The Business Fundamentals of AI

The Business Fundamentals of AI

August 10, 2018

Abstract

  • The power of artificial intelligence, or AI, comes from its power to predict.
  • Artificial intelligence can use prediction to radically reduce costs, make better decisions, and strengthen customer relationships.
  • In some cases, AI suggests a fundamental transformation of the business model.

Prediction is the principal contribution of AI

Prediction is at the core of everything we do. Should I marry this person? Should I go to this school? Should I buy this house? When choosing between two options, we first predict what the outcomes of the decisions will be. Then, we choose the option that brings us to the best outcome. But not all the decisions we make are big ones. In fact, most of the decisions we make on a daily basis are quite small. Should this email go to Jack or to Jill? Does this widget look broken? Which documents should I include in my report? These seemingly trivial decisions add up quickly. The principal contribution of artificial intelligence (AI) is to facilitate decisionmaking with better, cheaper, and faster predictions.

1. Reduce costs by automating trivial decisions

AI radically reduces costs by relieving people of the burden of trivial decisions. These trivial tasks may be accomplished by AI with greater efficiency – and in many cases, greater accuracy – than they would be by a human. An AI understands how a human would have behaved given the task at hand, but can perform their function more rapidly, and at relatively inconsequential cost. AI allows us to repurpose the efforts that would have been spent on a task suited for a machine, placing focus on tasks that machines cannot do.

2. Make decisions without satisficing

Humans are notoriously bad at searching for information. Nobel prize laureate Herbert Simon argued that human decisionmaking is flawed because we satisfice: we don’t evaluate all pathways to find the best one; rather, we search until one is good enough and stop. We satisfice because an exhaustive search is prohibitively expensive. Satisficing results in suboptimal decisions, regardless of whether they are common or strategic.

AI’s fast and efficient predictions reduce the costs of searching for information. The advantage of AI is to make the comprehensive search for information affordable. Executives and employees alike make better decisions when assisted by AI, because it analyzes all of the options and presents the best ones. AI allows us to boil the ocean without the incredibly high price tag.

3. Understand complex customer behaviors

Decades of marketing research (and millenia of industrial experience!) suggest that enterprises intent to bolster revenues by improving retention and referrals need to deeply understand their customer base if they are to succeed. Companies can use customer information to encourage loyalty, structure recruitment practices, optimize pricing, detect theft, and cater to their core communities. The capability to use information to interact with customers entails the process of customer segmentation.

While massive datasets and abstract models challenge human abilities to segment customers, artificial intelligence is adept at customer segmentation. This is because AI is exceptional at the detection of complex relationships in observed data. The amount of data a human can hold in memory at any given time is too small to consider all potential relationships between variables—or, in the parlance of customer segmentation, customer characteristics. This enhanced predictive ability of the company to take actions that strengthen the relationship between the customer and the brand.

There’s no such thing as a free lunch, however. While AI is incredibly good at discovering hidden associations, it is also prone to positing spurious, or false, associations. This predisposition to finding false relationships is the subject of the aphorism, “correlation does not mean causation.” As such, it is important AI be coupled with an expert who knows how to design an analysis that is robust to spurious inferences.

4. Seize opportunities in market positioning

The integration of artificial intelligence into company positioning can significantly enhance product differentiation and brand recognition. Consumers are keen to use new technologies, and companies that are successful in servicing market segments that care about AI-powered product offerings will cultivate new core constituencies. Moreover, companies that position themselves as AI-powered enterprises will see beneficial brand engagement from these same segments.

The use of AI positioning also increases the ability of companies to attract quality capital. In his book The Four, economist Scott Galloway argues that companies with broad customer bases are inequitably competitive when they can scale consumer interaction through technology. Companies that embrace artificial intelligence are valued at much higher multiples because the technology scales to niche relationships so effectively.

In some cases, the value of artificial intelligence will be so high that your strategy needs to shift in order to take advantage of it. For example, in Amazon holds a patent on a system to ship you what it thinks that you need, or what it predicts that you need, before you even ask for it. Once this prediction system becomes good enough, then the benefits involved in shipping you the thing the system thinks you need will outperform the current model of click-and-checkout. If this were to happen, it would result in a fundamental transformation of e-commerce industry. AI can suggest a fundamental reconsideration of your business model too.