“Risk comes from not knowing what you’re doing.” — Warren Buffett.
Road tested learnings from running Seldn, an AI startup. For the genesis of this series, read this.
My dear enterprise, for your artificial intelligence (AI) strategy, look to Warren Buffet circa 1965.
Shortly after publishing ‘AI Startups: Be Goldilocks’ several companies have been reaching out to XLabs with a single question: what is the analogous advice for an enterprise navigating AI? The answer is simple: enterprise: make AI your adamantium. To explain this further, we have to take a detour into a charming story about young Warren with a counter-intuitive moral:
Buffet named his company after one of his biggest mistakes. Before Buffett became the Buffett we all know and love, he purchased a clothing manufacturer: Berkshire Hathaway. He bought it as a deep value investment on the bet that the market would eventually value it for its assets. Only, as time went by, the assets became worth less and less. So he did the only thing that made sense to him: he took over the company! After Buffet became the new CEO of the old Berkshire Hathaway, the senior leadership brought him a turnaround plan: buy a host of new equipment and upgrade to the latest sewing machines. The upgrade would make Berkshire way more efficient than their competitors and result in increased profits. What Buffett realized was that this was a cost; not a competitive advantage! The machine-led efficiency is not a sustainable advantage because everybody else can simply purchase the machines (i.e., the advantage!). And five years down, they were all going to purchase another round of upgraded sewing machines. This efficiency gain was not an advantage but simply the cost of doing business.
Buffett thus refused to make that purchase! Instead, he decided to milk the cash cow (the original Berkshire Hathaway) for all it was worth and put the money into where he believed he had a competitive advantage: investing in other stocks! Well, the rest is history. Today 50 years later, Warren’s $256B conglomerate Berkshire Hathaway has one of the world’s most impressive winning streaks and is America’s fifth-most-valuable public company, next only to Apple, Alphabet, Microsoft, and Amazon.
So what is the main lesson for Enterprise AI here? Essentially this: there are two ways you can approach AI:
- The Ironman Suit: Treat AI as simply the cost of doing business. In the fast pace of today’s tech world, you must run as fast as you can just to stay in place. And if you wish to go anywhere you must run twice as fast as that. If you choose not to embrace AI, you will be left behind. Without AI, it’s better to divest your assets now and invest it where you might have a competitive advantage. AI can be a massive cost saver and efficiency booster via automated processes, insight or trend predictions, dashboard analytics or whatever the AI flavor of the month is. But using AI for any or all of this alone, will not give you a real competitive advantage. Because this first approach is a veneer. It uses AI as a suite of bolt-on software, similar to slapping on an Ironman suit. Powerful at first but here is the catch. If Ironman suits were available for purchase, everyone would be flying around with them and quickly no single person would have an advantage merely because of the suit! The same is true of AI. While it is true that you will be left behind if you don’t embrace AI, AI for these everyday business cases (e.g., automated analytics) will even out your advantage sooner or later. And you will simply stay in place, not move ahead.
- Adamantium Skeleton: Realize that AI is different from sewing machines! It is a continual compounding technology. Meaning, you can integrate AI into your competitive advantage for compounding growth and returns. When you do integrate AI into your real source of competitive advantage you have just sowed the seeds for your company become a moonshot for the next era! The catch here is that only a few companies have real competitive advantages. Why? Because there are only three true sources of competitive advantage and its hard to achieve any one of these: specific supply cost advantages, demand advantages (e.g., captive audience or cost of switching) and economies of scale. For a more exhaustive dive into what gives a lasting competitive advantage read Bruce Greenwald’s ‘Competition Demystified’ or get in touch with us. The reason competitive advantages (like economies of scale) are powerful is that they give you an exponential advantage or a moat as you grow. Integrate AI into every facet of how you achieve your competitive advantage (like economies of scale), and ladies and gentleman, you have yourselves what we call a bonafide ‘double exponential’! Building a technology into the bones of your business takes guts but gives you a new real advantage and a fierce moat. The analogy here is to Wolverine’s adamantium skeleton. Wolverine was picked because he had a true advantage: healing powers. Because was the only one who could survive the operation, they could double down on Wolverine’s advantage with adamantium. Similarly, with AI, you have to go to where you think you have an advantage and magnify it. AI should be integrated into your core and become part of your core differentiator. Which means, AI is no longer just a technology exercise but a deep strategy dive along with a solid technology investment. This takes thought and guts. But this is the right way to AI: use AI to build yourself an adamantium skeleton.
“When AI insights feed into a hardware or an infrastructure, i.e., a core business, then it is poised to be HUGE. Simply put, you have to put money where your AI mouth is. If you can and do, the benefits compound and you very quickly stand out.” — Lessons from an AI startup.