How will the rise of collaborative intelligence affect your company’s competitive position?
TL;DR
This article examines how the rise of large language models and other collaborative intelligence technologies will impact companies and industries by affecting the determinants of competitive advantage. It highlights how these technologies can enhance or weaken strategic resources and activity systems within companies, necessitating a range of managerial responses summarized in a 3x3 matrix. The article then demonstrates how to apply the framework by analyzing the corporate legal services industry.
Assessing the Impact of Disruptive Technologies on Companies and Industries
The business strategy field comprises many camps, each arguing for the best way to develop and execute strategy (see Strategy Safari for a book-length discussion of this phenomenon). The two most prominent approaches in academic and management literature are the resource-based view (RBV) and the activity-based view (ABV) of the firm.
RBV posits that companies create and sustain competitive advantage by amassing valuable, rare, inimitable, and non-substitutable resources. It is the source of many management concepts, including “core competencies” and “the right to win.”
ABV posits that companies create and sustain competitive advantage by carefully selecting and coordinating activities that create value and incur costs in ways that are superior to competitors. It, too, is the source of many management concepts, including the “value chain” and “lean manufacturing.”
This “battle” represents a false dichotomy. I think a business’ resources comprise its strategic balance sheet, and its activities comprise its strategic income statement. In combination, they determine the strength of a company’s strategic position—just as a company’s actual balance sheet and income statement determine its financial strength.
Both must be considered when looking for ways to improve competitive positions.
For example, a company’s existing customer base is a resource. Several activities a company performs (such as customer development) determine the rate at which this resource grows or shrinks. Whether it grows or shrinks depends, in part, on how well these activities are performed. Thus, the resources and the activities determine whether specific combinations contribute to or weaken a company’s competitive position.
When new, foundational technologies appear (see sidebar, below), such as large language models (LLMs) and other collaborative intelligence, they can have a positive, negligible, or negative impact on the competitive advantages derived from a company’s resources and activity systems (Figure 1).
Depending on the impact on a company’s activity systems and strategic resources, there are nine high-level managerial responses, as follows:
Strengthened Activity Systems, Strengthened Strategic Resources: In this scenario, the company should extend its advantages by investing to further strengthen strategic resources and innovating its activity systems to improve performance and interdependence, making the systems more difficult for competitors to discern and replicate.
Strengthened Activity Systems, Unchanged Strategic Resources: In this scenario, the company should innovate its activity systems to improve its operational excellence and reallocate or optimize existing resources to improve support for the enhanced activities.
Strengthened Activity Systems, Diminished Strategic Resources: In this scenario, the company should strengthen its activity systems to improve performance and interdependence, modify its resource mix, and reconsider its business strategy depending on the extent to which current resources have been diminished.
Unchanged Activity Systems, Strengthened Strategic Resources: In this scenario, the company should invest to strengthen its strategic resources further, redesign its activities to take better advantage of its now more valuable resources, and upgrade skills and technologies to improve the productivity of its activity systems.
Unchanged Activity Systems, Unchanged Strategic Resources: In this scenario, the disruption has not affected the company's strategic position, but company leaders should remain vigilant. The company should pursue targeted enhancements to activities and resources where warranted and prepare to adapt quickly to the disruption’s second- or third-order effects.
Unchanged Activity Systems, Diminished Strategic Resources: In this scenario, the company should explore ways to improve its activity systems (outside of the disruption, which did not affect them) to counteract the diminishment of its strategic resources, modify its resource mix to replace the diminished value, and explore new markets where the diminished assets may be more valuable.
Diminished Activity Systems, Strengthened Strategic Resources: In this scenario, the company should invest in strengthening its strategic resources further, redesigning its activity systems to counteract their diminished value, and improving resource leverage. If the net impact on the company’s strategic position is negative, it should consider modifying its business model.
Diminished Activity Systems, Unchanged Strategic Resources: In this scenario, the company must improve its activity system to remain competitive. It should redesign its business model to create more efficient and more valuable activities and to strengthen its resource leverage.
Diminished Activity Systems, Diminished Strategic Resources: In this scenario, disruption has greatly diminished a company’s strategic position. As such, it should either transform its business or consider exiting.
Sidebar: Foundational Technologies
Collaborative intelligence technologies, including LLMs such as ChatGPT, are on a path toward becoming foundational technologies because they exhibit certain characteristics. Here are four key characteristics of foundational technologies.
Scale and Universality: LLMs are being integrated into a wide range of applications, including customer service, content creation, education, and more. They have the potential to be applicable in many settings, suggesting a broad scale of influence.
Impact and Transformation: LLMs are already beginning to transform specific sectors by automating tasks that previously required human cognitive skills (e.g., writing articles, coding software, providing tutoring). The potential for transformation is significant, as these models could redefine roles and workflows in numerous fields.
Enablement of Other Technologies: LLMs can be integrated with other AI technologies, such as computer vision and predictive analytics, to create more comprehensive AI systems. Their versatility makes them a powerful tool for enabling a range of technological applications that blend language understanding and processing with other functions.
Long-term Relevance: Given their adaptability and the ongoing improvements in AI, LLMs are likely to remain relevant and continue to evolve. As AI research progresses, these models will become more powerful and more capable, becoming more integral to most industries' business operations.
The impact of collaborative intelligence (CI) on any company will depend on its business model, strategy, resources, and activity system. Still, some general impacts can be considered for all companies in an industry by examining activities and resources common across the industry.
The following example provides guidance on how to apply this framework.
CI’s Impact on the Corporate Legal Services Industry
In Corporate Legal Services, CI’s impact on any individual company could range from diminishing their lawyers' traditional roles in favor of technology-driven solutions to disrupting service delivery models to simply providing efficiency gains. CI’s industry impact can be discerned by examining common activities and resources.
Impact on Activities
Activities that could be diminished in the near term by CI include the following:
Routine Legal Work: CI’s ability to generate standard legal documents such as basic contracts, non-disclosure agreements, and simple wills could reduce the demand for these services.
Legal Research: As LLMs become more powerful, so will their ability to conduct legal research, including discovering relevant case law and pertinent statutes/regulations and performing cross-jurisdictional comparisons. This could reduce demand for these services.
Other Time-Consuming Tasks: Many law firms bill clients based on the hours worked. With LLMs streamlining and speeding up tasks, the billable hours for many services might decrease, affecting traditional fee-based revenue models. Firms may have to move to value-based or other revenue models.
Activities that will not be impacted in the near term by CI include the following:
Client Acquisition and Relationship Management: CI cannot replicate the interpersonal skills required to develop and maintain long-term client relationships.
Strategic Legal Advising: High-level strategic advice that requires a deep understanding of a client’s business and legal nuances will still rely heavily on experienced lawyers.
Creative Problem Solving While LLMs can provide information and potential solutions based on data, they cannot match the creative legal thinking and complex problem-solving abilities of experienced lawyers, especially in cases where novel legal issues are at play.
Negotiations: The art of negotiation in legal contexts involves emotional intelligence, persuasion, and human interaction, which are beyond the scope of LLMs and current robots.
Activities that could be strengthened in the near term by CI include the following:
Predictive Analysis: By analyzing historical data and outcomes, LLMs can assist lawyers in predicting the potential outcomes of litigation, helping in strategic decision-making regarding whether to settle a case or proceed to trial.
Client Engagement: LLMs can provide clients with a means to interact with the firm through intelligent systems, improving their engagement and off-loading routine interactions with professional staff, freeing staff to perform more high-value work.
Knowledge Management: LLMs can organize and manage internal knowledge resources, such as briefs, memos, and case studies, making it easier for lawyers to access and leverage firm-wide knowledge.
Training and Development: LLMs can assist junior lawyers in their training by providing instant feedback on draft documents and helping them learn from historical cases and firm-specific document repositories.
Impact on Resources (including core competencies)
Resources that could be diminished in the near term by CI include the following:
Client Relationships: If CI technology is highly exposed to clients, firms risk clients’ reconsidering firms’ value propositions. If CI outputs are not adequately governed, erroneous outputs could damage client relationships. While this is less about CI and more about how CI is used, it is included to highlight the issues.
Specialized Knowledge: If LLMs level the playing field by making specialized legal knowledge widely accessible, a firm's niche expertise might become less of a unique resource, diminishing its competitive edge.
Scale: Large firms often leverage their scale to manage vast quantities of information and resources. If LLMs allow smaller firms to handle similar volumes effectively, the competitive advantage of scale could be reduced.
Resources that will not be impacted in the near term by CI include the following:
Leadership: The quality of leadership provided by the firm’s partners and management determines the firm’s direction and culture. This resource is an exclusively human capacity (for now).
Alumni Networks: The networks of former employees, especially those who move into influential positions, can be a significant resource for business development. These networks are based on human relationships and alumni loyalty and are not affected by the introduction of CI.
Brand Equity: The firm’s standing and reputation in the legal community and among clients are built on human relationships and historical performance. While CI can be used to enhance specific dimensions of a brand over time, in the near term, it will have minimal impact.
Physical Assets: Offices in prestigious locations, though not as crucial in a digital world, still hold value for client perceptions and branding.
Resources that could be strengthened in the near term by CI include the following:
Client Relationships: CI can have positive and negative effects (see above) on client relationships. It can improve customer engagement and customer experiences and strengthen client relationships.
Collective Expertise: The use of LLMs in aggregating and synthesizing legal information can enrich the firm's collective expertise. By facilitating access to the entirety of a firm’s collective knowledge and legal opinions, LLMs can improve the firm’s ability to provide comprehensive and sophisticated legal advice.
Reputation: The strategic implementation of CIs for legal analysis, prediction of case outcomes, or other novel uses can further a firm's reputation for innovation, which is a valuable intangible asset.
Talent Attraction and Retention: By leveraging CI, a firm can create a more engaging and less tedious work environment for lawyers, improving the Quality of Work Life, which should improve the firm’s ability to attract and retain talent.
Action Planning
Given the preceding analysis, the following actions should be considered, depending on the magnitude of the impacts on any one firm.
Redefine Value Propositions: Firms should shift their value propositions away from commoditized services towards more complex, strategic services that CI cannot replicate. Firms should also consider new pricing strategies in light of CI’s ability to reduce billable hours for certain services. Explore subscription models, fixed fees, or performance-based pricing to align with the value delivered.
Innovate Service Delivery Models: Incorporate CI into routine tasks to improve efficiency and redirect human resources to higher-value and more creative/strategic tasks.
Innovate Client Engagement: Develop CI-driven platforms for client interaction that offer added value, such as 24/7 availability for routine inquiries and self-service options.
Educate Clients: Offer seminars and workshops to clients about the advantages and limitations of CI in legal services, positioning the firm as a thought leader in this emerging field.
Enhance Knowledge Management: Use CI to consolidate the firm's intellectual capital, making it easily accessible to all staff for better-informed advice and consistency in service delivery.
Enhance Risk Management and Quality Control: Develop robust frameworks to ensure the quality and accuracy of CI outputs, thereby maintaining client trust and mitigating the risk of damage to client relationships.
Launch Innovation Labs: Set up dedicated teams or innovation labs within the firm to experiment with new CI applications in legal services, staying ahead of the technology curve.
Most of you will not be in the corporate legal services industry, but I am hopeful that the example guides your thinking on how to apply the framework to your company and its industry. If you have questions or would like clarification, please use the comments section, and I will respond.