Think - AT LONDON BUSINESS SCHOOL

AI: a new hope

COVID-19 is a systemic shock with deep impact, but there is hope: digital technology, and particularly AI, will underpin economic growth

Michael-Davies-1140x346

In 30 seconds:

 

  • In this new epoch, the businesses that thrive over the long-term - and in doing so drive economic recovery - will be those with the courage and capability to leverage digital technologies, and AI in particular
  • The digital innovation they deliver must also be empathetic, ethical and environmentally sensitive, embedded throughout the customer journey and product creation process to address the major societal challenges we face, rather than exacerbating them. The World Economic Forum has characterised this challenge as a need: “…for a fairer, more sustainable and more resilient future”.
  • This must go beyond compliance and palliatives that some tech titans are pursuing to win over customers and employees who are now looking to align their values with the products they buy and the work they do

Beyond the horrendous health calamity of the COVID-19 pandemic, its economic effects are analogous to the ecological effects of another cataclysm: the impact of the Chicxulub asteroid 65 million years ago.

The Chicxulub asteroid and its aftereffects exterminated three-quarters of all the plant and animal species on the planet, including all the non-avian dinosaurs whose scale had made them the dominant terrestrial animals for more than 100 million years.

Yet, this catastrophic event, known as the Cretaceous–Tertiary (K–T) mass extinction, also opened up many diverse new ecological opportunities on earth. It ushered in a new epoch of evolutionary innovation with rapid and radical diversification into new forms and species. Horses emerged on land, whales in the oceans, bats in the air and primates too, resulting in the rapid advancement of mammals, among whom ultimately modern humans, Homo Sapiens, rose to prominence.

After the K-T event, there was no going back for earth’s ecosystem, and there’s no going back for earth’s economy; we cannot return to ‘normal’ or even a ‘new normal’ following COVID-19’s impact.

The fundamental question that business leaders now face is: what do we do next? What is it going to take to not just survive in the medium-term, but to thrive in this new epoch over the long-term?

Post-pandemic demand: depressed, disparate and different

Overall, worldwide demand for goods and services is way down and will be for some time. In some sectors, including travel and retail, it is deeply depressed. Demand is also very different: unsurprisingly people are very concerned about keeping physically and mentally healthy and are embracing all sorts of digitally-enabled products and services, in particular for communication, delivery of food and other necessities, and for entertainment.

This diminished demand has triggered a significant supply-side shock; widespread downsizing and bankruptcies have dominated the business landscape over the past months as the after-effects of the pandemic and measures to stem the tide of reverberate upstream and downstream throughout complex global supply chains. The effects will likely be long-lasting. They are resulting in a massive reduction in the availability and reliability of work and hence workers’ incomes, their confidence, and their propensity to spend versus save.

Tragically, even as the health effects have been highly uneven, we have also seen the economic effects increase disparities among groups of workers, with lower income and minority workers hardest hit in terms of both health and economic outcomes. This has heightened the importance of confronting long-standing ethical, social and environmental challenges.

There is not now and will not be any time soon any ‘new normal’; rather in this new epoch there will be significant shifts in people’s preferences and behaviours and at least for the foreseeable future both faster rates of change and greater uncertainty.

COVID-19:  demonstrating the power of digital

The most striking, and most significant, way in which demand is very different has been the explosive surge in the adoption and usage of digital technologies and digitally‑enabled services, demonstrating their power and potential.

Even consumers who had long been digital laggards, averse to almost any new technology, have perforce adopted digital communications to stay connected with family and friends. Indeed, many now report that even as social distancing in the physical world weakens some connections, virtual connections have brought them closer to people who are really important in their lives.

“After the K-T event, there was no going back for earth’s ecosystem – and in a similar way, there’s no going back for earth’s economy”

We’ve seen a huge step change in digitally‑enabled delivery, of necessity for take-out from shuttered restaurants, but also for groceries for meals to cook at home and many other necessities. This shift has even extended to a boost in sales for meal-kit services., such as Gousto, hiring thousands of extra staff. Whether this is a sustainable long-term trend or not will now depend on the extent to which household spending is constrained by economic hardship and uncertainty; it will come down to the dynamics of discretionary spend rather than the demonstrated desirability of the service.

At the same time, the need to support working from home and social distancing for their workers’ safety forced even those born‑analogue businesses that were digital laggards to rapidly, if belatedly, accept and adopt the new ways of working that born‑digital businesses, built on smartphones and cloud services and AI and machine learning have long taken for granted.

Many of us who might not otherwise have been familiar with it have now seen the some of the possibilities of this new and better ways of working, giving us control over where and when we work, avoiding irksome commutes. This experience is rapidly reshaping the expectations of those fortunate enough to still have work, as most say that they would like to increase their time working from home.

As one commentator characterised it early in the pandemic, “…we’re seeing the most rapid organisational transformation in the history of the modern firm… [as in] a period of days almost any process that could be rapidly digitised has been virtualised[1]

More recently Satya Nadella of Microsoft put it in more pragmatic terms at the height of the pandemic: “We’ve seen two years’ worth of digital transformation in two months. From remote teamwork and learning, to sales and customer service, to critical cloud infrastructure and security—we are working alongside customers every day to help them adapt and stay open for business in a world of remote everything.”

Every born-digital business begins with its SaaS stack: Slack and Zoom and all the other tools that make their operations extraordinarily easy, efficient and flexible, outperforming the economies of scale enjoyed by even the most enormous established enterprises. These businesses build on these platforms to think of data as an asset, agile approaches as the way to get almost all work done, and pursue the very widespread application of AI to automate everything that can be automated, almost any routine task, and to augment human capabilities, in particular when it comes to enabling well-informed decision-making.

I’ve laid out in earlier writing here in Think@LBS how we should think of this new digitally-enabled ways of working as a technology itself, one that is fundamentally more productive and effective than its analogue or digital predecessors[2].

Indeed, most incumbents now find themselves encumbered rather than empowered by their investments in IT infrastructure. Digital disparities are proving to be corporate co‑morbidities for the established enterprises that have been digital laggards, combining with COVID‑19’s consequences to destine them to decline and demise, sooner rather than later.

Fortunately, on the flip side, this has enabled digital leaders, well-prepared for virtual operation, to respond quickly and effectively to this sudden shock and to way outperform their erstwhile peers.

Breakthrough innovations creating real value

Prior to the pandemic, many born-analogue businesses were already using digital technologies, and starting to explore the enormous potential of AI in particular to reduce costs through automation of routine and narrow tasks, albeit thus far mostly with limited impact[3]. Some businesses had gone further, recognising that digital tech and AI can be harnessed to create superlative customer experiences and to enable new ways of working, combining automation of many mundane tasks with augmentation of human capabilities.

In customer service, for example, AI‑enabled ‘bots’ and ‘digital humans’ make resolving routine requests extremely easy and efficient. This is particularly powerful when as it frees up resources it is complemented by augmentation of human capabilities that make complex customer interactions magical. AI can then help to create magical customer experiences when it makes all workers experts in the problem domain, enables them to be more empathetic to customers and empowers them to take action[4].

“This catastrophic event - …the … (K–T) mass extinction - opened up many diverse new ecological opportunities on earth, ushering in a new epoch of evolutionary innovation”

In the hospitality sector, Toast is a good example of a cloud-based company which has used a range of digital technologies to develop its original proposition – as a customer payments app for restaurants – to support its target market get back on their feet and reinvent their businesses after reopening in a world of social distancing and reduced diner density.

But the real power of digital technologies lies in harnessing them in novel breakthrough combinations that create significant new value for customers: addressing unmet needs; serving new groups of customers and building new business models. A few analogue-born businesses have recognised ., such as Schneider Electric and Philips Healthcare, building new business models in very traditional sectors.

This is the key to our recovery: accelerated innovation, but even more importantly, breakthrough innovations that can create real new value in conjunction with the energised entrepreneurship essential to build new businesses that grow rapidly and scale up to create lots of new work. Together, these can save us time and money, free us from the increasingly onerous constraints of the physical world and provide us with much-needed new work. But there is a caveat.

Unfortunate unintended consequences

Although these digital innovations are enormously powerful and crucial to our post‑pandemic prosperity, it is vital that we also recognise and acknowledge that, like almost any novel technology, they come encumbered with unintended consequences.

There are widespread – and legitimate – concerns about systemic vulnerability as a result of our growing digital dependency; as do we do more and more online that means more risk of vital information being compromised, destroyed, stolen or held to ransom. Digital platforms present their own particular set of challenges for civil life: susceptibility to manipulation and in particular malign influence, to dissemination of misinformation, and even incitement to violence and real harm to people in the real world.

At least in part because of these issues, anti-trust authorities on both sides of the Atlantic are currently contemplating action against the threats that they perceive are posed by the power of some of the tech titans.

Even as they make customers’ lives easier and better – or even in the context of COVID-19, just viable – many digitally-enabled products and services at the same time impose negative externalities, such as increased traffic congestion or noise, on others who don’t benefit directly.

From an economic point of view, there is the much-discussed threat to employment that digital innovation unintentionally unleashes from the faster failures of feeble businesses and at the same time from accelerated automation of routine and narrow tasks, made worse because the employment effects appear to be skewed against some of the most vulnerable segments of society.

The digital dilemma

The only way to resolve the above dilemma: harnessing digital technology for business success and to create new work and new jobs, while also mitigating the unintended consequences, is to ensure that digitally-enabled accelerated innovation and energised entrepreneurship is also at the same time empathetic, ethical and environmentally sensitive.

Customers are demonstrating more powerfully than ever that ethical, social and environmental concerns drive their choices about the products and services they buy.

“It’s already clear that this is a structural shift, with massive bankruptcies and supply-side shocks, as the after-effects echo upstream and downstream throughout complex global supply chains”

This should be motivation enough for businesses contemplating what to do now, and whether to invest in AI and other digital tech.

Mere compliance with regulatory constraints is not good enough and nor is the palliatives that many tech titans are pursuing. What is really needed is to make this pragmatic and quotidian and embed the values of empathy, humanity and ethical consideration in the heart of product and service development, throughout the complete product lifecycle and customer journey.

Next steps

What does this mean in terms of concrete next steps?

The next steps depend where you are on each of these two journeys, to harnessing the power of digital tech to create new value and evolving into a digital leader, and to embracing an empathetic, ethical and environmentally sensitive perspective and embedding it into your complete product life cycle and customer journey.

The fortunate few may be able to check off some, or even several of these steps, but even they should be raising their level of ambition and accelerating their pace towards these goals.

If you’re still at the beginning of this journey, depending on your sector and your specific business situation, consider a sharp pare back in investment in incremental innovation to free up resources to move more quickly.

 

Michael Davies is Guest Lecturer for Strategy and Entrepreneurship at London Business School and will teach on the School’s new Business of AI Executive Education programme, which will launch in October 2020.

AI: Where do I start?

Practical steps to using AI to create value in your business:

  1. Build the basic skills by partnering with external experts, hiring people with the relevant specialist expertise, and investing in training for existing employees on digital technologies and AI. In this way, move your organisation from unconscious incompetence to conscious incompetence to be in a place where they can make well-informed decisions about what initiatives to pursue and how to execute on them.
  2. Invest in a portfolio of business experiments that are focused on business opportunities or challenges that can deliver real value. These should be ‘real options’ where the cost of failure is not crippling rather than big bets. They should cover the range from lower risk incremental innovation such as cost reduction through automation to superior customer experience offerings and ways of working to encompass the pursuit of at least some breakthrough innovations that can create new value beyond the current core business.
  3. Capture the learning from your experiments and pilot initiatives. Iterate and double-down on those that went well, scaling up the level of investment and develop broader and deeper organisational competences and capabilities.
  4. Quickly pull the plug on those that fail once you know why.
  5. In this way, move your organisation to a point where using digital tech and AI becomes integral to every significant facet of the business, enabling agile approaches and lower-cost and faster operations, superlative customer experience, work practices that unleash creativity, and significant growth from serving new customers. For some this could even mean building digital platforms and participating or even leading digital ecosystems – reaching a level of organisational unconscious competence.
Empathetic, ethical and environmentally sensitive innovation: Where do I start?

There is a parallel path to embed the much-needed empathetic, ethical and environmental perspective throughout the product creation process and customer journey of these initiatives:

  1. As the first key step, assess the current situation, bringing to bear external stimulus and challenge, critically with a range of diverse perspectives, to illuminate the unintended consequences of your operations and in particular your innovation processes – are you transparent so that your customers (and other stakeholders) are well-informed about what your products do, is their information safe and secure, are you protecting their interests, such as their privacy, are you considering bias, in particular unconscious bias, have you evaluated the negative externalities that you may impose on people who are not your customers, and in particular the adverse consequences from an environmental perspective, and figured out how to mitigate and alleviate their impact.
  2. Determine what immediate or imminent interventions – fast fixes – are needed now, and how to put in place robust processes to avoid these failure modes in the future – which likely requires bringing to bear systems thinking as a discipline, to think about flows and feedback loops.
  3. In parallel with this, explore each of the key activities in product creation, from research through design decisions, and how to make sure that going forward this perspective is embedded, whether through checklists, or activities, or artefacts (such as ‘Tarot Cards’), and what metrics might be appropriate to track progress and provide feedback. This will require more than just embracing an empathetic perspective; rather it will require active engagement with others affected by your products and services and processes – and putting in place effective feedback loops to track how ethical engagement is evolving over time.
  4. Over time, this also becomes an integral part of the way that the business works, again reaching a level of unconscious competence.
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