Edward Tse says companies that fail to transform for new tech era will struggle to survive

Everywhere I go in China these days, artificial intelligence (AI) is one of the most discussed topics among corporate leaders. In general, they are interested in and paying attention to the topic. But the level of understanding of its implications and awareness of the appropriate manner for adopting it varies a lot.  

A great majority of Chinese corporate leaders say they are using AI. Most of them, however, are simply using AI as a tool, for conducting research, writing presentations or doing translations. Some are using AI to drive more efficiency, especially in corporate functions such as finance, procurement and human resources. These measures help, of course, but fundamentally these companies continue to operate under the same construct of processes and organizations as before.

The urgency and degree of rigor of deploying AI also varies by industry sector. In general, companies in industries where competition is less, hard assets are large, and competitive advantages are mostly endowed, use AI mostly only as a tool. Typical applications include enhancing manufacturing efficiency, quality control, and assistance in preventive maintenance.  

In the biotechnology and pharmaceutical sectors, AI has greatly enhanced the ability of companies to discover new drugs, making China one of the world’s most productive hubs for innovative drug development.

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AI applications are particularly prevalent in industries that are consumer facing, such as consumer goods, retail and consumer electronics. These industries are relatively less asset heavy; face intensive competition; and have quickly changing consumer needs and shorter product life cycles.  

The fundamental nature of these businesses is the evolving relationship between the customer (consumer) and the supplier. In the past, suppliers made and sold products to consumers who chose from what was on offer. The power largely resided on the side of the provider. The internet era brought changes, with consumers beginning to express what they want in a far more direct manner than before. Suppliers need to respond with more product choices and delivery methods.  

In the AI era, we believe that the tug-of-war between the consumer and the supplier will further intensify with the power shifting even more to the consumer side. That means the supplier will need to become even more customer responsive and supply chains will need to become more flexible and resilient.

What does this mean for companies?

Given the nature of these sectors, AI will play a critical role in determining the future survivability of companies, as it will fundamentally change the dynamics of the consumer and supplier relationship.

The consumer will have a higher degree of freedom in expressing his or her preferences for different products or services that cater to their unique needs. On the other hand, the supplier will also have more tools and capabilities to predict and perhaps manipulate the needs of the consumer. This tug-of-war will play out at the supply-chain interface, which will need to become even more flexible and tailored.

Can companies in these sectors choose not to fully integrate AI into their business? I am afraid not. That is not only because competitors will compete through AI enablement but also because consumers are increasingly enabling themselves with AI. The same would apply to value chain partners, both upstream and downstream.

But what will the AI transformation involve? I believe that an AI transformation is a holistic program that involves the fundamental rethink and redesign of a company.

It will involve a redefinition of the company’s strategy, organization, processes, operations, business model and even culture. In other words, it will be a holistic transformation of the entire company. As such, an AI transformation must be driven and led by the most senior level of the company. And company leaders must embrace an AI mindset.

Today, many companies are simply using AI to twist small parts of their operations and organizations, without a comprehensive and holistic change. And often, senior leaders delegate the AI change to people who simply don’t have the knowledge, strategic view or proper delegation authority to create the necessary changes. As a result, many of the so-called AI change programs are not be able to achieve their intended impact.

A typical response from a corporate leader may be, “I know the importance of undergoing an AI transformation, but I am not sure if I am ready to undertake a transformation holistically right away in one go. What should I do?”

That is a reasonable question and I have come across it many times. Companies should first understand what kind of processes will need to be redefined and what kind of capabilities the organization will need to develop or acquire in the age of AI.

Companies should also identify which of their employees are capable of using AI, not only as a tool, but who can understand its implications for how to change a company or better address customer needs. These people are usually scattered across the organization. Some may be more senior but more often than not, they tend to be younger and more junior.

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Companies should identify them as “AI champions”, and assign them to lead the application of AI in specific scenarios and to drive process and organizational changes.

Starting small, but through a persistent experimentation, learning and adaptation process, companies can expand the transformation effort from small parts of the organization to its entirety. Along the way, companies should bring in more AI-capable people.

In the future, there will be three types of organization. One type will be companies that start out as “AI-native”, designing their entire business around AI principles. Another type will include those that are able to undergo AI transformation holistically and fully adapt to the AI era. The third type will comprise those that do not, or are unable to, complete their AI transformation successfully.  

The future winners will likely come from among the first two categories. Many of the third group will be much less competitive and for some, their ability to survive will be called into question.

The author is founder and CEO of Gao Feng Advisory Co, a strategy and management consulting firm with roots in China.

The views do not necessarily reflect those of China Daily.