Incumbent Firms/Boardroom Questions

Delivered March 28th, 2018. Contributors: Michelle R., Pamela E., Annette R. and

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AI in the Board Room

Our research team has investigated if AI is used in business by upper management, and we have concluded that a number of companies are beginning to utilize AI, either by the CEO of the company, or by upper management. The potential for AI in the boardroom is vast, and includes being able to improve strategic decision-making, review and process press releases, identify subtle changes in customer preferences, and administrative coordination and automate control tasks for management.   
HOW AI CAN IMPROVE THE BOARDROOMThe potential of AI is currently high, and many tech companies are beginning to envision how AI can improve a company's upper management. One way AI can advance the way companies are run is to improve the way the Board of Directors handles making strategic decisions. The AI will track capital allocation patterns across the industry, highlight any potential concerns such as a decrease in company spending while competitors are increasing investment, and then bring it to upper management's attention.

Another way is for the AI to review and process press releases. AI would be able to scour through more press releases than a human being would be able to, and would be able to identify new competitors moving into key markets much faster. When these new competitors have been identified, the AI would be able to make suggestions to members of the board on which investments would protect market share to upper management or the Board of Directors.

AI will also be able to analyze internal communications and assess employee morale, which will help improve the operational decision-making done by a Board of Directors. 

AI can easily pick up on subtle changes in customer preferences. Such changes could potentially have product or strategy implications for a company, and therefore it is imperative that these changes be identified quickly.    
CEOS AND UPPER MANAGEMENT THAT UTILIZE ARTIFICIAL INTELLIGENCEAI is already being used by upper management in companies. The CEO of Salesforce, Marc Benioff, uses an AI system called Einstein. Einstein scours through data to identify trends and patterns, evaluate performances of various markets, highlights key attention areas, and brings any important information to Benioff's attention. 

Deep Knowledge Ventures, a Hong Kong-based venture capital firm, uses Vital. Deep Knowledge Ventures credited Vital with rescuing the company when it was on the brink of bankruptcy. Vital was able to identify which projects that the company was investing in would have a very high failure rate, and therefore they were able to avoid making too many risky investments. 

Merck and Columbia Sportswear use an AI system called Aera. The AI system Aera can answer questions about revenue optimization, and can make suggestions such as shifting inventory from one territory to another.

 Aera has predictive modeling capabilities, and can take action when needed, making it easier for companies to make crucial decisions much faster. The CEO of Aera, Fred Laluyaux, hopes that companies and their CEOs will move towards automating their decision-making. 

Goldman Sachs started using AI in investing back in 2008. The AI is used to evaluate the profitability of a company, and determine whether a company's shares are undervalued. The AI has reportedly already processed over a million analyst reports and 26 million news reports. 
THE FUTURE OF ARTIFICIAL INTELLIGENCE IN UPPER MANAGEMENTA number of tech companies are beginning to research and develop AI that would change the way CEOs and the boardroom work. The World Economic forum predicted that the first AI to serve on a Board of Directors will happen by the year 2025. 

Kensho Technologies provide next-generation investment analytics. They are currently designing a system that will allow investment managers or CEOs to ask investment-related questions in plain English. One of the questions that could potentially be asked is, "What sectors and industries perform best three months before and after a rake hike?" The AI will then be able to provide answers within minutes. 

Tech companies will also develop AI that can simulate social skills and network the way CEOs and Board of Directors are able to.   

Deloitte released a State of the State report, and in it they stated that networking with an AI boss is a future possibility. They determined that personal interaction on part of the CEO or higher management still face a 23% chance of automation.   
CONCLUSIONThere are a number of ways AI can improve how upper management or a Board of Directors work, such as reviewing and processing information that will lead to faster and more informed decision-making. The CEO of Salesforce, Marc Benioff, uses an AI system called Einstein to help automate various procedures in order to increase productivity. Tech companies are beginning to develop AI to improve the way CEOs and directors do their work, and the first AI to serve on a Board of Directors is expected to happen by the year 2025. 

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Incumbent Firms - How to Stay Innovative

Incumbent firms, also called legacy companies, are successful companies that have, at times, become so confident in what they have successfully accomplished they neglect to change with the times. Worry about new ideas failing and hurting their profitability can keep them from embracing new ideas, technologies, and products. Their argument is counterintuitive, however. To stay competitive in today's market, incumbent firms need to create disruption within their organizations by focusing on the "leading-edge development of forward-thinking products and services" while continually improving and upgrading existing products and services. To achieve this, incumbent firms need to be innovative. The methods of innovation used by incumbent firms include R&D, M&A, incubators, accelerators, Corporate Venture Capital (CVC) investing, experiment-based decision-making, the implementation of Chief Innovation Officers, and the setting up "innovation outposts".  A description of each of these innovative methods, as well as specific examples of each in use, has been provided below.
Methods of innovation Research and Development (R&D) and Mergers and Acquisitions (M&A) are time-tested methods of innovation still being used today.  They are not, however, the only methods being used by incumbent firms wishing to innovate.  Other methods of innovation used include incubators, accelerators, Corporate Venture Capital (CVC) investing, experiment-based decision-making, the implementation of Chief Innovation Officers, and setting up "innovation outposts" in technology hot spots.  
RESEARCH & DEVELOPMENT (R&D) R&D has been used as an internal method of innovation for almost 50 years and is still a trusted way to achieve innovation. In fact, according to the National Science Foundation, corporate R&D accounted for $355 billion out of a total of $499 billion spent on R&D in the US during 2015.
MERGERS & ACQUISITIONS (M&A) M&A is a well-established and accepted method of external innovation. A TechCrunch article quotes PitchBook as stating that the merging with or acquiring startups and smaller businesses with innovative ideas and products resulted in U.S. and European corporate buyers spending a combined $1.7 trillion during 2016. 
INCUBATORS Incubators, like R&D, is a form of internal innovation. Ideas are generated are developed within an existing, often incumbent, company and then sometimes spun-off with the company that created the spin-off retaining a minority equity. Incubators are used by numerous companies. Startups and small non-profits currently account for 93% of business incubators but large, incumbent firms and legacy companies are starting to recognize the importance of incubators for fostering innovation and are creating their own. Below are examples of companies that used an incubator to create a product and company that was, in some instances, spun-off:

 McDonald's spun out Red Box which was then acquired by Coinstar 
  Google spun out Niantic Labs & Pokémon GO
   Oracle Labs’s developed the Java programming language
  Amazon’s Lab 126 created Kindle Echo and Fire products. 

AOL's Fishbowl Labs is designed to lend support to innovators and startup by providing them with the resources they need to successfully operate, no matter where they are located. 

Samsung's Strategy and Innovation Center is an incubator designed to help innovators "find solutions within the world of connected devices" and they are investing their capital, resources, and expertise to help make that happen. 

In their article, TechCrunch states that according to New Markets Advisers many "Fortune 500 companies—including Procter & Gamble, IBM, Walgreens and The Hershey Company—have some sort of incubator efforts in at least one business unit".

 Experian DataLabs is using an incubator in a way that is unique. Experian is partnering with the public. When clients contact Experian with difficult, data-related problems, the company uses their teams of data scientists and related problem solvers to solve the problem. Often, this requires the development of new products. Once the problem is solved, the new product is looked at to see if there is a greater need for it; if the problem that resulted in its creation is likely to be more widespread. If the answer to that question is yes, then this customer-driven product is released for general sale. Experian DataLabs currently has three locations: the US, the UK, and Brazil, where the solving of customer data problems using this method has resulted in the development of numerous (a concrete number was not given) new products.
ACCELERATORS Accelerators are a method of external innovation. The ideas are not generated by the company that runs the accelerator program. Instead, startups and small businesses apply to participate in a limited-time program that, although affiliated with corporations, are often managed by third-party companies. TechStars is a company that manages accelerators for other companies like Amazon Alexa, Barclays, and Cargill. Accelerators typically trade investment for a small percentage of equity. The incumbent firms that run accelerators do not own the companies they work with, rather a partnership is established

Examples of successful accelerator programs:
1. Walt Disney Co. whose accelerator helps select companies and tech innovators gain innovate new technologies, experiences, and products by giving them access to the Walt Disney Co.s creative expertise and other resources. In 2017, 11 companies including Kahoot!, Epic Games, and The Void were accepted into Disney's accelerator program. These companies received funding and guidance from Disney, as well as access to co-working space at Disney's LA-based Creative Campus. The intellectual property rights to everything created in the accelerator belongs to the company who created it. Disney's hope is that some of these companies will continue to have a working relationship with Disney once the accelerator ends and many do.  Disney is investing in innovation that benefits more than just its companies.

2. Google's Launchpad Accelerator Program. This is a 6-month long program that matches " growth-stage startups from emerging ecosystems" with Google's best networks, technologies, and people. Launchpad Accelerator Program includes "equity-free support", personalized mentoring by both Google and other Silicon Valley experts, training at Google's Silicon Valley-based HQ, and more. The training occurs during a two-week-long, all-expenses paid session.
CORPORATE VENTURE CAPITALS Corporate venture capital (“CVC”) is similar to accelerators in that funding is tied to a minority share of ownership equity. Unlike accelerators, fewer startups are funded through this model the relationship formed tends to last longer than those established during accelerator programs partly because the goal of CVCs is to "build an ecosystem of relationships in the startup world", that will give corporations a fresh eye on what new insights, ideas, and technologies are being developed. 

 Examples of incumbent firms with CVCs:
1. Google with Google Ventures which was the largest CVC in the world in 2015.
2. BMW with i Ventures
3. Citi Bank with Citi Venture
4. GE with GE Ventures 
5. Intel with Intel Ventures
CHIEF INNOVATION OFFICERS Chief Innovation Officers are in charge of developing innovative ideas and products within their organizations. They may develop their own ideas or be directly involved in the process if it is internal or they may act as more of a general manager and point of contact while working with other companies if the method used is external. Their specific roles vary according to the type of company or institution they work for and the method of innovation being used, but most are responsible overseeing the implementation of innovative ideas, products, and technologies no matter which method of innovation was used to create them.  To help further this area, Chief Innovation Officers summits are held annually at locations including New York City and San Francisco. These summits, attended by Chief Innovation Officers and other company leaders of innovation feature speakers from a variety of companies including Capital One, Merck, PayPal, and AIG.
INNOVATION OUTPOSTS Innovation outposts are used by companies that want to tap into the knowledge in locations that are technology hot spots such as Boston and Silicon Valley without fully relocating there. This approach is popular with Fortune 500 corporations who believe that if you have a presence where new trends, ideas and such are generated you have a better chance of recognizing and adopting them early on. Companies using innovation outposts need to make sure that they are not only recognizing the new ideas being developed around them but that they capture those ideas, understand what is going on behind them, then use an “integration and propagation” process to make sure the potential value provided by the ideas and trends they have recognized is effectively communicated to the innovation teams located at the company's headquarters. To be successful, any "integration and propagation" process needs to seek out and develop relationships with local innovation teams and experts who possess innovative intelligence and insights so that when opportunities present themselves, they can be taken advantage of quickly and successfully. 
Yeh ideology Yeh IDeology is a "Talent Strategies and Recruitment firm specializing in Design and Innovation" that works with F100 companies and top consultancies to create innovative ways to attract and retain top talent. Clients include Microsoft, Samsung, HP, REI, Bissell, and more.
ConclusionTo stay competitive in today's market, incumbent firms need to create disruption within their organizations by focusing on the "leading-edge development of forward-thinking products and services" while continually improving and upgrading existing products and services. To achieve this, incumbent firms need to be innovative. The methods of innovation used by incumbent firms include R&D, M&A, incubators, accelerators, Corporate Venture Capital (CVC) investing, experiment-based decision-making, the implementation of Chief Innovation Officers, and the setting up "innovation outposts". Companies may use their own departments to handle all aspects of innovation, or they may hire third parties like Yeh IDeology to help them out. 

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Incumbent Firms - Disrupted

Technology disruption is the wave of our future.  Every few years it appears that another new technology feature is putting an older one out of business. While Kodak had the niche market on cameras during its time, it could have also had the market on digital photos and file sharing, but executives didn't want to believe the trend and practically ignored it while others like Fuji forged on with new products to replace lost market share. To sum it all up, a Kodak employee developed a primitive version of a digital camera when the time was right, but Kodak executives brushed it off and tried to ignore what was happening and got disrupted. 
FINDINGSWhat happened to Eastman Kodak haunts executives today and serves as a reminder to businesses to be fierce, strong, and forge on when technology disruption is knocking at the door. While it's easy to understand why the digital market would be challenging to a company who sold film and cameras that used the film, it's worth noting that the first digital camera was produced in 1975 by a Kodak employee.  The camera is now collecting dust at the Smithsonian because Kodak executives wouldn't heed the warning. 
VULNERABILITYCameras and filmstrip meet the digital world and online sharing. Kodak's niche business was disrupted by a strong technology that would continue to evolve from digital cameras to phones and from printing pictures to online sharing. Several challenges of the disruption are:

1. Making film was a complex process and because of this competition was limited.  With digital, while there were some learning curves, the market was wide open.

2. Digital technology was not nearly as complicated so highly specialized skills were not required. 

3. Kodak's earlier investment in manufacturing and distribution were no longer needed therefore it just became an expense. 

4. The issue wasn't new competitors to the scene, the old market was disappearing.

5. Management didn't want to deal with it.  If they didn't talk about it, it wouldn't happen.  The reality was they had billions invested and no new products to replace the old. 

6. Kodak lost loyal partners because people weren't going to the locations for prints.  Its entire ecosystem was disintegrating as it was strictly built on film-based production.

7. Kodak did build a digital camera department and did see some success in digital sales, but with the onset of camera phones it was at a loss and had no other products developed. 

8. Kodak experienced internal issues with staffing due to the decline in the need for skilled people, which caused problems on the inside. 
WHAT HAPPENED TO KODAKSeveral theories have been tossed around as to what happened to Kodak and why they missed the emerging technology market.  Some of these theories are as follows:

1. Kodak was so impressed with itself and how big it was that it didn't realize technology was advancing to digital. This is unfortunately also not true because Kodak invented the first digital camera. 

2. Kodak invented the digital technology but didn't invest anything in it. This isn't exactly true because Kodak invested big money into huge cameras that cost tens of thousands of dollars. It just didn't evolve it to where digital simplicity needed to be.

3. Kodak didn't properly invest itself into digital technology. It didn't want to lose its film business and therefore really didn't emerge itself into the disruption. 

4. Kodak attempted to claim an online sharing by purchasing Ofoto in 2001, but never evolved it into sharing of photos, updates, links, or keeping in touch, it just tried to get people to buy digital photos instead of using it for online sharing. It got left in the dust when with Facebook, who then bought Instagram for $1 billion.  In 2012, Kodak sold Ofoto to Shutterfly for $25 million. 

What really happens is companies do try to compete by investing the proper resources but lack the sufficient embrace of the new technology and business model that the disruption brought about. For Kodak, they missed the point of the photo sharing site and the new technology and just used it as a way to sell digital prints. 

 Fuji was a far second in market share to Kodak during the film age. While Kodak was failing to embrace the disruption and salvage the company, Fuji moved onto new opportunities, products adjacent to film, and eventually into copiers with a partnership with Xerox and is now a $20 billion company where Kodak is $1 billion. 
BANKRUPTCYIn 2012, Kodak filed for bankruptcy protection, sold off patents, removed its legacy businesses, and became a much smaller business in 2013. The company that once was massive and dominated the market share was worth less than $1 billion. Kodak will forever be in the books as the company that could have evolved, embraced the disruption, and survived because it had talent, money, and foresight, but completely missed it and became a victim of disruption. 
HOW TO EMBRACE DISRUPTIONThere are things companies can do to survive a disruption. They can invest in other product markets like Fuji did when digital took over the film. Companies need to think about the following when trying to ride the wave of disruption.

1. What can we invent 
2. Long-term goals
3. Reinvention is key
4. Compete on capabilities, not on markets
5. Reorient talent
6. Focus on opportunities 
CONCLUSIONIn summary, we have provided insight into how Kodak got caught in a technology disruption and because of its lack of ability to embrace the new technology was the loser in the disruption.  We identified challenges to the disruption and several examples of reasoning on why they didn't survive and what they could have done to survive. Finally, we explained opportunities to handle the disruption. 