23 | Achieve exponential scalability by becoming an AI first company with Adnan Boz, Stanford University AI business course instructor, and CEO of the AI Product Institute

27:15And this is a business model change. and in business model disruption like this like generative ai the companies companies really apply three or four steps so jeffrey moore has a book named the zone to win and in zone to win he explains this much more in detail so he divides every enterprise into four and that's coming back that's coming from this three horizons framework from mckinsey you have this horizon one two three horizon one is your main business, core business, horizon two, horizon three is your research going forward. Then horizon two is actually intermediate place where you transform your business, transform this research into your core business.

27:56And he divides into four because usually the productivity organization in a company who develops this product is different than the performance organization that sells the product and provides the value. Now in this four horizons framework, He explains that in order to change actually your business model, you have to go through this loop where first you incubate something, incubate an idea. And you have to incubate for a while. It's not just one day, right? We are talking about maybe three to four years. The way Microsoft invested five years ago in OpenAI, this incubation. and the way nvidia invested about i don't know 78 years ago or maybe 10 years ago into av autonomous vehicle and the way google invests into certain things the way meta actually invested 10 years ago into vr now these are all incubations you try to grow in your company then once it hits size some significant size it's usually maybe 0.1 percent of the overall revenue let's say if your revenue is$100 billion.

29:03So we are talking about still$100 million revenue. It's not small for a lot of companies, but you have to grow your incubation to that point. Then he says that you have to transform it into your core business. And that is where all companies fail. He lists like 50, 60 companies who failed from, and there are many names. I don't want to name them now. So the main problem is that when a company thinks of incubation, if they're not experienced, what they do, they steal some resources from their current core business. Their current core business is a revenue machine that is generating, we said,$100 billion.

29:39So how can you steal from it while your investors are asking from you 10 % year-over-year revenue? How can you take out 1 ,000 people from there if you have 10 ,000, 10 % of the people, and still expect the company to generate that amount of revenue? You cannot. And here's the interesting part. But even if you steal those people, most probably those people cannot work on your incubation, new business, because they were hired to work on the current operating model, the way they do the business. So when you create this new incubation to change actually your business model, you need new people. You need actually trailblazers.

30:16You need people who are entrepreneurial. You need people who want to jump on topics, take high risks. Whereas the other people who are in your current business, core business, they don't take risks because you deliver year over year to your promises. So you hire this new team. That is why a lot of companies have these groups separated physically, even building-wise in another location. And then you incubate it. Then you start transforming into a business line item, as Jeffrey Moore says. I want to pause you a second and ask you a very interesting question because I never worked at a huge enterprise.

30:53Like the largest company I worked for, which was pretty big, was like a$7 billion company. And we had, I don't know, 10 ,000 employees around the world. So not a small company, but not a huge company. But most of the companies I worked for were startups. And we had between 30 to 100 people. And the company I worked with in between was a travel company. We had less than 1 ,000 people. So we had 800 people. It's a lot harder than to do this thing. So if I'm now running a tech startup that is doing okay, like I have good margins, I'm selling, I'm growing, but I'm looking two years ahead. And I understand what you and I are talking about that I got to infuse AI into this thing.

31:29And I got to go through the process that you very clearly described, but I don't have the manpower, the bandwidth, the resources to now incubate five different ideas. I maybe can bet on one, maybe. How do companies do that? What's the right process to figure out the most likely thing to, you gotta make a bet because if that bet fails, it might be the last bet you make in that business. Correct, correct. Yeah, this is a question a lot of companies ask. It's a really good question. And the answer I've found by working with a lot of companies is a strategy called Blue Ocean Strategy. And these two professors, they came up with this logic, I think 10 years ago.

32:10And the book is so famous, actually. It's a bestseller. They have their third book now. and it explains that in order to grow into actually a new business, you have to find the blue ocean. Because the way companies really operate, when you go through the product development lifecycle, and when the actual technology goes through technology adoption lifecycle, when the categories mature, everybody is fluctuating around the same idea, same offering. Let's take, for example, e-commerce. Go to any e-commerce website today, they're all the same. They're maybe 10 % different up and down. They have all recommendation systems.

32:47They have a search. Then they have these listings. They're all the same. Now, how do you really create something more valuable to your customers that will actually separate you from your competition, especially with AI? You employ their framework. So they're really good frameworks like the buyer utility map for actions framework, strategy canvas. That's the last one you actually utilize. So utilize those tools to identify a blue ocean. That means a place for you that is different than the current competition and removes the product features and other things that competition forces, but brings value to the customers, unprecedented value to the customer.

33:30so that those customers will come to you and they will also have high barrier to entry because you change the business model so much, they cannot change it overnight. So if you apply Blue Ocean strategy, that will allow you to find the niche idea that will keep you apart from the competition as well as add unprecedented value to your customers. So that's the first. I love what you're saying a lot because it reverses the sequence in which we spoke about things. We spoke about technological infrastructure and on top of that, the operating infrastructure and on top of that, the business infrastructure that talks to the customer.

34:08And the real thing here and what you're saying is if you want to do this and you want to do this in an effective way, especially as a smaller business, the trick is to really understand the needs of the customer and the value that you can bring in a unique way that nobody else is doing right now and then reverse the process. Then say, okay, in order to do that, our business model needs to be this, which means our operating model needs to be this, which means our technology needs to support it. So the starting point of this process, and I agree with you 100%, the smaller you are, the more critical this becomes.

34:44Because if you're Google, you can make a hundred bets on any given point, and they do. That's why they change it to Alphabet. They have all these other businesses because they knew that search one day will die. and that drives, I don't know, today, 80 % of the revenue, probably more. And so they have eggs in all these different baskets, but if you're a smaller company, you probably have enough resources for one of those bets. And what you're saying is the key to all of this is to really understand the need. What can you solve? How can you provide very unique value and invest everything into that where now it will be harder for people to catch up because now you have a new category of business that did not exist before in which you are the only solution, at least in the beginning.

35:29Correct, correct. So here's the trick, right? And it says maybe not so common sense. And a lot of people try to utilize common sense and they think Blue Ocean strategy is just really understanding the user. And I can go talk to user, but I see it again and again. And I teach it in my classes as well. We do workshops on Blue Ocean. Now, the biggest impact of Blue Ocean is to have you step back, step back, look at the whole end-to-end life cycle. So when we work, and that happens actually to a lot of companies who are getting new into the AI, what they do, because they live in this closed loop area, closed loop solution, they cannot think outside of that box.

36:13So for instance, if you're doing e-commerce and you think, okay, what can I do with AI in e-commerce? Let's say you want to apply AI there and then you start thinking, oh, how about I add a recommendation engine or how about I make the search better? Maybe I should do the chatbot, right? All in the box. You're thinking really from the problem. Okay, Blue Ocean suggested, okay, step back. Let's see, how does this user even start thinking to buy something? Let's go back and let's go back to the point where they actually sit in the porch with their neighbors and they see a barbecue in their neighbor's yard.

36:50Start there, all the way there. Then they see it and they create the need and then they actually create the ones. Then based on their income, they create the demand and they go to the website, they search. Maybe that's not the only thing they do, but they want to really buy this barbecue because they saw it in their neighbor's backyard. And developing this understanding of that everything starts with a need then turns into want then turns into demand based on your resources it is really important it's really important so when you go back to the need and figure that up how did it even started then you start coming up with very unique solutions and maybe instead of creating a recommendation engine maybe you're gonna slap a smart sticker on on the street could be even that or maybe you put a sticker on the barbecue devices on their neighbor so they can see the brand and shop directly instead of going extra to a website to search.

37:50You can come up really with interesting solutions which no competitor thinks because competitors are locked in the box. Oh, how can I improve, optimize my website, my e-commerce website? That's all they think all day long. And with AI, that comes even more important because what AI brings is far beyond than just optimizing what you have right now. It requires you to have a new way of thinking sometimes. Like, for example, Google search. Let's assume you are actually Google search and you're the VP there and you're thinking day in, day out in the 2000s. How can I optimize search? You maybe make it faster, more beautiful, maybe more different colors.

38:29That's all you think all day, right? And the algorithm gets maybe better. but you never really think, hey, can I use it here in natural language processing, a large language model to turn it into a chat? You won't think that because it's not in the realm of your solution at that moment. So in order to think about that, you have to really step back and ask yourself, hey, how did the user even think about going to Google? So why did they go there? So you think, okay, oh, they're at home. they have friends at home and they want to cook something and the guy is thinking to maybe order something or cook something and then they go google for something or maybe they're curious about a movie they just watch the movie and then they go google about it so if you go back to the point where their need starts then maybe you can even just remove the whole search and say okay the guy is just curious about a movie why don't i put the actual icon on the movie on apple tv they can just click there and get the information right you suddenly eliminated search but here's the thing if you're the vp of google search you would never think to eliminate your whole organization that that actually is the archaels heel of large organizations so in a in a for an organization to change large organization like google or we are talking about 10 000 of people to change their business model, they have to think to kill themselves first.

39:56And nobody I know would actually think, hey, can I just close my department and fire all 1 ,000 people? That's not part of their goal, right? They won't think that. So that is why you need product managers. You need CEOs who can see the bigger picture and think of even changing the whole organization to a new organization. And you need that higher level view. And only CEOs can do that, or sometimes product organizations. In some companies, the product organization is connected to the VP of products and CPO, chief product officer, separate from the technology org and other places. And that gives them the power to make those changes.

40:36But in some other organizations, the product organizations connected under, I don't know, tech CTO maybe, or maybe marketing somewhere, which is irrelevant, but they don't have that power. So at that moment, the CEO has to make that decision. So it goes back to the organization and how you also structure, as you can imagine. I think these are really valuable points. I think they are, especially now with the level of disruption we are going to see because of AI, it becomes even more critical. And like you're saying the understanding that the business model that you have today may not exist, all of it.

41:15I'll give you a few examples. I'm consulting the different companies on how to approach AI. And I had a conversation with the CEO of a very large legal company, one of the biggest in the nation. And I told him, did you think about the fact you may not be able to charge per hour, at least not for paralegal work moving forward, which is, I don't know, 50 % of your income, sometimes more. And he's, no. I'm like, think about it. All paralegal work will disappear or will be minimized to minutes instead of have a team of five people working on your case, researching, collecting information, putting it together, analyzing it.

41:48And they're going to work for three months. So that's going to be$1.2 million worth of paralegal hours. That all goes to six minutes of an AI machine to do all of that. So that 1.2 million is gone. What do you do? And so this is the paradigm shift that, like I said, people at the helm, CEOs, leadership teams, that's the way they have to think this way. And there's a lot of other examples, not necessarily directly AI related, electric cars. So I think it's obvious to everybody that internal combustion cars are going to be a luxury that people who buy Ferraris may be able to afford and everybody else will move to electric cars.

42:30And yet you don't see Ford saying, okay, I'm going to stop making all the cars I'm making today and start making only electric cars because that keeps Ford running. So they have to find this interesting balance between how much do we cut the branch we're sitting on by selling something that right now we don't know how to make it, at least not profitably, and eating away our own market share and cake by giving away the stuff that we know how to sell today. So I think we live in this very unique moment in history where things like events that happen every now and then, like Kodak disappearing. Kodak was a global monopoly that very few existed as I own 80 % of a global market in something that disappeared to nothing because they were not able to go through that process.

43:19And I think we're going to see a lot of that happening in the next few years of companies' valuations being spread to other competitors that have been around forever. Do you agree? Yeah, definitely. And I suggest every company to think that what if the marginal cost of the product I'm providing or service I'm providing is zero? What will happen in the market? So what will be the new equilibrium of supply and demand? This is the question they have to ask themselves. Because once the marginal cost is zero, that means you will have all kinds of competition. Even, I don't know, a two-man team company will be your competitor.

43:58And in fact, that is happening right now. For example, Grammarly, right? It is a great company. I'm a Grammarly user. So your Grammarly is an assistant, writing assistant. And the day OpenAI dropped ChatGPT, it literally just killed at that moment the business. Because now you have actually more intelligent technology behind. And they caught up, actually. They're pretty good at catching up with these technologies. They're still in good shape. Just think about if you would be a company, some other company who doesn't think what's going to happen, and suddenly the marginal cost of assistance, writing assistance, becomes 0.001 cent per 1 ,000 tokens.

44:42That is the price of OpenAI API and where Grammarly charged, I don't know how much I'm paying, like maybe$15,$20 for, I don't even write, maybe a couple thousand tokens. So suddenly it is like, we can virtually assume that it is zero already. So I want every CEO to think whatever they're producing, whatever value they're providing, that the marginal cost of what they're doing can go to zero. Of course, if they're producing physical products, there is always some extra cost there. But when things digitize, like Peter Diamandis also talks about this digitization in his 60s, when things digitize, they become exponential.

45:22But first, they don't become exponential. There are a lot of solutions. They first actually charge$10 ,000. Then they charge starting$1 ,000. Then it drops to$100. dollar, then it becomes a service you pay only$10 a month. But we are in a time, even that$10 a month is turning into$0 right now, the marginal cost. So I want every CEO to ask themselves, okay, what if the marginal cost will drop to zero? How am I going to earn money with all that competitors in the same market? How will the new equilibrium of supply event look like? And that is where blue ocean strategy is really good. Blue ocean strategy will take you out of that competition where marginal cost is zero and people don't pay money, anything anymore for the product and take you into a blue ocean, they call it, where there is no competition because you just innovated.

46:15And you can still ride that wave of innovation for a while, let's say another five years. Of course, after five years, when that becomes zero marginal cost, you again have to use blue ocean strategy to jump to another way. And I think these last two points are really amazing. And I think it's a great point to stop because you and I think can go back and forth on this for a very long time. But I think in general, if I want to summarize the stuff we talked about, because I think we touched on many different points. One is the understanding that the future is very different than the present and it's happening very fast.

46:50So if we were used to, okay, the next business cycle that I got to adapt to the next innovation is in 10, 15 years, we're talking months and that means you got to react very quickly and you got to build that muscle of being able to continuously reacting very quickly because this will just accelerate and then like you said what are the tough questions you got to ask yourselves and what are the major changes you got to make in your business on any of the layers that you mentioned that you got to take action on right now in order not to put your business at risk Adnan if people want to follow you learn more from you connect with you work with you what's the best way to do that uh yeah great summary first of all that is there is even a four-step framework how to act right now i put it on my linkedin as well i gave a training at when i was still at nvidia about two and a half hour training to executives how to do what to do from now on right and basically as you explained you first have to be present you know these things are happening you have to accept it Second, you apply a neutralization strategy where you fix your operating model in a couple of months timeframe, not quarters.

48:00Then you actually go back, fix your infrastructure model. And that is the optimization. And the last step is doing actual differentiation, fix your business model. So those are the four steps you go through. Yeah, you can find all information on my LinkedIn, Adnan Boss, or on Twitter, Adnan Boss, or AIProductInstitute.com. And you can download resources. I also write about these things on my blog post. You can follow me there as well. Adnan, thank you so much. This was really, A, incredibly valuable and B, really fascinating conversation. I appreciate the time you're sharing and the knowledge you're sharing.

48:38Thank you, sir. Thanks for having me. I really appreciate the time you spent here. Thank you. What an amazing conversation with Adnan. While this is not like most of the episodes that I've shared so far that are very practical, this has profound implications on the future success of a business. And as I mentioned in the beginning, if you're in a leadership position, this has to be the future mindset of any person in leadership position in the era that we're moving into. Now let's move to some exciting news in the AR world that happened in this past week. First of all, Stability AI, the company behind Stable Diffusion, announced their next version of the model.

49:14They call it Stable Diffusion XL 1.0, different than the previous one that was Stable Diffusion XL 0.9. And it provides higher resolution, more accuracy, better colors, and overall better results than the previous model. It also supports in-painting, which is reconstructing missing parts of an existing image, and out-painting, which is expanding an image that currently exists, and even image-to-image prompts, meaning you can upload an image and use it as a baseline to then go and make variations to that image. All of that is available in the new model. I must admit that personally, I didn't get a chance to play with it and compare it to the current pack leader, which is MidJourney.

49:58But from what I've seen, it's definitely a big improvement to the previous stable diffusion model. The biggest benefit on MidJourney is that stable diffusion is completely free and you can get access to it either through their API or through their Dream Studio website. Another interesting news from the AI world that is not necessarily generative AI, but it's definitely really interesting to where this world is going, is that Google's DeepMind has unveiled what they call MedPalmM. It is a demonstration of a generalist, multi-modal biomedical AI system, which means it can get inputs and communicate across various aspects, meaning text, images, genomics, and other data as part of a single model architecture.

50:49It's geared specifically towards the medical world. And it's an amazing first step in the direction of having significantly better medical capabilities while making it cheaper and faster and more accessible to the masses. And when we think about the dream future of AI, one of the biggest promises is obviously solving some big human problems, such as various medical issues like cancer and so on. Very interesting news in that aspect from Google's DeepMind. Next piece of news comes from Stack Overflow. It's a company that if you don't know, is probably the largest community of computer programmers and developers in the world.

51:31It's basically a huge community where people can come and ask for advice and get advice from other developers. It's been around for a long while, and it's definitely the largest and most active community of developers. And they just announced Overflow AI. So they are taking the data of 58 million questions and answers that exist in the community and making it accessible through a chat interface. The cool thing about it beyond obviously the fact that instead of searching through an endless number of posts and hoping to find the right ones, you can ask a question, get a summarized answer from all the previous content that exists with citations to where their sources are.

52:12You can ask follow-up questions and you can even have it help you draft additional follow-up questions to the community in order to get answers. Overall, it sounds like an amazing tool by Stack Overflow. And this obviously follows what we talked about many times in the show before. if you have a large amount of proprietary data, adding AI and LLM on top of that is going to make your service or your product even more powerful than it was before. And this is just another example of that. And from Stack Overflow to Amazon, Amazon is obviously one of the giants in the game. A while back, Amazon announced Amazon Bedrock.

52:48It's an infrastructure of artificial intelligence that runs on top of AWS. So if you're deploying your software on Amazon's AWS servers, you can use Amazon Bedrock that basically brings the large language models infrastructure as a native capability into anything that runs on AWS. And what they've announced this week, that they are releasing agents for Amazon Bedrock. Those of you who don't know what agents are, it's an expansion of a large language model. It allows you to define a task that then the agents will create multiple sub steps for it and will prompt itself and can take multiple different actions across things it has access to in order to complete the task.

53:38So this capability is now available natively for people who develop and deploy their solutions on Amazon's AWS and that are using Amazon Bedrock access to the different models. This enables close to magical capabilities to anybody who's using this platform. And I don't see Google or Microsoft staying behind. So I expect to see them releasing similar capabilities to their hosting platforms as well. And the last piece of news comes from Netflix and the backlash to position that they opened, Netflix opened a position for an AI-focused product manager, and the offered salary ranges between$300 ,000 to$900 ,000 a year for that role.

54:28And the goal of that role is to increase the leverage of Netflix's machine learning program. Now, obviously, if you're Netflix and you find ways to, as they said, increase the leverage of the machine learning program, it's a great return on investment to invest$900 ,000 a year in that program, because the returns are going to be significantly higher. That being said, there's a really bad taste in the community for a offering a salary like that for a single person. And especially in a time where a lot of people got released from large tech companies in a time where actors and writers are on strike because of changes that are happening in the industry that Netflix is driving.

55:11So you have a large amount of people who are afraid to lose their jobs. And at the same time, one of the companies that has pushed them into that situation is offering positions at$900 ,000. If I connect this back to the topic of this amazing episode with Adnan, you can understand the connection. If you understand how to build a digital first and AI first company, and you learn how to leverage that, you can reach exponential scalability and you can make significantly more money without investing significantly more resources. And$900 ,000 in the scale of Netflix is negligible. And so I expect to see more of that, meaning companies who are willing to invest in the right people, in the right technology, in order to capitalize on this amazing transformation that's happening right now and come up ahead faster and better than anybody in their field.

56:08And before you go, I have two small requests. One is if you haven't done this so far, please write a review for Leveraging AI on your favorite app, whether it's on Apple Podcasts or on Spotify, that helps more people find this podcast. And on that topic, the second request, If you know people that can benefit from this podcast and you know they can learn from it, please share it with them. I appreciate that very, very much. That's it for this week. Go and explore AI. Play with it. Try different things. Try different tools and share what you learn with me and with the world. And until next time, have an amazing week.