The essence of formulating a competitive strategy is relating a company to its environment. Today, few conversations about industry environment and market forces can continue very far without discussing data, its challenges, and the opportunities it presents. Almost every legal department and law firm has invested time and resources toward building strategies that seek to harness the value within data through cross-functional teams and advanced exploratory tools. For a firm to achieve its goals it must build the appropriate policies for implementing artificial intelligence (AI) and automation across the enterprise.
Though it appears straightforward, this is not such a simple task given the forces at play. After all, competition in an industry is rooted in its underlying economic structure and goes well beyond the behavior of current competitors. The state of competition in an industry depends on five basic competitive forces: the threat of new entrants; bargaining power of suppliers; bargaining power of buyers; rivalry among existing firms; and the threat of substitute products or services. In the AI world, there is a clear advantage to those who begin the process of introducing AI solutions to better understand their data. The longer AI initiatives are left on the ‘roadmap’ or unfinished, the more at risk a firm becomes from the forces listed above.
The acceleration of our innovation in recent times is a reaction to forces which have been underway for centuries, leading board rooms to a point where new strategies are required that rise to the challenge. The fourth industrial revolution (IR) is well underway, heralding a series of social, political, cultural, and economic upheavals that will unfold over the 21st century. The first IR (1760-1840) gave birth to the mechanization of industry through harnessing steam and waterpower. The impact was primarily felt by the agricultural community, turning an agrarian society into a consumer-based industrial society. Many people were no longer able to farm as their land was taken over by factories, requiring a mass reskilling into occupations like boiler makers, ironsmiths, mechanics and other roles which supported the machines which needed to be fabricated or repaired.
The second IR (1870-1914) witnessed the expansion of electricity, petroleum and steel. This was a phase of rapid standardization and industrialization, leading to the introduction of public transportation and airplanes. The introduction of these two things would transform the world forever. Steel would replace iron in the construction industry as a strong and cheaper alternative to the construction of rail lines, ships, skyscrapers and larger bridges. Michael Faraday started playing with the idea of electricity. Then, a few years later, Thomas Edison and Sir Joseph Swan perfected their design of a lightbulb which was practical for home use.
The third IR (1970-2000) can be summarized by globalization and the birth of the internet. Originating in the United States, Japan, and Europe, the third IR gave rise to new ways of communicating across and within national borders. This would dramatically change the nature of supply chains, social interaction, the financial services industry, connectivity, defense technologies, and finally give rise to ecommerce. The third IR made the world a smaller place and would create the foundations for the fourth IR through the standardized use and access to information technology and the subsequent explosive growth of data.
Now we are in a period of opportunity, but it must be noted that fortune favors the bold. There is some merit to the argument that its worth waiting to see how early adopters test the application of AI solutions across different functions, but not everyone is a large ship requiring significant room to adjust course. Waiting too long presents its share of problems, only in the age of AI these concerns can be magnified given the accelerated returns once a firm has done the hard work and created libraries of AI models. Early adopters with coherent competitive strategies will achieve differentiation by instantly providing valuable insights that would previously require teams of specialist knowledge workers. Would you hire a firm that built its human capital around sophisticated technology, or one that leveraged AI tools as an addition to the human knowledge worker? One option enables the talent at a firm, the other allocates AI a supporting role.
To hedge against this outcome, a firm can begin the process of defining their AI strategy in a coherent and sensible manner. For example, in coping with the five competitive forces, there are three potentially successful generic strategic approaches to outperforming other firms in an industry:
- Overall cost leadership
Overall cost leadership is achieved through a set of functional policies aimed at this basic objective. It requires aggressive construction of efficient-scale facilities; vigorous pursuit of cost reductions from experience; tight cost and overhead control; avoidance of margin customer accounts; cost minimization in areas like R&D, service, sales force, advertising and so on. A low-cost position defends the firm against powerful buyers because buyers can exert power only to drive down prices to the level of the next most efficient competitor. Achieving a low overall cost position often requires a high relative market share or other advantages, such as favorable access to raw materials. It may well require designing products for ease in manufacturing, maintaining a wide line of related products to spread costs, and serving all major customer groups in order to build volume.
Differentiation is achieved through creating something industry wide that is deemed to be unique. Approaches to differentiating can take many forms, including design or brand image, technology, special features, customer service, dealer network, or other dimensions. Differentiation, if achieved, is a viable strategy for earning above average returns in an industry because it creates a defensible position with the five competitive forces, albeit in a different way than cost leadership. Differentiation provides insulation against competitive rivalry because of brand loyalty by customers and resulting lower sensitivity to price. Achieving differentiation may sometimes preclude gaining high market share. It often requires a perception of exclusivity, which is incompatible with high market share.
Focus is about focusing on a particular buyer group, segment of the product line, or geographic market. The entire focus strategy is built around serving a particular target very well, and each functional policy is built with this in mind. The strategy rests on the premise that the firm can serve its narrow strategic target more effectively or efficiently than competitors who are competing more broadly. As a result, the firm achieves either differentiation from better meeting the needs of the target, or lower costs in serving this target, or both. Even though the focus strategy does not achieve low cost or differentiation from the perspective of the market, it does achieve one or both positions vis-à-vis its narrow market target.
Whichever path the executive team decides to pursue, the growing influence of the fourth IR has made the development of these strategies a time sensitive issue. Fundamentally, we are talking about harnessing useful information in order to make good decisions. Humanity has been operating on these terms ever since we understood the need to build a fire for food, warmth, and protection. The difference with the fourth IR compared to its predecessors is the speed of innovation itself. The very nature of how we organize as a society is changing beneath our feet as we venture into a new world of surveillance, virtual reality, and questions concerning the responsibility of the state to provide a universal basic income to sections of the workforce most at risk for automation. Competing in this world requires dedication and resources deployed firm wide. Without a commitment to investing in their future, firms risk being left in the past.