Opinion In the era of AI disruptions, business principles that guarantee success

Klaus Schwab, founder of the World Economic Forum, wrote a few years ago that the world was in the midst of the Fourth Industrial Revolution. The defining features of this revolution, which began around 2010, were machine learning, AI, big data, quantum computing and the blurring of the lines differentiating the physical, digital, and biological worlds. Schwab contrasted this with the Third Industrial Revolution that started in the 1970s around the internet, robotics, and IT. It shifted production processes from analog to digital and catalysed the growth of the service and knowledge economy. The second revolution, a century earlier, was triggered by electricity, the internal combustion engine, telegraph and telephone, and assembly line production — breakthroughs that transformed communication and transportation systems and catalysed the rise of multinational companies. The first Industrial Revolution started with the invention of the steam engine in 1776. This laid the foundations for industrial mechanisation.

The thread linking these four revolutions is technological innovation. It created new tools for managing business. It did not, however, alter the fundamentals underlying corporate growth and profitability.

I identify four factors that have driven business success in the past and which, I believe, will remain pivotal for its success in the future.

First, cost management. One equation I learnt in first-year economics was that prices tend towards marginal costs. In other words, the price of products falls in line with the declining cost of producing an extra unit of output. Companies that have a high average cost structure, therefore, face increasing pressure to generate a decent return on their investment, especially when they finance their expenditure through debt. The reason Henry Ford succeeded in putting “America on Wheels” with his Ford Model T in the early 20th century was because of a laser focus on cost efficiency. The reason China is today a global manufacturing hub is that it combined scale with operational efficiency to produce world-class products at the lowest unit costs. Companies that take their eye off costs will always struggle to navigate the turn of the business cycle.

Second, access to competitively priced factors of production and control over the supply chain. The billionaire robber barons of the 19th/early 20th century — Andrew Carnegie, John Rockefeller, Cornelius Vanderbilt — used monopolistic and exploitative tactics to secure such access. In the contemporary world, the Chinese government ensured that the country’s manufacturers had ready and affordable access to land, capital, power, water, and transport infrastructure. This gave them a competitive head start. By contrast, in India, companies have difficulty acquiring land, the capital markets are shallow, the price of utilities is high, and the road/rail network is inadequate. In consequence, even companies that are world-class in organisation and make products that meet the highest standards of quality struggle to compete in the world market. Business success hinges on supply chain competitiveness, resilience, and control. That has been so in the past. It is so today and will be into the future.

Third, regulatory alignment. In 1911, the US government broke up Standard Oil, the largest and most powerful company in the US, into 34 separate, competing companies on the grounds of “illegal monopolisation”. Since then, the regulatory oversight over business has waxed and waned. US President Ronald Reagan and UK Prime Minister Margaret Thatcher were of the mindset that governments should “get out of the way” of business. Government, it was said, did not solve problems; it was the problem. Today, industrial policy is back in vogue. These shifts in the regulatory pendulum did not and have not altered one fundamental. Corporates needed/need the implicit, if not explicit, support of the state to generate sustained growth and profitability.

Technological innovations had not/has not given them the power to sidestep the regulator. This fundamental will endure. Regulatory alignment will remain an essential precondition for business success.

Finally, human judgment. I look back and ask: Would templated reasoning of the kind consultants present today have led James Watt to experiment with steam power in the late 18th century? Would Henry Ford have taken the decision to raise the wages of his employees and the prices payable to his vendors to generate demand for the Ford Model T car if he had subjected himself to the logic of linear analysis? Did Steve Jobs decide that design is not just about “how it looks” but about “how it works” on the back of algorithmic signals? Is China’s current dominance of the renewable energy business — they produce the lowest cost solar panels, wafers, cells, modules, and wind turbines — the result of a natural resource bequest or the decision by their leaders to set aside the conventional wisdom that renewable energy was uncompetitive and to deem this sector of strategic significance? These are rhetorical questions. The answer is none of these transformative, at times counter intuitive, decisions were the result of only hard data and quantitative analysis. They all bore the imprint of subjective intuition, insight, and leadership.

I dare say that in time, AGI will surpass human cognitive intelligence. But if, as a result, human judgment is supplanted and/or subverted, the pillar upon which the arc of four industrial revolutions was built would be knocked down. The German Philosopher Friedrich Hegel wrote, “We learn from history that too often we do not learn from it”. At this time of rapid change, business leaders would do well to bear this forewarning in mind.

The writer is chairman and distinguished fellow, CSEP Research Foundation