Why Strategy Matters More, Not Less, in the AI Era

 

Artificial Intelligence Is a Transforming Technology

It's now clear that artificial intelligence (AI) will transform how business is conducted in virtually every sector of the economy. While many AI concepts have existed for decades, OpenAI's public release of ChatGPT in November 2022 was a tipping point that triggered an arms race among technology companies to develop AI capabilities.

Spending on AI exploded in 2023 and has continued at a blistering pace since. In August of this year, Goldman Sachs projected that AI-driven capital spending in the U.S. will total $581 billion in 2026.

Spending in the U.S. for AI-related infrastructure is projected to total $10.3 trillion from 2025 to 2032 according to a September 2026 article in The Wall Street Journal. On average, that's a staggering 3.6% of U.S. GDP each year, and it dwarfs earlier infrastructure investments, including those for the railroads, the highway system, and the communications infrastructure for the internet.

Meanwhile, the functionality of AI technologies is increasing at a breathtaking pace, and the number of AI models, applications, and other tools is growing exponentially.

By one measure, the performance of the leading "frontier" large language models is doubling every seven months. BenchLM is currently ranking the performance of 228 models and tracking an additional 764 models. And, the Hugging Face repository now contains over 3 million AI models, datasets, and other tools. 

Most major business software providers - including Salesforce, Microsoft, SAP, Oracle, Adobe, Hubspot, and a host of others - have already added AI capabilities to their platforms and applications, and more of this is almost certainly on the way.

AI is still far from perfect in many ways, and there are growing concerns about the dangers it could pose to our society if development continues to be unregulated. But, there is no longer any doubt that AI is quickly becoming pervasive and that it is already reshaping the landscape of business.

AI Won't Produce a Sustainable Competitive Advantage

Under these circumstances, it's not surprising that many business leaders view AI as a strategic resource that can be a potent source of competitive advantage.

This belief is understandable, but it's flawed.

AI is rapidly becoming a competitive necessity for companies of most types and sizes, but core AI functions and basic "off-the-shelf" AI applications and tools won't produce a sustainable competitive advantage for most individual companies for two reasons.

AI Isn't Proprietary for Most Companies

First, the attribute that enables a resource to provide the basis for a sustainable competitive advantage is scarcity. When a resource is available to (and affordable by) all or most of the competitors in an industry or market, that resource won't produce a competitive advantage for any of the competitors.

As Nicholas Carr pointedly wrote more than two decades ago, "You only gain an edge over rivals by having or doing something they can't have or do." ("IT Doesn't Matter," Harvard Business Review May 2003)

Most significant technologies follow this rule. When a technology is widely available and broadly affordable, that technology isn't likely to provide  a competitive advantage to any individual company.

For a technology to provide a competitive advantage for an individual company, the technology must be proprietary. By proprietary, I mean the company must own or control access to the technology.

Most AI technologies are not proprietary to the end users of those technologies. For example, Anthropic owns Claude Opus 5.5, the company's flagship large language model. Therefore, Claude Opus 5.5 is a proprietary technology for Anthropic, and this enables the company to control access to the model and charge individuals and companies fees for the right to access and use the model.

Claude Opus 5.5 is not, however, proprietary to the end users of the model because all individuals and companies that license or "subscribe" to the model gain access to the same model features and functions.

Improvements in Operational Effectiveness Don't Produce Durable Advantage

The second reason AI won't usually produce a sustainable competitive advantage for an individual company is that many uses of AI are designed to improve operational effectiveness. For example, AI can be used to streamline business processes and increase worker productivity.

AI-driven improvements in operational effectiveness can enable a company to generate higher profits than competitors, but such superior performance is usually short-lived.

Improvements in operational effectiveness achieved through the use of AI rarely produce a durable competitive advantage for two reasons.

First, information about how to achieve such improvements tends to be disseminated broadly and quickly. It becomes a favored topic for blog articles and articles published at media outlets, and for webinars and conference presentations.

And second, projects involving the use of AI to improve operational effectiveness can usually be implemented relatively easily and quickly. Therefore, when such improvements are achieved by a company, they can be easily imitated by its competitors.

Michael Porter explained why improvements in operational effectiveness don't usually result in durable competitive advantage in these terms:

"Companies only gain advantages if they are able to achieve and sustain higher levels of operational effectiveness than competitors . . . Once a company establishes a new best practice, its rivals tend to copy it quickly. Best practice competition eventually leads to competitive convergence with many companies doing the same things in the same ways." ("Strategy and the Internet," Harvard Business Review, March 2001)

Judge AI Initiatives By Their Impact on Strategy

For the reasons just discussed, AI on its own is unlikely to provide the basis for a sustainable competitive advantage for most companies. That doesn't mean, however, that AI can't make a significant contribution to competitive advantage.

To maximize that contribution, company leaders should identify the uses of AI that will enhance the effectiveness of their company's overall business strategy. Put another way, leaders should focus on those AI applications that will boost their ability to win in their chosen target market.

This approach makes strategy enhancement the main criterion for evaluating prospective AI initiatives, and it enables company leaders to choose the AI initiatives that will have the biggest impact on their company's competitive advantage.

Image courtesy of Deepak Pal (www.iqlect.com) via Flicker (CC).