectors of the economy, unlocking enormous value in the process. But relatively few of these and other technologies went on to become direct sources of sustained competitive advantage for the companies that deployed them, precisely because their effects were so profound and so widespread that virtually every enterprise was compelled to adopt them. Moreover, in many cases they eliminated the advantages that incumbents had enjoyed, allowing new competitors to enter previously stable markets.

The latest technology with the potential to radically alter how business is conducted is, of course, generative artificial intelligence. Gen AI identifies patterns in data to create new content—including text, images, and sound—that closely mimics human creations. And because the results it creates are fed back into the datasets it analyzes, it can learn over time to create content that is more innovative, more valuable, and more humanlike. Understanding the strategic implications of this technology must encompass not just what gen AI can do now but also what it might be able to do in the future—because it’s getting “smarter” all the time.

There’s no doubt that gen AI will create a lot of value.  Smart early movers in sectors adopting gen AI have certainly captured some of this value in the short term. But relatively soon all surviving companies in those sectors will have applied gen AI, and it won’t be a source of competitive advantage for any one of them, even where its impact on business and business practices will probably be profound. In fact, it will be more likely to remove a competitive advantage than to confer one. But here’s a silver lining: If you already have a competitive advantage that rivals cannot replicate using AI, the technology may serve to amplify the value you derive from that advantage.

Gen AI is certainly making companies more efficient.  The trouble is that gen AI can deliver similar savings to any company that deploys it. Value is created but not captured—at least not for long.  The technology can also be used to drive innovation. In fact, empirical studies have shown that gen AI may actually be more adept than experienced professionals at conceiving new products and other valuable business ideas. It would seem to follow that introducing those products and ideas could be a source of sustained competitive advantage. But again, when most rivals also have access to gen AI, they can generate the same (or similar) innovative results.

Learning capabilities turn the very idea of gaining advantage from the technology upside down. Because gen AI uses constantly updated data, your “first mover” applications of the technology are absorbed in the data that is analyzed when your competitors apply gen AI as “late movers.” They benefit not only from their own efforts to advance but also from your prior efforts to do so.

It’s probably true that an organization could benefit from developing and applying a customized version of the technology that has been optimized for its industry or sector. That could be helpful, for example, when pattern recognition in a particular industry has some unique attributes or requires unusual data that doesn’t work well with general-purpose gen AI.  So the innovative company might gain an advantage from its special-purpose gen AI, but it would be temporary.

And even if your data is proprietary and your competitors have no functional equivalents, relying on data as a source of sustained competitive advantage creates another problem. As gen AI becomes more sophisticated and incorporates larger and more-diverse datasets in its analyses, it may be able to identify the kind of data a company must have to be making the kinds of decisions it is making. It may even simply imitate your strategy after observing the favorable results. Your competitors could copy your successes without access to the primary data on which your strategy was based.

Even though gen AI is likely to “change everything,” it is—either by itself or using data that isn’t functionally unique and can be inferred—unlikely to be a source of sustained competitive advantage for any one company that deploys it. But what if your organization has valuable capabilities and unique resources that cannot be replicated? In that case, applying gen AI to improve how you take advantage of those assets may generate business ideas that wouldn’t emerge when gen AI was applied to more-generic resources and capabilities. If your assets are rare and difficult for others to imitate, gen AI’s insights can be a source of sustained competitive advantage for you—assuming that you’re agile enough to act on them (itself a rare capability).

2 key takeaways from the article

1. History has shown that technological innovation can profoundly change how business is conducted. But relatively few technologies went on to become direct sources of sustained competitive advantage for the companies that deployed them, precisely because their effects were so profound and so widespread that virtually every enterprise was compelled to adopt them. Moreover, in many cases they eliminated the advantages that incumbents had enjoyed, allowing new competitors to enter previously stable markets.
2. There’s no doubt that gen AI will create a lot of value.  Smart early movers in sectors adopting gen AI have certainly captured some of this value in the short term. But relatively soon all surviving companies in those sectors will have applied gen AI, and it won’t be a source of competitive advantage for any one of them. In fact, it will be more likely to remove a competitive advantage than to confer one. But here’s a silver lining: If you already have a competitive advantage that rivals cannot replicate using AI, the technology may serve to amplify the value you derive from that advantage.

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Topics:  Strategy, Artificial Intelligence, Technology, Sustained Competitive Advantage