November 2022 marked the beginning of widespread public use of artificial intelligence (AI) platforms with the release of ChatGPT, a language model-based chatbot created by OpenAI. Numerous mega-cap technology companies, including Amazon, Google, and Microsoft, have subsequently invested billions into AI platforms hoping to capture a slice of a growing market.[1] The potential of AI is alluring, promising greater productivity, increased efficiency, and workforce transformation.[2] But do the possibilities of AI translate into value creation for a business, or is AI another business buzzword that will ultimately fall into the corporate abyss of profit-draining initiatives?
How a Business Creates Value
Before discussing AI’s potential value, it is important to revisit how a business generates value for its shareholders. Businesses generally create value by expanding EBITDA, the most common measure of a company’s financial health and cash generation ability. To grow EBITDA, a business must either increase revenue or profitability, as detailed in the following examples:
Revenue Growth
- Introduction of new products/services
- Price increases
- Market share capture from competitors
- General economic growth in the industry
EBITDA Growth
- Operating leverage
- Cost cutting by reducing headcount or other expenses
- Increased margins on products/services through price increases or production efficiencies
How Would AI Create Value?
For AI to create positive value, it must spur EBITDA growth through one of the drivers noted above. While AI may expand creative processes for new product development, value adds to revenue are muted as market share capture and general industry growth are generally outside of a company’s direct control, while price increases are seen more as a function of costs, branding, and general market acceptance. Therefore, AI’s benefit to a company would likely stem from profitability improvements. AI has the potential to replace workers, automate repetitive tasks, streamline business processes, and enhance overall productivity, thereby lowering operating expenses and expanding profitability. Therefore, if a company invests in AI and adequately embeds associated cost-reduction measures in its forecast cash flow projections, then it is reasonable to assume that business enterprise value will also increase.
Conclusion
From global conglomerates to small business enterprises, AI’s potential to create value is endless. However, AI can only realistically impact various cost mechanisms of a company given the current computing power. Unless forecasted cash flows reflect AI implementations that effectively increase profitability, no value accretion can truly be assigned to the business no matter how much “value” the C-suite claims AI provides. Regardless, AI will continue to dominate the business consciousness in the present no matter if its future results in a tangible benefit or a defunct business buzzword.
[1] Hicks, William. “Amazon to Invest up to $4 Billion in San Francisco-Based Anthropic.” Bizjournals.com, 25 Sept. 2023, https://www.bizjournals.com/sanfrancisco/inno/stories/news/2023/09/25/amazon-anthropic-funding-4-billion-aws-ai.html.
[2] Chui, Michael, et al. “The Economic Potential of Generative AI: The Next Productivity Frontier.” McKinsey & Company, 14 June 2023, www.mckinsey.com/capabilities/mckinsey-digital/our-insights/the-economic-potential-of-generative-ai-the-next-productivity-frontier#business-and-society.
