Whether IT can be the basis for competitive advantage is an old topic. On the one hand ERPs weren't because everyone could buy one and hire consultants to support implementation.
On the other hand internet was available to everyone. Any business could have built an e-commerce web site. And yet there's only 1 Amazon.
So is AI closer to ERP (more like CRM actually re: you excellent point about proprietary data) or the internet? So far I've seen several articles claiming AI/GenAI could redefine competitive advantage but all the examples were about operations effectiveness...
Agree. I'm sure GenAI will give some companies a temporary advantage - a bit like your ERP point. But persistent advantage is much more difficult (esp. in operational effectiveness, which is mostly about cost...).
I'm also thinking about this as we move through space-time.
From first principles, I find it hard to believe that a widely available tool can generate a competitive advantage.
I tend to think about things in terms of fixed costs and market gross profits.
Higher fixed costs (primarily R&D and distribution) relative to market gross profits and customer captivity dictates the number of players who can profitably compete. So high fixed costs => higher profits.
In industries where R&D are significant today but can be dramatically reduced (as perhaps Software), the industry should become more fragmented because it can now room more players. If variable costs gets reduced, it has the same effect. More competition, less profits. In these scenarios, I would expect LLMs to be the inverse of a competitive advantage.
Depending on distribution and customer captivity.
If you still need to pay for displaying adds, then the things you can automate is only a fraction of the cost of distribution. And arguably, the savings will be reallocated to more ads and sales regardless. This should paradoxically dampen profit pressures, because new players have higher barriers to overcome.
In cases where you get a new paradigm (10x better product), you'll also have 10x more competitors. So speed becomes the crucial part (as it always has been). In this sense, maybe the LLMs makes the impact of relative skill less pronounced. It's an enabler in one sense, and a flattener in another.
And if the costs are reduced, businesses that are not viable today may become viable. Many niches, with capped profit potential. In a sense, these pocket may have inherent competitive advantages simply due to the size of the profit pool. But should be equally available to incumbents and new players.
If distribution can be automated or eliminated, customer captivity remains an isolating mechanism for incumbent. Microsoft has huge network effects and distribution advantages, and may be primed to capture both cost savings and revenue uplifts.
So here's how I parse it:
- In some cases, it softens existing competitive advantages by reducing fixed costs, which increases competitive pressures
- In some cases (new paradigms), it may level the playing field compared to earlier generations
- In some cases (new viable businesses) it may be source of competitive advantage if you capture a niche with a small profit pool
- In some cases (incumbents with customer captivity) it can strengthens their position
Whether IT can be the basis for competitive advantage is an old topic. On the one hand ERPs weren't because everyone could buy one and hire consultants to support implementation.
On the other hand internet was available to everyone. Any business could have built an e-commerce web site. And yet there's only 1 Amazon.
So is AI closer to ERP (more like CRM actually re: you excellent point about proprietary data) or the internet? So far I've seen several articles claiming AI/GenAI could redefine competitive advantage but all the examples were about operations effectiveness...
Agree. I'm sure GenAI will give some companies a temporary advantage - a bit like your ERP point. But persistent advantage is much more difficult (esp. in operational effectiveness, which is mostly about cost...).
I'm also thinking about this as we move through space-time.
From first principles, I find it hard to believe that a widely available tool can generate a competitive advantage.
I tend to think about things in terms of fixed costs and market gross profits.
Higher fixed costs (primarily R&D and distribution) relative to market gross profits and customer captivity dictates the number of players who can profitably compete. So high fixed costs => higher profits.
In industries where R&D are significant today but can be dramatically reduced (as perhaps Software), the industry should become more fragmented because it can now room more players. If variable costs gets reduced, it has the same effect. More competition, less profits. In these scenarios, I would expect LLMs to be the inverse of a competitive advantage.
Depending on distribution and customer captivity.
If you still need to pay for displaying adds, then the things you can automate is only a fraction of the cost of distribution. And arguably, the savings will be reallocated to more ads and sales regardless. This should paradoxically dampen profit pressures, because new players have higher barriers to overcome.
In cases where you get a new paradigm (10x better product), you'll also have 10x more competitors. So speed becomes the crucial part (as it always has been). In this sense, maybe the LLMs makes the impact of relative skill less pronounced. It's an enabler in one sense, and a flattener in another.
And if the costs are reduced, businesses that are not viable today may become viable. Many niches, with capped profit potential. In a sense, these pocket may have inherent competitive advantages simply due to the size of the profit pool. But should be equally available to incumbents and new players.
If distribution can be automated or eliminated, customer captivity remains an isolating mechanism for incumbent. Microsoft has huge network effects and distribution advantages, and may be primed to capture both cost savings and revenue uplifts.
So here's how I parse it:
- In some cases, it softens existing competitive advantages by reducing fixed costs, which increases competitive pressures
- In some cases (new paradigms), it may level the playing field compared to earlier generations
- In some cases (new viable businesses) it may be source of competitive advantage if you capture a niche with a small profit pool
- In some cases (incumbents with customer captivity) it can strengthens their position
Sorry for the ramblings :D
Agree. So probably it’s mostly weakening advantage, I think. Except for the newly-generated niche play.