The AI Revolution

Here are just 3 examples of what I saw on social media last week:

–"RIP product designers."
–"This AI side hustle makes 1,579$/day."
–"That's going to replace software engineers."

And that's more or less the same drumbeat for the last 18 months.

Given the buzz on the web, the AI revolution should be in full swing. And yet, for most enterprise customers I talk to, AI adoption remains a challenge and shows a very different dynamic.

Today, let's check the pulse of the AI revolution.

When ChatGPT launched in late 2022, it felt like AI development suddenly accelerated at an unimaginable pace. GPT-4's arrival in March 2023 set expectations sky-high for what was to come.

What Should Have Happened

Many anticipated that even more powerful models would quickly emerge, AI development would become unstoppable (anyone still remember the big call to pause AI development?), and AI would rapidly transform every industry.

The hype created an atmosphere of both excitement and fear, with many feeling that we were on the cusp of a transformation we couldn't control.

But the reality of AI's impact has been quite different from these lofty expectations. The gap between the AI revolution we were promised and the one that's actually unfolding is significant - and understanding this gap is crucial for navigating the true AI landscape.

What’s Happening Right Now Instead

The reality of AI's impact has diverged significantly from the hyped expectations:

1. Adoption Paradox: AI adoption in enterprises has surged from 33% in 2023 to 65% in 2024 (McKinsey). However, only 8% of companies have adopted AI in more than 5 business functions.

2. Prototype Trap: Many companies are still in the experimentation phase. A lot of projects are caught in the 80% trap, struggling to scale use cases to production.

3. Trough of Disillusionment: High-profile AI failures, like McDonald's recent chatbot fail, have led to growing skepticism and, in some cases, budget cuts for AI initiatives. 

These challenges stem from several factors:

• LLMs are hitting a plateau, with marginal improvements despite massive investments.

• Organizations lack AI maturity, facing both technical and non-technical, especially cultural, hurdles.

• Regulation is already impacting implementation, especially in regions like the EU.

• AI progress is hard to measure, making it difficult to justify large-scale investments.

Despite these challenges, some high-profile case studies like Moderna or Klarna are publicly celebrating their AI success, while most others are making rather incremental progress behind closed doors.

The AI revolution hasn't fizzled out - it's just taking a different shape than expected. Instead of a sudden, disruptive upheaval, most industries are seeing a more gradual, subtle, but noticeable business transformation. This also highlights the importance of focusing on practical, achievable forms of AI adoption rather than getting caught up in overhyped promises by big tech.

What’s Likely To Happen Next

Based on these observations, I expect the immediate near future of the AI revolution to focus on two key areas:

1. Process Improvements: AI will augment repetitive and complex tasks, creating "cyborgs" and "centaurs".

2. Product Innovations: AI will enable completely new experiences and products, driving a whole wave of innovation.

Both of these areas will lead to an increased competitiveness over time, which - depending on the industry - might be drastically and completely reshape the landscape or more subtle, giving slight advantages over others.

Let’s take a closer look at that:

AI's Impact On Your Competitiveness

To understand the impact of AI on competitive dynamics, let's revisit Porter's classic Five Forces framework, which is an excellent lens through which to examine these changes:

1. Threat of New Entrants

AI makes it both easier and harder for competitors to enter the market.

On the easy side, GPT-4 & Co. as well as open source options are available to everyone, helping new companies compete with established players.

On the hard side, some industries require specialized data and skilled people to get good AI results, which can make it difficult for new companies to launch.

Pay close attention to whether you're in an industry with a high or low barrier to entry for new AI-first entrants.

2. Threat of Substitutes

AI is enabling entirely new categories of substitutes.

From AI-generated content competing with human creators to virtual assistants replacing certain service roles, the landscape of potential substitutes is expanding rapidly.

As John Rush rightly pointed out on X, this will wipe out the middlemen in many industries:

If your company is currently in a similar "middleman" position, you're most likely to be disrupted by AI.

3. Bargaining Power of Suppliers

When a company becomes the main provider of a crucial AI service, it will greatly impact supplier power.

Imagine a startup that creates an AI system to improve supply chain logistics. By using unique data, top AI experts, and special algorithms, this company can offer a service that is much better than traditional methods. As more businesses see the benefits, the startup quickly becomes the market leader. They have exclusive access to even more data, talent, and technology that make their service so effective, making it hard for new competitors to enter the market. With this strong market position, the AI company can control prices and charge higher rates because customers have few other options that offer the same performance. This gives the AI provider a lot of power, allowing them to take a large share of the value they create.

And if you now think that this sounds like a fantasy, then check the story of Celonis, Germany's most valuable AI startup.

As AI becomes central to competition across industries, managing the bargaining power of AI service providers will be a critical strategic challenge.

4. Bargaining Power of Buyers

AI-powered tools are making markets more transparent, giving buyers access to more information and alternatives. This shift could increase buyer power in many sectors. We've already seen this in the B2C space, with large comparison sites that not only find the cheapest insurance, hotel, etc., but also change it with the click of a button.

AI could do the same for the more complex B2B world (which is like B2C, but with 100+ more filters and search criteria) by understanding the different nuances of service offerings and finding the right providers.

Traditional purchasing workflows and RFP processes will be disrupted by AI, which will make much smarter and faster decisions about what to source, from where, and at what price.

If you're in a market where you can source from many different suppliers, make sure you're using AI as a strategic advantage. Likewise, if you're a supplier, make sure you're crafting your offerings in a way that sets you apart from your competitors.

5. Rivalry Among Existing Competitors

AI is intensifying competition by enabling more efficient operations, deeper customer insights, and faster innovation cycles.

Companies that successfully implement AI will gain significant advantages in operational efficiency and customer engagement, potentially leading to winner-takes-most dynamics in some markets.

However, the complexity and cost of AI may also drive increased collaboration among competitors, particularly in data sharing and AI development - partnerships for autonomous driving in the automotive industry are a good example for this.

The AI Advantage: A New Force

Given its impact on the existing forces, AI is a new force in itself. The ability to effectively leverage AI is becoming a critical determinant of competitive advantage, cutting across all other forces - the "AI advantage".

Companies must now consider their AI advantage as a core part of their strategic positioning, making sure to remain or regain competitiveness in their respective markets.

Instead of waiting for a big bang and big tech to figure it out, this means building the technical and non-technical readiness over time to effectively leverage the opportunities that new AI technology will bring.

Augmenting existing workflows with AI is an ideal strategy to enter this space and build competitive advantage.

Conclusion

Future business success will depend on your ability to understand the AI-driven changes in your industry, develop robust AI strategies, and effectively implement AI solutions, starting with augmenting the right workflows.

While the pace of change may not match the initial hype, the long-term impact of AI on competitive dynamics is likely to be profound and far-reaching.

Don't sit back and wait it out. Instead, take your first steps today and build your organizational readiness for tomorrow.

That's where the real AI revolution is happening.

Stay augmented to stay ahead.

See you next Friday,

Tobias