24. Michael Porter's Productivity Frontier
What framing should we use when trying to predict the impact of AI?
“A company can outperform rivals only if it can establish a difference that it can preserve.” - Michael Porter
With ChatGPT having grown to a staggering 100 million users in 60 days — making it the fastest-growing product ever — many are trying to work out what it all means for the future of business.
I don’t know, but I recently re-read Michael Porter’s 1996 article, What is strategy? and it seems like as good a place as any to begin the quest.
The key theme in Porter’s piece is the concept of the Productivity Frontier, which describes the maximum competitive advantage or the state of best practice that a business can attain when it fully harnesses operational effectiveness and strategic positioning.
According to Porter, the Productivity Frontier represents the sum of all existing best practices in a particular market. It reflects the maximum value that a company can create for a given cost, using the best available technologies, skills, management techniques, and purchased inputs.
Porter argues that strategic positioning alone offers only a temporary advantage since competitors can quickly copy or replicate what were once highly-differentiated aspects of a company's strategy, product or service. In Porter’s model, the Productivity Frontier's edge constantly creeps outwards as businesses compete to improve their operational effectiveness and differentiate their offerings strategically.
Framing the advent of Large Language Models (LLMs) like ChatGPT in Porter’s model, it’s clear that vast numbers of businesses may have the opportunity to improve their operational effectiveness and lower their costs significantly. Moreover, by harnessing the power of AI, these companies may find new ways to radically improve their productivity, reduce waste, and differentiate themselves from their competitors.
If they succeed, they will push the outer edge of the Productivity Frontier farther upwards and to the right, creating new competitive advantages for businesses that can adapt and leverage AI effectively.
I can’t tell you what AI means for the future of business, but using Porter’s model, it’s clear that it could have a massive impact on the availability of operational effectiveness for many, pushing the outer edge of the Productivity Frontier much farther out than we’ve seen before, and several pixels up and to the right for those who succeed in harnessing it, and pushing those who don’t closer to the bottom left corner.
Best regards,
GT
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