HBR: Can Gen AI destroy incumbent firms’ competitive advantage?

The rapid advancement of generative AI technologies is poised to fundamentally alter competitive dynamics across industries by potentially eroding traditional barriers to entry that have long protected incumbent businesses.

The evolving competitive landscape: Generative AI systems are expanding beyond traditional software applications to transform entire industries and challenge established business models.

• Companies that have historically relied on protective “moats” – competitive advantages that make it difficult for new entrants – may find these barriers diminishing as AI capabilities advance
• The transformation is being driven by three key pillars: increasing compute power, rapid model development, and expanding availability of training data
• These technological advances are accelerating at an unprecedented pace, forcing businesses to quickly adapt their strategies

Market disruption patterns: AI’s ability to lower barriers to entry is creating new opportunities for startups while presenting existential challenges to incumbent firms.

• New market entrants can now more easily gain footholds in previously difficult-to-penetrate industries
• Many newcomers are entering markets with products and services that surpass incumbent offerings in quality and capabilities
• Traditional companies must think strategically and act swiftly to defend their market positions against these emerging threats

Surviving competitive moats: Despite the disruptive potential of AI, certain types of competitive advantages are likely to remain resilient.

• Strong brand recognition continues to provide meaningful differentiation
• Proprietary data assets and intellectual property rights offer ongoing protection
• Operational excellence, government relations capabilities, and established personal relationships remain valuable defensive assets
• innovative business models can create new forms of competitive advantage

Historical context: The current AI transformation mirrors previous technological disruptions, particularly the software revolution identified by Marc Andreessen in 2011.

• Andreessen’s famous observation that “software is eating the world” correctly predicted how digital technologies would reshape industries
• The AI revolution represents a similar inflection point, but with potentially broader and deeper implications

Strategic implications: The erosion of traditional competitive moats means businesses must develop new strategies for maintaining market position.

• Organizations need to proactively assess how AI might impact their existing competitive advantages
• Companies must balance defending existing moats while potentially developing new ones based on AI capabilities
• The pace of change requires swift action while carefully considering long-term strategic positioning

Looking ahead: While generative AI presents clear threats to incumbent businesses, it also creates opportunities for those who can effectively harness its potential while maintaining or building new forms of competitive advantage. Success will likely depend on how quickly and effectively organizations can adapt their business models while preserving their core strengths in areas less susceptible to AI disruption.