If you own a business, thinking of starting a business or are an investor in businesses and wondering what AI means for you, this is for you.
1. Impact of Generative AI:
Generative AI is expected to have on several business sectors, including Sales, Marketing, R&D, Customer Operations, and Software as identified in a McKinsey report. However, despite its vast potential, there are areas like Strategy and Pricing, which depend on human insights and behaviour which will be less disrupted.
2.Hype Cycle of Technologies:
Research by Gartner’s and their Hype Cycle, which has Generative AI at the "Peak of Inflated Expectations." This is a typical path for new technologies which eventually move through disillusionment towards practical applications and productivity as they mature and are better understood.
3. Limits of AI in Strategy and Pricing:
While AI can offer valuable guidance and possible strategies it cannot fully replace humans in areas that require deep understanding, nuances such as market behaviours, emotional intelligence, and flexibility. This underlines a fundamental limitation in how AI can be applied in real-world businesses.
4. Behavioural Science and Human Interaction:
Despite advancements in AI, behavioural science and marketing will play a crucial role in business for the foreseeable future.
This first graph will help, it’s from the McKinsey consultancy and is taken from a report they published looking at the areas which are likely going to be most impacted by the introduction of Generative AI
Generative AI an area of AI which has achieved the most publicity recently. You’ll be familiar with Voice, Music, Text, and Images. But Generative AI covers so much more; in fact, anything from designing new real-world objects to the creation of totally synthetic worlds. The area of Generative AI is massive.
As you can see, McKinsey has highlighted several areas where they found Generative AI will have the most impact, including ‘Sales, Marketing, R&D, Customer Operations, and Software’.
Yes, change is coming (if it hasn’t already).
For example, most of my day-to-day activities are in these five areas. When I’m not working or talking to a real person, then I’m working with one of our AI tools which vastly improves my work.
What’s interesting about the McKinsey ‘s Generative AI overview are the areas marked in black. In particular, ‘Strategy’ and ‘Pricing’.
To save you finding this part of the report, they don’t go into a detailed explanation, but I’ll explain in a moment what makes these areas really interesting and why this is important to you.
Let’s look at the second graph. This is from another well-regarded consultancy, Gartner call the Hype Cycle
If you’ve not seen these before, the hype-cycle plotting technologies along a curve. As new technologies emerge, more people get to see, use and talk about it them and so they move the hype-cycle.
It reaches the ‘peak of inflated expectations’ when the mass media pick it up. This triggers lots of new people to try a technology for the first time. Inevitably – and this is the case with most new technologies - those people discover it doesn’t to all they expect. This means the technology slides down the hype-cycle curve into the ‘trough of disillusionment’.
Not lost, as now a better understanding of the technology and its capabilities emerges. This prompts more businesses to get involve, so better versions come to market. Now the technology is raised out from the doldrums to the ‘slope of enlightenment’.
Eventually, each new technology finds its place, through into the ‘plateau of productivity’. That is, until a new technology comes along which then makes its own way through the hype cycle.
Of course, at the Peak of Inflated Expectations. I’m writing this in mid-2024, and I’m fairly confident that it’s still going to be there for a while.
As a technology-led marketing company and long-time users of AI, you’d expect us to have already found the areas where Generative AI isn’t what it’s all cracked up to be. And yes, we have.
As I said we use Generative AI across our whole business from marketing, sales, product development and R&D.
Let's look at what was so peculiar about ‘Strategy’ and ‘Pricing’, and why McKinsey thought the impacted of Generative AI was not so great.
In business, the success of both Strategy and Pricing relies heavily on nuanced human behaviour. A mixture of experience, knowledge, and intuition is paramount.
Just so we’re clear, strategy is the overarching plan to the goal you set out to achieve. In fact, if you don’t have a strategy, at best, you’ll not know that you’ve achieved your goals, and you’ll very likely fail along the way.
You can't just have a strategy alone. For it to be viable, along-side strategy you need tactics.
In fact, Sun Tzu stated in 'The Art of War,' 'Tactics without strategy is the noise before the defeat.' Meaning you must have a coherent strategy – not just a collection of tactics you’re going to try to execute successfully.
Let me give you an example of a strategy created by ChatGPT which on the surface seem viable. Here is the prompt;
Prompt“My goal is to become a World Leader in Coffee Retailing, provide a viable strategy taking into account local and regional products customs.”
Response“Becoming a world leader in coffee retailing is an ambitious goal that requires a well-thought-out strategy….”
Too dam right it does!!
There is no way that Generative AI can verify the risk, costs or viability. Executing a business strategy is beyond its capability, as are understanding the nuances.
Even if we scaled back our aspirations to opening one local independent coffee shop, we’re faced with the same issues.
Prompt“Oops - I need to scale back my aspirations... provide a viable strategy for starting a local coffee shop in Bournemouth?”
Response“Starting a local coffee shop in Bournemouth, a vibrant and picturesque coastal town in the UK, offers a unique opportunity to tap into both the local community and the tourist market.”
Yes - vibrant and picturesque it is!
As you can see every aspect of a successful business strategy ultimately relies on people.
Here’s why I think Generative AI isn’t going to encroach on every area of our working and personal lives.
People rarely make decisions based on logic alone.
Business owners don’t like unpredictability, particularly when dealing with customers, suppliers, and co-workers.
Generative AI can be very good at providing an outline of a business strategy, but it can't 'execute' the tactics for you. (At least for now).
The second area McKinsey point out will be less affected by Generative AI is Pricing.
Now there are two main approaches to price setting (assuming you want to sell for a profit). They are, cost-plus and value-based.
In cost-plus pricing you add a fixed profit margin to your costs and that becomes the sales price. A value-based sale price is your costs plus the ‘perceived value’ of the product to the customer.
These pricing strategies go a long way to explain the price difference on supermarket shelves with own brand products against premium brands. Often supermarkets dictate the price they are willing to pay suppliers. Ideally this is an agreed margin above which it costs the supplier to provide the goods.
While we expect premium luxury items to use better quality materials what the customer is willing to pay goes a long way to determine the price of the shelf.
If we leave an important aspect like the cost of goods to an AI, there's potential for biases; such as people being offer different prices based on age, ethnicity, gender, or sexual orientation.
I've already been subject to age discrimination in product recommendations. Obviously, Amazon knows my age and ethnicity. Yet it recommended this higher price toothbrush rather than the cheaper one.
Here you can see that these two electric toothbrushes are essentially the same but sold at different prices.
The adult one is nearly £28, and the kids' toothbrush is £21. That’s 33% more and it doesn't even come with the any Frozen stickers – which I'm sure Braun, the manufacturer, pays a royalty to Disney.
You can possibly tell this makes me angry!
Most of the time, we purchase products based on emotions – this is actually why I bought the Frozen toothbrush.
Pricing, strategy, along with hundreds, maybe thousands of other areas of business, are driven by emotion. Generative AI (for now) doesn’t know diddly.
There has to be an alternative which explains why we humans make the decisions we do; choose our friends, have relationships, and buy stuff from some companies and not others.
Richard Thaler was awarded the Nobel Prize winner as a result of developing the fundamentals of Behavioural Science.
Our behavioural marketing approach is unique because it's the optimal mixture of the latest AI technology, data, and behavioural science.
Remember, we humans have been buying and selling to each other for thousands of years.
So, where are you now with Generative AI? Are you in the 'Holy Crap' camp or 'Not so Fast'?
I’m excited about the speed and direction of Generative AI. I'm also very confident we haven't seen anything yet.
However, for the foreseeable future humans will be needed to fill in the gaps.
Human logic can be skewed which gives little chance for AI to fully reason, understand and predict us. Yet alone explain why I, and thousands of others, willing buy the more expensive toothbrush.
Alan Coote:
What qualifies me to talk about this?
Alan is the founder several successful businesses, a technical director and has worked as software and electronic engineer developing AI systems as far back a 1990.
He is the co-founder and Development Director at Monogram Media, where we’ve building and integrating AI across our tools and processes for several years.