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AcademyofManagementReview
COMPETITIVEADVANTAGESTHROUGHARTIFICIALINTELLIGENCE:TOWARDATHEORYOFSITUATEDAI
Journal:
AcademyofManagementReview
ManuscriptID
AMR-2020-0205-Original.R3
ManuscriptType:
OriginalManuscript
TheoreticalPerspectives:
Resourcebasedview,Knowledge-basedview,Learning,Adaptation,Routines,andKnowledgeManagement
OtherTheoreticalPerspectives:
TopicAreas:
Business-levelresources/capabilities<BusinessandCompetitive
Strategy<BusinessPolicyandStrategy,Knowledgemanagement<StrategicManagementProcess<BusinessPolicyandStrategy,
Technologyevolution<TechnologyandInnovationManagement
OtherTopicAreas:
Abstract:
Howcanfirmsestablishcompetitiveadvantagesusingartificial
intelligence(AI)?AlthoughAIisbeginningtopermeatebusiness
activities,ourunderstandingofhowAIcanbeusedtocreateuniquevalueislimited.Toaddressthisvoid,weintroducetheconceptof
situatedAIandilluminateitsimportanceforestablishingAI-drivencompetitiveadvantages.Thepaperhighlightstheorganizational
activitiesinvolvedinsituatingAI—grounding,bounding,andrecasting.Italsoexplainstheconditionsinwhichthesesituatingactivitiesbetter
enablefirmstodevelopAI-drivencapabilitiesthatarefirm-specific,cost-effective,andappropriateforopportunitiesinthestrategicenvironment.Thus,thispaperprovidesanintegrativeframeworkforconnectinga
firm’sAIpursuitstocompetitiveadvantage.
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COMPETITIVEADVANTAGETHROUGHARTIFICIALINTELLIGENCE:TOWARDATHEORYOFSITUATEDAI
AyendaKemp
PamplinCollegeofBusiness
VirginiaTechUniversity
ayenda@
Acknowledgments:Iamgratefultotheassociateeditor,AllanAfuah,andtothereviewersfor
theirinsightfulguidanceandsupportthroughouttherevisionprocess.ThispaperhasbenefitedimmenselyfromhelpfulcommentsfrommycolleaguesCynthiaDevers,DeviGnyawali,RichardHunt,AbrahamOshotse,KarenSchnatterly,andMaxStallkamp.
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COMPETITIVEADVANTAGETHROUGHARTIFICIALINTELLIGENCE:TOWARDATHEORYOFSITUATEDAI
Abstract
Howcanfirmsestablishcompetitiveadvantagesusingartificialintelligence(AI)?AlthoughAIis
beginningtopermeatebusinessactivities,ourunderstandingofhowAIcanbeusedtocreate
uniquevalueislimited.Toaddressthisvoid,weintroducetheconceptofsituatedAIand
illuminateitsimportanceforestablishingAI-drivencompetitiveadvantages.Thepaper
highlightstheorganizationalactivitiesinvolvedinsituatingAI—grounding,bounding,and
recasting.ItalsoexplainstheconditionsinwhichthesesituatingactivitiesbetterenablefirmstodevelopAI-drivencapabilitiesthatarefirm-specific,cost-effective,andappropriatefor
opportunitiesinthestrategicenvironment.Thus,thispaperprovidesanintegrativeframeworkforconnectingafirm’sAIpursuitstocompetitiveadvantage.
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TheprospectofusingAItoestablishcompetitiveadvantagespresentsatheoreticalpuzzle.
Estimatespredictthatby2033,somewherebetween40and50percentofjobswillbeautomatedusingintelligentalgorithms(Frey&Osborne,2013),reflectingenhancedproductivityandlowercosts.ItisalsopredictedthatAImayleadtonewproducts(Barro&Davenport,2019;
Davenport&Kirby,2015),byallowingfirmstoembedAIintotheirproductsandbyigniting
innovationsinafirm’sproductdevelopmentprocesses(Gregory,Henfridsson,Kaganer,&
Kyriakou,2021;Cockburn,Henderson,&Stern,2019).Despitethispromise,agrowingbodyofresearchhighlightsthatAImaypresentsubstantialstrategicobstacles.AImaybemyopic
(Balasubramanian,Ye,&Xu,2022),incapableofperceivinginterdependencieswithinafirm
(Raisch&Krakowski,2021),andrecalcitranttomanagerialcontrol(Murray,Rhymer,&
Sirmon,2021).ThesefactorssuggestthatusingAItolowercostsandcraftdesirableproducts
maynotbeassimpleaspreviouslysuggested.Inaddition,AIisaformofexplicitknowledge
(Broussard,2018;Shrestha,He,Puranam,&vonKrogh,2021),andresemblesageneral-purposetechnology(Teece,2018).SoevenwhenAIleadstovaluecreationwithinafirm,theactivitiesunderpinningtheseoutcomesmaybereplicablebyafirm’srivals.Thus,whileAIholdspromiseforpromptingcompetitiveadvantages,itisunclearhowthispromisecanberealized.
ThispaperbeginstoresolvethispuzzlebydevelopingatheoryofsituatedAI—AIwhoseagencyiscircumscribedinafirm’sexperiential,structural,andrelationalsystems.Wegroundourframeworkintheorganizationalcapabilitiesliterature,whichholdsthatcompetitive
advantagesemergeprimarilywhenfirmsdeploytheirstrategicassetsusingorganizational
capabilitiesthatareidiosyncratic(Barney,1991),inexpensivetodevelop(Winter,2000),andalignedwiththefirm’sinternalandexternalenvironment(Mahoney&Pandian,1992;Sirmon,Hitt,&Ireland,2007).WearguethatachievingtheseoutcomesismadedifficultbyAI’s
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propensitytoactwithagency(Murrayetal.,2021),whichmaybecounterproductivewhennotproperlycontextualizedwithinthefirm.WealsoacceptthatuncontextualizedagencymaybeAI’sbaselinestate(Balasubramanianetal.,2022).
Weaddressthestrategiclimitationsofartificialintelligencebyexplaininghowfirmsmay(1)circumscribeAI’sagencyinthefirm’suniqueexperiencesandsystemsand(2)embedthis
transformedAIinthefirm’sorganizationalcapabilitiesthroughthreesituatingactivities:
grounding,bounding,andrecasting.Groundinginvolvesorchestratingwhichexperiencesone’sAIwillbeallowedtolearnfromacrosstheorganization.Boundinginvolveseffortstoshapetheexperiencesanchoringacompetitor’sAI.Recastinginvolvesorchestratingthecontinual
adaptationofalgorithmsandtheirsurroundingroutinestoenhanceAI’salignmentwith
interdependentactivitiesinafirm.Wealsoconsiderhowtechnologicalconstraintsand
environmentaldynamisminfluencethebenefitsofsituatingAI.Thus,thispaperacknowledgesAI’sstrategiclimitationswhileexplaininghowfirmscanovercometheselimitationstobetterrealizeAI’spotentialasanewfoundationforcompetitiveadvantage.
CONCEPTUALBACKGROUNDThePromiseofAIforCompetitiveAdvantage
Artificialintelligence(AI)broadlyreferstomachinesthatcancompletecognitivetasks
previouslypossibleonlyforhumans(Davenport,2018).Whilethereisalonghistoryof
machinesdisplacinghumanworkers,theriseofAIisuniqueinthatmachines,forthefirsttime,can“l(fā)earn”andperformtheirworkwithagency(Faraj,Pachidi,&Sayegh,2018).Withprevioustechnologies,machinescompletedtheirworkbyfollowingintricateif-thenstatements
programmedbyhumanactors.Themachinehadnoagencytospeakof;itsactionswereadirectreflectionoftheknowledgeofitsprogrammers(Dreyfus&Dreyfus,2005;Norman,2017).In
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contrast,withAI,thecomputerisprovidedasetofinputdata,alearningobjective,anerror
function,andamathematicalalgorithmforminimizingthaterrorfunction(Chenetal.,2020;
Alpaydin,2016).Armedwiththisbasicdescriptionofaproblem,thecomputerthenlearnsits
own“rules”forlinkingtheinputdatatothedesiredoutcomes.Whatiscriticalabouttheserulesisthattheyarenotcreatedbyhumanactorsand,inmanycases,cannotevenbeexplainedby
humans(Castelvecchi,2016).Thus,AIcanbethoughtofaspossessingadistinctformofagenticrationalitythatincreasinglyallowsmachinestoperformcognitivetasksatalevelequalingor
surpassinghumanperformance(Murrayetal.,2021).
ThepowerofAIhasledmanytobelievethatAIwillrevolutionizeeconomicproductionbymakingfirmsmoreefficientthroughintelligentautomationandbyassistinghumansin
solvingnovelproblemsthatmayleadtovaluecreationthroughthedesignofnewproductsandtheimprovementofoldones(Barro&Davenport,2019;Brynjolfsson&Mitchel,2017;Frey&Osborne,2013).Indeed,wearebeginningtoseeprocessandproductimprovementswithAI
acrossmultipleindustries(Tarafdar,Beath,&Ross,2019).Asoneexample,DBSBankrecentlyimplementedAIthatpredictswith85percentaccuracywhetheranemployeewillleavewithinthreemonths.ThefirmisnowusingAItopoweradigital-onlybankinIndiathatemploys90
percentfeweremployeesthanatraditionalbank(Davenport,2018).Asasecondexample,
fragrancedesignersnowuseAIduringproductdevelopmenttoproduceperfumesthatappealtoconsumersmorethanfragrancescreatedbyhumanexpertsalone(Goodwinetal.,2017).
Despiteimprovementsinoperationsandproductdesign,however,firms’investmentsinAImayfailtomaterializeasprofits.InarecentsurveybytheBostonConsultingGroup,nineoutoftentopmanagersreportedthatAIrepresentsalargebusinessopportunityfortheirfirms
(Ransbothametal.,2019),and43%ofexecutivesreportedhavingimplementedAIintheir
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organizations.Thereportalsonoted,however,that“mostcompanieshaveahardtimegeneratingvaluewithAI.”Lui,Lee,andNgai(2022)offerempiricalsupportforthisconcern,findingthatmarketspenalizeAIadoptionsatthefirmlevel.Thus,whileAIisbeginningtoleadtoproductandprocessimprovements,firm-levelbenefitsofAI,suchasimprovedmarketperformanceorcompetitiveadvantage,maybemoredifficulttoachieve.
ThreeStrategicLimitationsofAI
Whatexplainsthisdisconnect?WhileexistingtheorydoesnotexplainhowfirmscansystematicallyleverageAItodevelopcompetitiveadvantages,recentresearchshedssomelightonobstaclestodoingso.Weexaminetheseobstaclesfromanorganizationalcapabilities
perspectiveandidentifythreereasonswhyfirmsmaystruggletoestablishcompetitive
advantageswiththeirAIinvestments.WefocusonAI’sgeneric,explicit,andmyopicnature.WhileAIundoubtedlyraisesmanyothernewchallengesforfirms,thesethreelimitationstakeprominenceinourtheoryduetotheiradverseeffectsoncapabilitydevelopment,whichwewillargueiscentraltoestablishingcompetitiveadvantageswithAI.
ThefirststrategicchallengeofAIisitsgenericnature.ThelogicemergingfromanAIalgorithmisgenerallynotuniquetotheuserapplyingthatalgorithm.Instead,itcanbe
“rediscoveredbyanyoneusingthesameprocedure”(Shresthaetal.,2021:4).Forexample,allelsebeingequal,aneuralnetworkalgorithmwillarriveatthesamelogicforconnectingasetofinputstooutputsregardlessofwhetherSpotifyorPandoraoperationalizestheneuralnetwork.ThissuggeststhatAImaydisplaycommonbehavioralpatternsacrosscompetingfirms.This
pointregardingthegenericnatureofAIiscriticalbecauseAIisregardedasageneral-purposetechnologyakintoelectricity,thesteamengine,ortheinternet(Brynjolfsson&Mitchell,2017;Frey&Osborne,2013;Lynch,2017).General-purposetechnologiesarelikelytobewidely
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adoptedamongcompetingfirms(Bresnahan&Trajtenberg,1995).Asaresult,these
technologiestendtogenerateeconomy-widebenefitsratherthanprivaterents(Bresnahan&Trajtenberg,1995;Teece,2018).Thus,whileAImayhelpafirmtodevelopbetterandcheaperproducts,theex-facieexpectationisthatAIwillhelpafirm’scompetitorstodothesame.
ThesecondstrategiclimitationofAIisthatAImanifestsasaformofexplicitknowledge.AIalgorithms,andthedatathatdrivethem,mustbeavailabletothecomputerintheformof
explicitinstructionsormathematicalformulas(Broussard,2018).Consequently,the
organizationalknowledgethatdrivesafirm’sAIprocessesmaybeextractedfromcyber-attacksandmaybehighlyportableduringemployeeturnover(Tramér,Zhang,Juels,Reiter,&
Ristenpart,2016).Thisobservationisconsistentwiththegeneralideathatexplicitknowledgediffusesrelativelyquicklyacrossorganizationalboundaries,makingitchallengingtobuild
competitiveadvantages(Grant,1996;Nickerson&Zenger,2004).ThischallengeisespeciallysalientforAIbecauseintellectualpropertylawsdonot(currently)allowforpatenting
mathematicalformulasandprocedures(Gaudry&Hayim,2018;Liyange&Berry,2019).Thus,identifyingmechanismsforpreventingthespreadofAIassetsacrossfirmboundariesiscritical.
ThethirdstrategiclimitationofAIismyopia.AIismyopicinthesensethatAI
algorithmslackcontextualawarenessofactivitiesandeventsbeyondthescopeoftheirassignedtasks(Balasubramanianetal.,2022;Dreyfus,2012;Raisch&Krakowski,2020).AsingleAI
algorithmcantypicallyexecuteonlyasmallsubtaskwithinanentireorganizationalroutine
(Davenport,2018).Thus,AI-drivenroutineswillnormallyemploycollectivesofAIalgorithms(see,forexampleKumar,Venugopal,Qiu,&Kumar,2018).Yet,analgorithm’sabilityto
recognizeinterdependenciesbetweenitstaskandothertaskswithinthefirmislimited.Thismayresultinexpensivetechnicalandoperationalfailures(Balasubramanianetal.2022;Dreyfus,
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2012).Moreover,becauseAIcompletesitstaskwithhighdegreesofagency,managersfinditdifficulttocorrecttheseerrorswhentheyoccur(Murrayetal.,2021).
ArelatedconsequenceofAI’smyopiaisthatAIwilllackasophisticatedunderstandingofafirm’sstrategy.Thus,evenwhenAIbehavesinamannerthatisoptimalforcarryingoutatask,thereisnoguaranteethatthiswillresultinbehaviorthatisappropriateforthekindsof
marketopportunitiesafirmispursuing(orshouldbepursuing)(Balasubramanianetal.,2022).Forinstance,abudgetairlinemaydevelopAIthatcorrectlyidentifiesthatacustomercanpay$2,000forashort-haulflight.Still,thisAImaybeincapableofunderstandingthatmakingsuchanofferisinconsistentwiththefirm’smarketidentityandlow-costproviderstrategy.Inotherwords,theultimatevalueofAItothefirmdependsnotonlyonitstaskeffectivenessbutalsoonitsfitwiththefirm’soverallstrategy.Thus,organizationalmechanismsforovercomingAI’s
myopiaarenecessaryforestablishingcompetitiveadvantages.
Thegeneric,explicit,andmyopicnatureofAIallendangeritsfirm-levelbenefits,butareuniquelydifficulttosurmountbecauseAIisbothamachineandagentic.Forexample,AI’s
genericnatureisakintogeneralhumancapital.Generalhumancapitalcannottypicallyunderlyinterfirmadvantagesbecauseafirm’scompetitorscanusuallyacquireanddeploythat
knowledgeinwaysthatcloselymimicthefocalfirm(Barney&Wright,1998).UnlikewithAI,however,generalhumancapitalisconvertiblewithinafirmthroughsocializationandcanbe
madecontext-specificashumanemployeesengageinrichinformalsocialinteractionswithinthefirm(Coff,1997).ThisoptionisunavailableforAIbecauseitisamachine.Ontheotherhand,AI’scapacitytoactwithagencyremovesthetypicalmodesofcontrollingtechnologyinan
organization.Consider,forexample,thecaseofexpertsystems,whichwereheavilyusedbeforetherecentriseofAI(Cholletetal.,2022).LikeAI,thesesystemsweremyopicbecausethey
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coulderroneouslyoverlookorganizationalinterdependencies.However,whensuchproblems
arose,theycouldbeaddressedbysupplyingthemachinewithmorerules.ThisoptionisnotasfeasiblewithAI,whichdependmoreondatathanrulesasbehavioralconstraints.Thus,AIaltersthefirm’sknowledgeproductionfunction,makingpathstocompetitiveadvantageelusive.
ConceptualBuildingBlocksforTheorizingAI-drivenCompetitiveAdvantages
WedevelopatheoryofsituatedAItoexplainhowfirmscanovercomethesestrategiclimitationstocraftcompetitiveadvantages.Weuseasourconceptualfoundationsthe
organizationalcapabilitiesliterature(Eggers&Kaplan,2013;Nickerson&Zenger,2004),andtheworkonhumanagency(Emirbayer&Mische,1998;Westphal&Zajac,2013).Webrieflydescribeeachconceptualbuildingblockbelow.
CapabilitiesandCompetitiveAdvantage.Anorganizationalcapabilityisacollectionofroutinesthat,togetherwiththeirimplementinginputflows,conferuponanorganization’s
managementasetofdecisionoptionsforproducingsignificantoutputsofaparticulartype
(Winter,2003).Theorganizationalcapabilitiesperspectiveviewsfirmperformanceasafunctionofsystematicandrandomfactors(Winter,2000).Marketsaremodeledascollectivesof
competingfirmssolvingarelatedproblemundertechnicalandbehavioraluncertainty(Afuah&Tucci,1997;Nickerson&Zenger,2004).Profitsareviewedasephemeralintheabsenceof
competitiveadvantagesgrantingsomefirmsastructuraledgeoverothers(Barney,1986).Andaafirm’sprimaryconcernliesinidentifyingandorchestratingpatternsoforganizationalactivitiesthatcanbereliablyleveragedtocreateandcapturevalue(Winter,2003).
Thecapabilitiesperspectivefocusesonthreecoresourcesofcompetitiveadvantage:
firm-specificity,capabilitydevelopmentcosts,andenvironmentalfit.Firm-specificcapabilitiesarethoseproducedusingco-specializedknowledge,leadingthemtohavegreatervalueinsidea
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firmthanexternally(Helfat,1994;Mahoney&Pandian,1992).Also,craftingfirm-specific
capabilitiesismorelikelywhenatleastsomeoftheco-specializedknowledgeneededtoproduceordeployacapabilityistacitorsociallycomplex(Grant,1996;King&Zeithaml,2001;
Nickerson&Zenger,2004).Second,becausecraftingcapabilitiesrequiresorganizationaleffortandresources,thecostofdevelopingacapabilitymustnotsupersedethevalueearnedfrom
deployingthecapability(Argyersetal.,2019;Winter,2000).Finally,customersarelikelyto
respondpositivelytoafirm’sofferingsonlywhenthefirm’scapabilitiesareadequatelymatchedtotheirneeds(Sirmonetal.,2007).
Situatedagency.Organizationsactwithagencytoinfluencetheircapabilitiesandthe
environmentsthatbindthem(Gavetti,Helfat,&Marengo,2017;Gavetti&Torras,2021;Nayak,Chia,&Canales,2020).Agencygenerallyinvolvesfreechoicewithconstraints(Emirbayer&Mische,1998;Giddens,1979).Ourbasicargumentisthat,whilefirmscannotalwayslimitAI’sagencydirectly(andmightnotwantto),firmscanbalanceamachine’sagencywithhuman
agency,bystrategicallystructuringthecontextinwhichAImakessenseofproblemsandappliessolutions.Agencyhasthreedimensionsthatinformhowanactor’sbehaviorisconstrainedandhowfreechoicemaymanifest(Emirbayer&Mische,1998).Theiterationaldimensionofagencyinvolvesactionsanchoredinanorganization’spriorexperiences.Thepracticalevaluative
dimensionofagencyconsidersactionanchoredinanorganization’spresentsocialcontext.Theprojectivedimensionofagencyregardsactionsbasedinanactor’sabilitytoreimaginetheir
organization’spresentarrangementstomeetfuturegoals.Agencyisconsideredtobesituatedwhenconstraintsonagencyoriginatepredominantlyinthesamecontextinwhichtheagentacts(Botti,1998;Westphal&Zajac,2013).WebuildonthisworkbyconceptualizingsituatedAIasthetechnologicalanalogofsituatedagency.
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Capabilitydevelopment.WearguethatfirmscansituateAIduringcapability
development.Capabilitydevelopmentinvolvesorchestratingorganizationalactionacrossfour
steps:bundlingstrategicassets,embeddingassetsinroutines,assemblingroutinesascapabilities,andmatchingcapabilitiestoopportunitiesintheenvironment(Collis,1994;Eggers&Kaplan,2013;Sirmonetal.,2007).Withinthescopeofthismodel,wetreatinputdataasthemajor
strategicasset(Gregoryetal.,2021),andwereplacethefocusontraditionalroutinesinpriorcapabilitymodelswithafocusonconjoinedroutines,whichreferto(partially)automated
organizationalroutineswheretheroutine’sdesignandexecutioninvolvesamixofhumanandnonhumanagency(Murrayetal.,2021).
We,therefore,defineanAI-drivencapabilityasacollectionofconjoinedroutineswhich,alongwiththerequiredinputdata,allowafirmtoexecutespecificvaluechainactivitiesina
repeatableandreliablemanner(Gregoryetal.,2021;Helfat&Winter,2011;Winter,2003).OurmodelintroducesthreesituatingactivitiesthatfirmsmayleveragetoorchestratethedevelopmentofAI-drivencapabilities:grounding,bounding,andrecasting.
AcorepartofourtheorizinginvolvesaccountingforhowsituatedAIisadaptedinafirm’sAI-drivencapabilitiesovertime.Therefore,webuildonpriorresearchviewing
organizationaladaptationasincrementallychangingafirm’scorestructuresandstrategies
throughexperimentationandproblem-drivensearch(Ethiraj&Levinthal,2004).Wefocusonthelearningliteraturecenteredonthecognitiveunderpinningsofadaptivecapabilityformation(Gavetti&Levinthal,2000;Tripsas&Gavetti,2000).
Afinalconsiderationadoptedfromtheorganizationalcapabilitiesperspectiveisattentiontodynamisminthefirm’senvironment.Asafirm’sstrategicenvironmentbecomesmore
dynamic,newmarketopportunitiesmayemerge,existingopportunitiesmayevaporate,andthe
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technologiesandcapabilitiesneededtocaptureopportunitiesevolve(Sirmonetal.,2007;Teece,2007;Tripsas&Gavetti,2000).EnvironmentaldynamismhassignificanceasitrelatestoAI-
drivencapabilitiesbecauseAIshiftstheextenttowhichafirm’sroutinesareresponsivetochange(Balasubramanianetal.,2022;Murrayetal.,2021).We,therefore,considerhowenvironmentaldynamisminfluencesthebenefitsofsituatingAIforcompetitiveadvantage.
AIcharacteristics.OurtheoryisintendedtoaccountforthelargeandgrowingformsofAItechnologies.WefollowthemachinelearningliteraturebycharacterizingAIalgorithms
basedontheirtrainingparadigms(supervisedversusunsupervisedlearning)andtheirdegreeofexplainability.AnAIalgorithmismoreexplainablewhenitiseasierforhumanoperatorsto
describethelogicthroughwhichthealgorithmlinksinputstooutputs(Aryaetal.,2019;Gilpinetal.,2019).Thismayinvolvedescribingwhichfactorsanalgorithmweighsheavilywhen
arrivingatasolutionorprovidingsomeintuitionforhowthealgorithmtreatstheinteractionbetweendifferentfactors(Gilpinetal.,2019;Hendricksetal.,2019).Whilesomealgorithmsallowforahighdegreeoftransparencyregardingtheirinnerworkings,otherAIalgorithmsdonot.Figure1showshowsomestandardAIalgorithmsfitthistaxonomy.
***Figure1abouthere****
ThelearningparadigmtellsushowAIisinstructedtomakeinferencesfromthedata.
Withsupervisedlearning,AIisprovidedwithtrainingdatainwhichthe“rightanswers”fora
problemhavebeenlabeled(Dike,Zhou,Deveerasetty,&Wu,2018;Murphy,2012).Labelsmaybeprovidedbyhumanactorsormaybeinferredusinghumanknowledgeofthedatasource.Forexample,afirmmaytrainAItowritecomputercodebyscanningsiteslikeforuser-providedcodingquestionsandthenusingthehighest-ratedinputasthecorrectanswer.Incontrast,unsupervisedlearningprovidesAIwithdatabutnotwith“ans
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