AI factory: AI IS A MANAGEMENT CHALLENGE, NOT A TECHNOLOGY CHALLENGE

By Prof. Dr. Arjan van den Born CFA

This book is written for the hustler; today's digital executive. It discusses the competencies an executive needs in order to run today's digital organization. These are new skills as the traditional management skills as taught by MBA programs are no longer relevant. The traditional curriculum for the Master of Business Administration comes from a world where technology was insignificant, competition stable and the big challenge lay in administering the organization. But in the digital age, competition is everywhere, technology is constantly evolving and propositions and processes are increasingly digital. To run an organization in the digital age, it is of the utmost importance that executives and managers understand these challenges. These challenges are about learning, creativity, innovation, entrepreneurship, technology, transformation and teamwork. This book discusses developments in digital technology and what they mean for today's digital organization. The following topics are discussed; digital strategies, digital business and revenue models, platforms, digital propositions, dynamic pricing, human and machine collaboration, AI factories, data labs, data governance, digital teams, experiments, data-driven decision-making, digital ethics, data-driven organizational culture and digital transformation. The purpose of this book is simple; to increase the digital business knowledge of managers and executives. To show them the unique opportunities digital technology offers, to give them a toolbox for the digital age and to prevent us from looking at a 21st century challenge with a 20th-century mindset.

• Language: English
• Publisher: BookBaby
• Release date: Apr 1, 2021
• ISBN: 9789082012347

Book preview

video.

PREFACE

The real problem of humanity is the following: we have

paleolithic emotions; medieval institutions; and god-

like technology.

Edward Osborne Wilson,

Harvard Magazine, September 9th, 2009

Artificial Intelligence (AI) is primarily a management and organization problem, not a technology problem. Understanding the technology is not that hard. The required hardware and software are available and are not that expensive (i.e., basic software such as R, Python, TensorFlow, Hadoop, Spark, Kafka, Kubernetes are open source). Additionally, the digital talent and skills are progressively becoming available to all firms. To attract this digital talent should not pose too much of a problem for most of the larger organizations provided they are able to formulate a compelling digital vision and an executable digital strategy.

The difficulty begins when organizations start implementing AI in their business. There is one overriding observation; the difficult things are easy, and the easy things are difficult. This is the AI paradox. It is not the seemingly difficult stuff of technology, statistics and algorithms that are holding most traditional businesses back. It is the relatively mundane stuff of organization and management that often turn out to be insurmountable. What is our new business model? What digital services do we offer? How do we blend the digital technologies and analog humans? How do we transform ourselves to a digital business? How do we compete with new digital entrants? How do we implement AI responsibly and ethically? The business and social problems are the challenges that are tough to solve. Technologies such as AI are, in their core, problems of management and organization.

While it is important that executives and managers understand the basics of digital technologies, it is much more important that they understand what this technology means for them as executives and managers. What do these technologies signify for running a business in the increasingly digital, data-driven twenty-first century? It is therefore a pity that most executives and managers don’t know how to run a digital business. They tend to believe that managerial skills thought in most of the traditional MBA programs apply to the digital age. They do not. The curriculum of most Master of Business Administration (MBA)-programs originates from a world where technology was quite unimportant, the competition was pretty stable, and the big question was how to administer and control a business. But in the digital era, competition is everywhere, technology is constantly developing, and propositions and processes are increasingly digital and data-driven. To run a business in this digital age, it is paramount that executives and managers understand the business models and challenges of the digital age, not the way firms were run and controlled in the 1960s and 1970s. Today’s business problems are more dynamic and more scientific in nature. It is about where an organization wants to be and how the organization will get there. It is about learning, creativity, innovation, technology, transformation, teamwork, and entrepreneurship.

Of course, some fundamental laws of running a business will not change due to digitization. A competitive strategy is just as important in the digital age as it was in the analog world. Arthur Schopenhauer once wrote that creativity is seeing what others see and thinking what no one else has ever thought.² Looking with fresh eyes is required if one needs to transform an organization from an analog to a digital organization. This requires a basic understanding of this digital world, the technology used, and the business models employed.

This book is written for the hustler; the digital manager of the future. It outlines what a hustler or digital savvy manager needs to understand about managerial concepts such as dynamic pricing, digital business models such as competitive strategy, innovation, and entrepreneurship, digital business models, platforms, revenue models, digital services, entrepreneurial marketing, entrepreneurial finance, man-machine cooperation, data governance, DataOps, digital teams, pilots and experiments, decision-making, cultures, and digital transformation.

Most of the knowledge discussed in this book is not novel in itself. It can be found at various places. From hardcore academic journals to blogs, vlogs and white papers. Some insights are new, a result of compiling this book. Other insights have been around for some time. This book should be considered a curriculum for the modern digital manager: what should managers know about running a modern digital firm? While this book is quite broad in its ambition, it does not run very deep. For every subject in this book, there are various specialist books, papers, blogs, and vlogs that will give you a much deeper understanding of the various topics.

The goal of the book is to augment the knowledge of current managers and executives. To give them the managerial toolbox for the digital era. The book should prevent mistakes by analog directors and executives. They typically do not understand the technology, what it offers and its limitations, and they do not know how to manage the digital firm. Many senior managers look at digital technology with a 1980’s mindset, aimed at control and administration, and think that digital transformation is just another organizational change that can be handled as easily as any cost reduction. This book shows that this is clearly wrong as the shift from analog to digital requires a whole new way of looking at business.

Figure 1 depicts the key differences between digital and analog firms. A digital firm not only offers different types of products than analog firms, it also employs different inputs and production factors to build these digital products. The ways of production, the processes, are radically different in a digital firm. Logically, all other managerial aspects, from strategy to governance and from architecture to culture are also very different indeed in a digital firm.

Figure 1: Analog versus digital firms-key differences

1. INTRODUCTION

The rules of the game can be a critical influence, helping

to determine whether entrepreneurship will be allocated

predominantly to activities that are productive or unproductive

and even destructive.

William J. Baumol,

Journal of Political Economy, October 1990

Upon his death in 1877, Cornelius Vanderbilt was the wealthiest man in the United States with assets over 100 million dollars, and the largest owner of railroads in the world.³ But upon birth, 82 years earlier in Staten Island, New York, he had nothing. Neither steamboats nor railroads existed in America. But Cornelius was a born entrepreneur. When he was just sixteen years old, he convinced his parents to lend him $100 to buy a sailboat in order to start his own ferry business. Due to hard work, smart business strategies, and luck, he was able to quickly expand his ferry business. By the age of twenty-four, he sold all his sailing vessels and became a steamboat captain on the busy Philadelphia–New York City route. This made him a fortune and he gradually expanded his fleet of steamboats. But by the mid-nineteenth century, Cornelius understood that the future of transportation was not by way of water but by way of rail. So, he became attracted to railroad transportation, which was then still in its infancy. Instead of building new railroads, he took the easier route of buying existing ones. In the period of a couple of years, he acquired the Long Island Railroad, the New York and Harlem Railroad, the Hudson River Railroad, and the Central Railroad, and merged these with the other rail networks he already owned.⁴ As he had done with his shipping ventures, his success with railroads lay in significant investing in the latest equipment. This allowed him not only to improve service, but also to lower fares—a strategy later employed by many of the low-cost airline carriers such as Southwest Airlines, Ryanair, and Easyjet.⁵

Another part of Cornelius’ business success was founded upon his ability to take on established state monopolies. On the routes between New Jersey and New York (1824) and New York and Albany (1834), he not only competed on the waters with the monopolist ferry lines, but also fought them in the courts. In landmark rulings, he was able to overturn some of the state monopolies. In other circumstances, he was able to obtain a substantial payoff from the monopoly player to take his business elsewhere. Cornelius did not always preach the virtues of the free market. He was more than happy to impose a monopoly on his routes when such an opportunity presented itself, or to accept ransom money from his competitors so that they might continue to operate their monopolies.

Cornelius Vanderbilt was not the only tycoon at the end of the nineteenth century in the United States. He was just one of the great industrialists who made their fortunes, sometimes by monopolizing huge industries through not-so-ethical business practices and misusing personnel. Men such as JP Morgan (finance), Henry Ford (automobiles), and Andrew Carnegie (steel) are examples of other great industrialists. Perhaps the most famous of these is John D. Rockefeller. His trust, Standard Oil, owned or controlled 90% of the U.S. oil refining business in 1880, making it the first great industrial monopoly in the world.

These famous men lived at that time, after the first era of discovery of America had passed, when a new era focused on development and growth began. An era where technology played an increasingly larger role in society. The first industrial revolution (1780–1840) powered by the discovery of steam, telegram, and railroad, was closely followed by the second industrial revolution (1870–1920) with its discoveries of the automobile, electricity, telephone, and antibiotics. These discoveries meant an abundance of opportunities for able businessmen to tap into these new technologies and build their business models on those technologies—men such as Carnegie, Rockefeller, and Vanderbilt, who knew that modern technology was most profitable if it was used at scale. That this also resulted in buying out competitors to achieve those economies of scale should not be a surprise.

State lawsuits were not successful in their efforts to overturn the monopoly power. Eventually, the efforts of investigative journalists resulted in federal action. Most notably, starting in November 1902, the investigative reporter Ida Tarbell wrote a series of nineteen carefully researched articles on Standard Oil in McClure’s Magazine.⁶ In these articles, she detailed how John D. Rockefeller ruthlessly forced his competitors to sell or perish.⁷ This series of articles changed forever the public opinion and the attitude of politicians toward the robber barons. It kick-started a whole string of anti-trust laws promoting competition and worker rights.

The tale of the industrial robber barons is a classic account of a period where novel technology boosted novel, innovative products, and services, and led to new ways of production. A period where opportunities seemed vast and endless and where rules and regulations were largely absent. A period of hyper competition transpired in many new fields where large players used their funds to increase the barriers to entry and to put existing players out of business. The tactics employed were not of the highest ethical standards; i.e., forming illegal consortia, controlling railroad and pipelines, and sometimes, even resorting to physical aggression.

One of the founding and most important scholars of entrepreneurship is Joseph Schumpeter (1883–1950). He was a child of this robber baron era; the time of the upcoming great industrialist such as Rockefeller who used novel technologies to innovate and replace existing business models. In Schumpeter’s own words:

It is not that kind of competition which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization—competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives.⁸

According to Schumpeter, the entrepreneur has a crucial role in our society; the entrepreneur performs the function of innovation that enables the liberal system to persist. Joseph Schumpeter argued in his famous book Capitalism, Socialism and Democracy that economic progress, in capitalist society, implies turmoil. Schumpeter’s memorable term for this kind of competition was Creative Destruction. Creative because the new technology enables the creation of new products or services and destruction because it shattered the old businesses and the way they operated.

There is enormous societal value in those entrepreneurs that find a higher, new level of competition by using technology to offer better propositions to customers. But this does not imply that all entrepreneurship is good. The famous economist Baumol argued that there are various forms of entrepreneurship: (i) productive, (ii) unproductive, and (iii) destructive.⁹ In a historical overview dating back from Ancient Rome, he shows that it is important for society to set the rules of the entrepreneurial game in such a way that the productive, innovative entrepreneurs are rewarded and that unproductive and destructive behavior is penalized. Not all forms of entrepreneurship are good for the economy. It is the job of society to set the rules, to redirect investments into responsible, innovative, and ethical areas and away from destructive, rent-seeking areas.

1.1 Impact of Technology

It is no wonder that many of today’s writers on modern technology draw attention to the parallel between the robber barons of the first and second industrial revolutions and today’s titans such as Facebook, Amazon, Google, Microsoft, and Apple. There are many reasons to compare the forces and changes of the early twentieth century with the early twenty-first century. Below are listed a few parallels:

1. In the early twentieth century, a number of technology inventions such as the automobile and electricity enabled the creation of valuable products and services. This created enormous entrepreneurial opportunities as markets grew with double-digit percentages. For example, the number of cars exploded. There were 8,000 cars on US roads in 1900, 470,000 cars in 1910, 9.2 million in 1920, and 27 million cars in 1930. This growth attracted many entrepreneurs looking for opportunities in a mechanized world where technology was important and rules and regulation were largely absent.

2. The novel technologies of the early twentieth century not only enabled the creation of radical new products and services, but also enabled businesses to organize in radically new ways . Where a century ago the emergence of industrial-scale organization led toward new business models and new management theories such as Taylor’s Scientific Method, the digital firm of tomorrow embraces methods such as Holocracy, Design Thinking, Agile, and DevOps. Now, as then, new business models, often emphasizing economies of scale or network-effects, and new forms of (digital) organization allow business to take advantage of the technology and provide these new (digital) products at scale and at low costs.

3. The early twentieth century industrialists and the twenty-first century tech giants of today pride themselves in providing good quality products for low prices . For instance, Vanderbilt charged only a quarter of the competitive fares on the ferry route between New Brunswick, New Jersey, and New York City. ¹⁰ Their arguments resemble those of Founder and CEO of Amazon Jeff Bezos when he says: At Amazon, I know what the big ideas are: low prices, fast delivery, and vast, huge selection. ¹¹

4. Virtue signaling was important in both eras. Then and now, the mission statements of the leading companies are dressed in lofty ideals. For instance, Rockefeller often declared that the whole purpose of Standard Oil was to supply The poor man’s light. ¹²This is not so different from Facebook’s public mission statement that says: Give people the power to build communities and bring the world closer together. ¹³ These companies understand intimately what their revenue drivers are. They know how to increase demand for their most profitable products and which freebees they can give away. During the 1880s, Standard Oil gave away lamps and stoves to stimulate the demand for their kerosene. This is not so different from Google who gives away free search, as they understand that their real business model runs on data, predictions, and advertisements.

5. Just as the monopolists of the gilded era, today’s founders and owners of BigTech cover themselves in philanthropists’ cloaks. They invest in research, education, health care, et cetera. In the early twentieth century, Andrew Carnegie, one of the leading industrialists, established the Carnegie Endowment for International Peace, the New York Public Library, and the college that would become the Carnegie Mellon University. Nowadays, tech billionaires such as Microsoft founder Bill Gates use their billions to enhance health care and reduce extreme poverty, expand educational opportunities, and offer access to information technology.

6. One the most notorious characteristics of the earlier robber barons was their uncaring disregard for the health and safety of workers . For instance, JP Morgan paid workers wages often as low as a dollar a day. Conditions for employees were poor, with many fatalities. This is not so different in the cases of Apple and Amazon today. ¹⁴ In the Corona crisis of 2020, it became painfully obvious that loyalty of most BigTech firms belongs to their shareholders and not to their employees. ¹⁵

7. Today’s digital behemoths can be characterized by same disrespect for government as their industrial predecessors. For example, when Mr. Vanderbilt was questioned in the 1870s by Mr. Simon Sterne, of the New York Investigating Commission, his answers were, I don’t know, I forget, and I don’t remember, to 116 questions (out of 249). ¹⁶ This is not so different from the many evading answers of Mr. Zuckerberg of Facebook and Mr. Pichai of Google toward the hearings of the US Senate. ¹⁷ Most tellingly is the view of former Google CEO Eric Smidt in 2011. Based on a 1995 formula of Andy Grove, he argues that: High tech runs three-times faster than normal businesses. And the government runs three-times slower than normal businesses. ¹⁸ Eric Smidt concluded that government should thus not interfere with the business of BigTech.

8. In the early twentieth century, the small and midsized enterprises (SMEs) where the most vocal protesters of the business ethics of the industrial monopolists. The small oil refineries that were put out of business by Standard Oil and the small and mid-sized steel mills that were unable to compete against the purchasing power of Carnegie Steel complained vigorously to antitrust bodies. Customers were less inclined to criticize the industrial giants. In the digital economy of the twenty-first century, a comparable pattern can be seen. SMEs such as price comparing and shopping site Kelkoo and web browser Mozilla take the lead in criticizing the antitrust behaviors of BigTech. They feel that they are unable to compete with Google under the current rules and regulations. And e-commerce SMEs confronted with the power of platforms, such as Amazon, are also complaining. Too often, these platforms are Dr. Jekyll and Mr. Hyde. Sometimes, they present themselves as market makers and regulators; at other moments these platforms expose themselves as being the main competition by offering the same product at a much lower price.

The final parallel can be found in the struggles of individuals, businesses, and governments as they try to cope with the rapid change of technological pace. This was not too different in the early twentieth century. Charlie Chaplin’s movie Modern Times shows the difficulty of preventing alienation and preserving humanity in a mechanized world. This again rings true in our time, an era ruled by algorithms and overloaded with information. The swift development of digital technology is a source of concern for many people. Humans are barely coping with technologies such as the Internet, Web 2.0 and mobile phones as the next generation of digital technologies (IoT, Big Data and AI) await just around the corner.

Shoshana Zuboff tells us about another interesting parallel, not the one between BigTech and the Gilded-Age tycoons, but between BigTech and the early Spanish Conquistadores when they invaded much of Latin America. Just as the robber barons did, these conquistadores exploited a novel and rapidly growing world of opportunities. The invaders found vast strokes of valuable land and minerals that were there for the taking for entrepreneurs who were willing to take risks, had access to capital, and were eager to adopt questionable ethical practices. And just as the robber barons used their industrial technology to subjugate competition, the conquistadores used their superior technology in weapons and ships to subdue the local population. In all these cases, the early entrants found a vast empty space that was, in their eyes, ready for the taking.

1.2 Digital Economy

While there are many parallels between our current BigTech corporations and the robber barons of the Gilded Age (and the colonialists of the sixteenth to eighteenth centuries), there are also some important differences. Entrepreneurs should understand these differences if they want to be successful in the digital economy.

1. Nineteenth-century industrialists benefited from economies of scale (and scope). But these economic forces are tame when compared to the network-effects that are found in the digital age. Network-effects can be considered to be economies of scale on steroids as they tend to lead to a winner-takes-all competitive game. In the days of the industrialists, many industries could be characterized by a dozen or more competitors with often single-digit market shares. The markets for digital services are typically characterized by only a handful of competitors. In many digital markets, there is one winner who profits from its competitive position.

2. With the invention of the Internet, a new digital world is created. A separate realm where people can have separate lives. As people increasingly are both living in a digital and analog world, this has implications for who we are. Do humans have the same identity online as offline? How do businesses combine their digital and analog activities? Many analog firms struggle with this duality. The digital and analog worlds are very different and played using different rules. The digital world is more malleable and changeable. It is a flexible, measurable world where new identities, products, and services are made and undone in minutes.

3. The twenty-first century world is data-driven and evidence-based. Human behavior is influenced, guided, and even determined by algorithms. Data and algorithms have become factors of production . Dealing with this new factor of production and align them with labor and capital is something that is quite specific to our digital era.

4. The power to predict, direct, and control human behavior grows . The combination of technology and psychology is enabling organizations to offer elaborate choice architectures which implicitly favor certain preferences. Nudging, punishing, and rewarding people for certain behavior. The state of China demonstrates that the step from Big Data to big brother is small. Swaths of data generated by elaborate surveillance systems are used to trigger the right behavior. In the west, behavioral data are used much in the same way. People are tracked and led using many of the same methods by BigTech. Elaborate algorithms determine our choices to optimize business revenue. This is known as the surveillance economy in which digital companies use every means possible to maximize screen time and click rates.

5. The current surveillance business model is largely based on data from laptop and smartphone. But the Internet is exponentially developing with different sensors around, on, and in our bodies. Smart cameras, fire detectors, audio, thermostats, locks, personal assistance, doorbells, et cetera are increasingly used in our homes. Google Nest is very happy to use your data, and to obtain an even better understanding of you and your needs—online and offline. In addition to the sensors on our bodies and in our houses, there are hundreds of millions of cameras on streets, of lighting poles with pollution sensors and sound sensors, and smart traffic lights who see and direct the traffic. All this city-data are owned by various institutions from the local governments to many outsourcing parties and commercial corporations who all search for a profitable and sustainable business model.

Digital technology is invading space as well. Start-ups such as Planet Labs send hundreds of shoebox satellites into orbit. Using this "space