Archives June 2023

Do you feel like a surfer staring at endless waves as you contemplate the ocean of business possibilities from generative AI?

You’re not alone. The latest iterations of generative AI, from ChatGPT to GitHub Copilot to Stable Diffusion and others, have leaders contemplating three options for their next move. You can 1. stick your head in the sand; 2. try to invest and capture value from every aspect of generative AI; or 3. insightfully select the right options that serve your customers, improve your operations and make best use of your personnel.

Unless you have unlimited capital and resources, I recommend Option 3.

In Option 1, John notes that “My Dad started this business 40 years ago without generative AI. I’ve run it the last 20 years without generative AI, and I can run it another 30 years.”

That will lead to ruin. Eventually, the tide will come in. John’s business will drown. I give John 5 years max.

Option 2 looks enticing, and even I have to contain my excitement at the possibilities. A recent McKinsey analysis, “The economic potential of generative AI: The next productivity frontier,” examined 63 use cases and concluded that generative AI could add $2.6 trillion to $4.4 trillion in value annually. And generative AI can play in any sector – the McKinsey report detailed use cases in retail and consumer packaged goods, banking, pharmaceuticals and medical products.

But that wave likely leads to a wipeout as well.

Susan may think her organization can handle everything, but few enterprises can afford to hire enough people and throw enough money at the massive quantities of computational power required to train generative AI with the however many billions of parameters necessary to tailor it to every aspect of your operations. And today’s high interest rates preclude going into massive debt.

OpenAI spent a staggering amount of money to develop ChatGPT, and the world’s most famous large language model costs a bundle to operate. Estimates for OpenAI’s daily spend are all over the map, from $100,000 a day to $700,000 a day. And the company may have lost a staggering $540 million last year, including $89.31 million on staff.

Earlier this year, Microsoft confirmed it has invested billions in OpenAI. Unless Susan’s business can tap into some of the billions of dollars venture capital is pouring into generative AI, her enterprise will burn through its cash reserves before seeing enough benefits.

After all, if you look closely at the McKinsey report, 75% of generative AI’s total impact will come in customer operations, marketing and sales, software engineering, and research and development. The potential for generative AI in manufacturing and supply chain functions is much lower.

Supply chain and manufacturing still will benefit from AI, according to the report, but that benefit will come from “numerical and optimization applications that were the main value drivers for previous applications of AI.”

So Felicia, who picked Option 3 for her consumer packaged goods firm and concentrated on automating key functions in customer service, marketing and sales, will be the likely winner.

For leaders, the right strategy is to transform your business into an AI enterprise. The danger is staying onshore or trying to ride every wave you see. I think 50% of businesses will be like John, 40% like Susan and 10% like Felicia. Insightful Leaders will follow Felicia’s path and select the most lucrative generative AI waves to ride. Make sure your organization is on the right wave.

It’s hard to believe, but eCommerce is almost 30 years old. This means businesses must pair grown-up, agile strategies with solid execution to maintain and gain competitive advantage.

The first documented online transactions where a customer placed an order, sent money to another human and received goods in exchange took place in 1994. Although Smithsonian Magazine reports dueling claims as to whether the first sale involved a CD or computer equipment.

No matter, the point is that eCommerce is getting old. From those few transactions decades ago, first quarter eCommerce sales accounted for 15.1% of all retail sales, its highest share since the pandemic-fueled second quarter of 2020, according to The Wall Street Journal.

In addition, eCommerce is no longer the province of digitally native businesses. Virtually every retailer has embraced, or tried to embrace, unichannel strategies where they sell everywhere (online, in store) and deliver everywhere (in store, direct to the customers’ homes or buy online pickup in store). While online sales growth is outpacing retail growth, the increase is no longer stratospheric enough to overcome poor strategy and lackluster execution.

In other words, as The WSJ’s Justin Lahart writes: “The picture that emerges is one where sales tend to grow each year, but at nothing like a viral pace, with different players duking it out for share and winning or losing depending upon how they execute. If that sounds a lot like the business of retail before the advent of online shopping, that is because it is.”

Strategies to take advantage of eCommerce abound.

For example, as The WSJ reports, formerly online retailers like Warby Parker (eyeglasses), Allbirds (sneakers), Parachute (bed linens) and others are opening retail stores, reducing the shopping center vacancy rate to 5.6%, its lowest in years. Leaders of these enterprises are using online sales data to place stores near their customer base, which also helps them decide how to build out their distribution network.

Walmart’s strategy is to offer a suite of online pickup and delivery services, as well as online advertising, which skyrocketed its U.S. e-commerce sales by 27% in the most recent quarter.

While online grocery sales are up overall, the volatility among segments requires strategies agile enough to react to and fulfill consumer demand. The latest data, reported by Supermarket News, show that some segments skyrocketed while others plunged – so VUCA (volatility, uncertainty, complexity, ambiguity) is going nowhere.

Like everything else, your company’s supply chain strategy will require optionality to succeed. I would love to discuss ways Tompkins Leadership and Tompkins Ventures can help.

Bad news for Shopify, Blue Apron and AEO points out the importance of devising a solid supply chain strategy – and pairing it with solid execution.

As The Wall Street Journal reports, the eCommerce provider, meal-kit delivery company and apparel retailer are pulling back on plans to deliver their products directly to consumers. All three hoped to gain market share by rapidly expanding distribution capabilities to challenge Amazon – a tall order.

In my view, The Wall Street Journal’s headline, “Companies Find Ambitious Logistics Strategies Haven’t Delivered,” is inaccurate regarding Shopify and Blue Apron. Those two enterprises basically had no strategy, just assumptions. Shopify and Blue Apron assumed that they had the customer, so they might as well do logistics just like Amazon did – even though neither Shopify nor Blue Apron had particular expertise in logistics. That “strategy” does not work unless you have the scale that Amazon has to become profitable in logistics. Neither did.

AEO, for its part, had a great strategy. The company aimed to scale by offering its logistics services to other retailers. This is the perfect way to play it, as many retailers, large and small, are frustrated by dealing with Amazon.

Unfortunately, AEO failed in execution. Amazon spent decades assembling its fleet of vehicles, warehouses, planes and final mile providers. AEO tried to build quickly through a flawed M&A process, spending hundreds of millions of dollars upfront to buy logistics providers instead of building organically, supported by the continuing growth of eCommerce.

Yet even though the company is pulling back, AEO’s focus on a solid strategy did yield some positive results, cutting delivery costs for American Eagle brands. Instead of totally abandoning this strategy and selling off its logistics assets like Blue Apron and Shopify, AEO is simply reducing its workforce and expansion plans. With the infrastructure and strategy in place, AEO could be well-positioned for future growth. And yes, eCommerce continues to grow, just not at the explosive numbers of 2020, making it hard for AEO to justify those huge capital outlays.

As Tompkins Ventures Business Partner Aaron Alpeter told The WSJ: “The reality is that logistics is hard. Supply chain is hard, and you spend your whole existence in supply chain trying to make sure the things that were supposed to happen happen, and you have customers that effectively tolerate (only) perfection.”

What AEO, Blue Apron and Shopify are facing should give executives pause in this world of perpetual disruption – supply chain strategy is important, and pairing a good strategy with solid execution is paramount for success.

But your company has options, and if you want to lead your enterprise to supply chain success, I would love to discuss them with you. Going it alone is not wise in this world.