Dynamic Business: Artificial Intelligence — in the right frame of mind

Industry Economist Paul Clark.

Firms that embed Artificial Intelligence (AI) will generate productivity and efficiency gains that provide them a competitive edge.

AI will change the nature of work, changing the way labour is used and how workers are developed. Firms that most effectively incorporate AI are likely to see improved productivity, increased competitiveness, and be more agile.

To coin a phrase from a well-known TV advertisement, AI is everywhere. It’s in our smartphones, digital voice assistants, smart home devices and navigation applications. AI powers up our social media interactions, our streaming services, and the games we play on consoles.

It’s also found in every sector of the economy, from agriculture and manufacturing to services, and everywhere in between.

It’s used in healthcare to better diagnose illness, delivering treatment plans and medicines formulated to the needs of individual patients; in the police, where facial recognition is controversially being used to prevent crime, and in education, where AI has given rise to new teaching methods.

According to McKinsey’s global survey, AI adoption rates by business have more than doubled between 2017 to 2022, with 50 per cent of businesses now using AI in at least one area of their business.

At the same time, the average number of AI components that these businesses use, such as natural language processing, computer vision and deep learning, has more than doubled to 3.8 over the same period. That figure will have increased in 2023 with ChatGPT having grown to 100 million users within a few short months.

Firms in New Zealand haven’t kept pace. Indeed, most small firms are doing very little in the AI space, other than perhaps dabbling in applications like ChatGPT, BARD and DALL-E. Even larger firms, who are far more likely to adopt AI, tend to limit investments to specific applications.

There are, however, a small minority of firms, for whom AI is more instinctive. Tech savvy, mostly small, these firms have put algorithms and big data at the core of their operations. For them, decision making is a science with AI determining what is produced, how it is produced, for which customer and at what price.

The hesitancy to adopt AI is surprising given its potential benefits. Simply put, AI makes firms more competitive and that usually means more profits.

It does this by reducing costs, though improved supply chain and operational efficiencies; think end-to-end visibility; predictive maintenance and replacing people in repetitive tasks who can then be moved onto more productive endeavours; and by boosting revenues from newly identified markets and from products and services that have been hyper-personalised to the needs of the customer.

So, what’s the hold-up? Some of the hesitancy to adopt might have to do with the fact that most firms in New Zealand are operationally focused, are time-poor and don’t have the wherewithal or digital smarts to get into AI.

It is also true that some have an inbuilt resistance to change.

Discarding tried and trusted practices requires a big change in mindset. That is even a bigger challenge when business owners don’t fully understand the potential of AI or where there is reluctance from workers who feel that their livelihoods are being threatened.

There is also the issue of when to invest, given how quickly AI is moving and the risks of obsolescence. And that is before we get to the technical challenge of integrating AI within the existing data and systems architecture. The cost of incorporating AI can also be prohibitive, especially for sophisticated customised solutions.

Lastly, it can take time for AI to bed in and deliver the value needed to push returns on investment above the hurdle rate.

Getting over these obstacles is not easy. Having an AI strategy in place that clarifies how AI contributes to a firm’s long strategic goals will be helpful.

It is also important to acknowledge that AI is not infallible and put in place governance frameworks, and protection measures to address privacy issues and potential for bias.

Demystifying what AI is through education is key. Emphasising the collaborative nature of AI-human partnerships goes some way to alleviating concerns that workers have.

Firms that adopt AI need to address workforce impacts through reskilling and continuous learning so that employees can work alongside AI systems. In the future, EQ will be just as important as IQ.

Businesses also need to invest in integration tools. Most of that will be software, which makes it easier to integrate AI into existing systems and data infrastructure. Partnering with external parties that have the requisite skills will also make the transition a lot easier.

Training staff and fostering a culture of learning, innovation and collaboration is important, as is evaluating performance once integration has been completed.

As AI adoption increases overseas, the competitive benefits of AI become more widely acknowledged, and more powerful AI tools come to the fore, Kiwi firms are increasingly expected to look to AI to gain a competitive edge.

This in turn will spur on slower acting rivals to adopt AI to improve their ability to compete. That then sets off a virtuous AI investment cycle, which leads to AI being adopted across more and more end uses, resulting in an increase in AI maturity. That’s the theory at least.

In practice, many firms are cash-strapped. Unable to make substantive investment in AI, these businesses will continue to operate on much the same basis as they always have, losing competitiveness to those that are able to stay on the AI investment hamster wheel. Eventually they will fall by the wayside or be consumed by others seeking to add new competencies, skills, and capabilities to their existing repertoires.

However, the news isn’t all bad. For those able to keep pace a new dawn awaits.

AI will reduce barriers to entry and open the doors to new industries. A lot of these new entrants will be the same AI-centred firms referred to earlier. But they won’t be the only ones.

They will be joined by more established firms that have adopted AI and are now looking to pursue new opportunities. The net result is likely to be a blurring of the lines of distinction between industries.

AI is also likely to boost levels of industry rivalry by levelling up the competitive playing field.

Smaller firms that have embraced AI will now be able to compete on a more equal footing with larger rivals operating in the same industry.

Larger firms, especially those that are encumbered by silo structures, defined hierarchies, and legacy systems may struggle in this environment.

For larger firms, the emphasis should be on eliminating these constraints. That means removing silos, flattening hierarchies, and installing highly collaborative teams with end-to-end accountability for delivery. That though is likely to be both disruptive and traumatic.

An alternative approach might be to cherry pick and strategically implement AI in end uses where it can make the largest contribution to business goals. To that end, larger firms should leverage off their huge proprietary data sets and their ability to develop highly customised AI solutions.

It will be these abilities that determine how well they deliver products and services that can be hyper-personalised to the customer’s needs.

· Paul Clark is Industry Economist, Financial Markets, Westpac Institutional Bank.