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Innovation

Generating new business models with AI

15 October 2021 • by Patrick Reinmoeller in Innovation

Despite some ethical concerns, leaders must know how to tap new capabilities to transform their businesses ...

As artificial intelligence transforms organizations from the inside out, knowing how to tap these new capabilities and working out how to embed them into a company’s processes and strategy are becoming essential skills for anyone who aspires to lead a business.

Harnessing the power of AI to drive radical improvements to existing business models, but also creating entirely new markets, was the focus of a recent IMD Leading In Turbulent Times Webinar led by Professor Patrick Reinmoeller.

He stressed that business model innovation is nothing new – the first industrial revolution occurred in the early 1700s and used steam power to usher in the age of mass production – but what is different today is the speed and scale of the transformation. “We are going into a world where business model change is much more diffuse,” said Reinmoeller.

We are now in the age of the fourth industrial revolution – a fusion of advances in AI, robotics, 3D printing and other emerging technologies. “AI is a massive market and a massive opportunity,” said Reinmoeller, noting that it will be worth an estimated $7.8 billion by 2025 in India alone.

The challenge is applying these impressive results in practice. For business leaders of the future, this will be an essential skill.

The LTT Webinar focused on building new business models, which are a configuration of choices – you have to consider what you want to do, the value to create and benefits to capture, in addition to the purpose.

“Right now we are in an era in which every function in every company is thinking, what can we do with AI? Can it help us increase operational effectiveness?” Reinmoeller said, noting its use in quality control, predictive maintenance, customer service, and demand forecasting in supply chains. 

A fantastic example is Stich Fix, a mail-order clothing retailer that takes an algorithmic approach and places a heavy emphasis on data. It offers a personal styling service, with customers filling out a survey about their style preferences and the company sending them several items. The customer offers feedback on the selection, feeding back into the data machine and improving the prediction model.

“It’s a massively successful business and it highlights how subscriptions to a system like that are beneficial,” said Reinmoeller.

Predictive power

He shared a template for building or overhauling business models using AI: first off, AI can be used to make predictions to inform strategy. “AI helps us in identifying the geographical market segments or product market categories we might want to go into,” he said. “The challenge for business leaders is that you need specific ‘what’ questions to ask. You need specific ideas so the AI can say whether choice A is better or worse than choice B.”  

Value creation

Second, AI can help executives to find out what value their organizations can create for customers. “We create value by generating effects,” said Reinmoeller. These can be a specific function like transportation from a car, an emotional effect like a design that is attractive, or an effect that is more symbolic like first-class plane journeys conveying prestige, he explained. “We can use AI to help us with making the right choices on what kind of effects to accomplish.”

Growth driver

Third, AI can help to determine the revenue streams that help the business to extract the most value from the marketplace. “To capture value you need to figure out with AI what gives you an opportunity to, for example, raise prices or lower costs in ways that are still acceptable for customers,” he said.

The professor pointed to Shein, the Chinese “social commerce” company that combines social media with online shopping. Its success rests partly on its formula of selling a constantly updated range of fashion items at knock-down prices.

The company trawls the web for the latest trends using algorithms to work out what is resonating with consumers. It then tests these new designs in its app, giving mangers a real-time view of the performance of each item.

“In addition, you can also use AI to test different models of ownership,” Reinmoeller said, highlighting the rise of the sharing economy, which uses AI to match people with assets they want to rent, whether homes on Airbnb or rides on Uber.

Ethical concerns

But the professor stressed – and participants agreed – that the role of human values and judgment in the decision making process remained of paramount importance to businesses.

“In recent years we have seen performance beyond profit becoming big constraints on strategies,” Reinmoeller said. “This is an important development to address when we speak about how AI helps us innovative business models.”

He pointed to numerous ethical challenges that were widely shared by participants. For instance, human resources leaders are using AI to streamline or automate some parts of the hiring process. However, this is raised concerns over bias – Amazon was recently forced to scrap an AI recruiting tool that showed bias against women. 

“This is where the boundaries of empathy are reached,” said Reinmoeller, suggesting that emotional intelligence is a uniquely human skill. “If you use AI solely to maximize profit without considering the societal impact, it could be a short lived business model as you will lose all legitimacy.”

Authors

Patrick Reinmoeller - IMD Professor

Patrick Reinmoeller

Professor of Strategy and Innovation at IMD

His teaching, research and consulting focus on strategic thinking for senior executives. He is the co-director of Asian Innovation strategies program.

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