AI in the Middle Market - Part I

Part II will be posted tomorrow, but if you cannot wait, or want to see what else I have, visit and subscribe to my newsletter, Base of the Pyramid.

“who wishes to fight must first count the cost”

-        Sun Tzu, The Art of War

Overview

The November 2022 launch of ChatGPT acted like a starter pistol, setting off a race among companies to position themselves for what many believe will be the next phase of technology-led growth and innovation: generative artificial intelligence (AI). In spite of the enthusiasm, and the eye-popping valuations and capital expenditures associated with generative AI for the companies in the eye of the storm, the fact remains that the majority of those who have actually used generative AI tools try it out and gradually drift away, underwhelmed.

For the majority of companies in the middle market, the hype cycle is at most tangentially related to their business, and the operative question with generative AI is the same as the question for every other technology: how will this improve my business performance, sparking value creation? Specifically, what is the path by which this technology will either drive revenue increases, cost decreases, or both? The fact that there is not yet a consensus answer to this question is the reason why generative AI is already being seen as a technology that is beyond the peak of enthusiasm and in the early stages of a decline into disillusionment (see Exhibit A).

Exhibit A: Gartner Hype Cycle for Emerging Technologies, 2024

Potential ≠ Results

The challenge of every business leader is to shift through a vast universe of potential opportunities and focus scarce resources (time, talent, capital, etc.) on the far smaller set of those opportunities that can be profitably acted upon.

Using this lens, it is rational to examine both the bullish and bearish cases for generative AI:

• The bullish case for generative AI as a game-changer in the business world is simple yet profound: if a considerable fraction of work tasks can be automated, with accompanying increases in productivity, then AI should unleash a tidal wave of value as businesses are handed a new lever to both increase revenues and reduce costs.

• The bearish case for generative AI is that implementing the technology is not currently cost-effective for most high-value use cases and there is no guarantee that it will ever become so. Additionally, given the level of investment made in AI to date, there is growing concern about whether an adequate return can be earned on the capital deployed thus far and on the much larger sums currently projected to be deployed in order to bring this technology to market at scale. 

Part II will be posted tomorrow, but if you cannot wait, or want to see what else I have, visit and subscribe to my newsletter, Base of the Pyramid.