Industry

Analysis & Strategic Capabilities in

Organization Design
Investment Potential in the Artificial Intelligence Industry & Viv Labs
Irena Yordanova & Jordan Glazier September 28, 2014

MSOD 617 FOUNDATIONS OF LARGE SYSTEMS

Dr. Christopher Worley, Pepperdine University Graziadio School of Business

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Artificial Intelligence (AI) Industry: Competitive Forces

Artificial Intelligence (AI) is the development of intelligent machines or software to
operate in a human-like way, and it is a branch of computer science that is highly technically
based on complex algorithms and networks. AI plays a key role in knowledge economies,
offering decision-making solutions for many organizations or industries by providing patterns in
enormous quantities of data. The artificial intelligence industry comprises of knowledge based
systems / applications in areas such as robotics, business intelligence systems, intelligent search,
etc. It is considered to have an enormous global potential (Rijmenam, 2014).
Medium Barriers to Entry
One of the most attractive aspects of AI industry is its currently medium threat of new
entrants and opportunity for high margin. It has a medium barrier for two reasons. On one hand
the industry requires highly advanced technical skill and integration knowledge or a
specialized workforce. As Waltz (1996) also explains, AI depends on its broad interdisciplinary
relationships with other fields to meet its dual challenges: creating mechanical intelligence and
understanding the information basis of its human counterpart. AI problems are extremely
difficult, far more difficult than was imagined when the field was founded (Waltz, 1996).
On the other hand acquiring the knowledge and capital investments needed to fund such
ventures are becoming more easily accessible with the fields own development and interest of
its offering capabilities. For example, in 2011, a Stanford MOOC signed up more than 150,000
students to learn the basics of AI (Basulto, 2014). And Q2 2013 marked the largest quarter over
the past 5 years for AI investments with companies including Anki, Tempo AI and Skytree raise
funding. funding to AI-related companies nearly tripled over the last five years, rising from
$178M in 2009 (CB Insights). As Basulto (2014) explains, AI is becoming the next big tech

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trend. Recent Google acquisition of the DeepMind AI start-up and VC investment of $40M in
Vicarious FPC AI company, Facebook opening a new AI lab (Basulto, 2014) are just a few
examples of strong interest and support in AI industry development. It is not too hard also for an
existing company in an adjacent niche to move over into the AI niche. In short, were seeing a
lot of AI learning that used to be locked away at the nations elite R&D labs, and having that
shared with future entrepreneurs around the globe (Basulto, 2014). Additionally, AI patents or
regulations do not show to be a barrier to entry as are money and knowledge.
Low Substitutes
The phenomenon about AI technology is that it is a type of product designed to substitute
for human activities. Thus, conversely, humans are the most obvious substitute for it. While
similar types of technologies can accomplish the same function, the alternative to AI itself is a
human performing the given task manually. Our research also shows that the development of
artificial brain in neuroevolution can be seen as a close alternative (Olson, 2012). Yet, neural
network is also described as simply another approach to AI (Phatak, 2014). In the absence of
many true substitutes, there would only be a threat if humans do not develop technology, which
seems unlikely; or develop overly complex technology that is difficult to utilize and implement,
which would be a judgment on product development.
Relatively Low Power of Buyers & Low Rivalry (with potential of increase)
Due to the high interest and applicability of AI, it makes the industry attractive and
important across other fields: As computers become even cheaper, smaller, and more powerful,
AI capabilities will spread into nearly all industrial, governmental, and consumer applications
(Waltz, 1996). According to Angel List, there are 214 AI company startups today, with $4.4M
average valuation (Angel.co), which itself is not large. It is perceived that AI firms are not all

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developing the same or similar products but rather working across multiple product platforms.
Thus the outputs for the industry are quite fragmented and specialized. The relatively small
number of firms and competition for same products gives buyers little bargaining power. As also
seen, the large players in the industry like Microsoft, Apple, Google, IBM, may also have
incentive to acquire small firms, which further reduces rivalry, making it an attractive industry.
Additionally, as labor is a supplier to the industry, it could be a big constraint, given there are not
as many AI experts, and the good ones are well known and expensive.
Financial & Economic Attractiveness
Two major needs presented for AI development are the overall acceleration of
computational capability / software improvements and the release from information overload
(Tucker, 2012). Tucker (2012) quotes experts such as Ron Furlan, Dylan Glas and Eliezer
Yudkowski saying that economically, automation is a leveraging factor of workers output and
AIs predictive modeling programs make data mining an essential tool in business highly
targeted marketing strategies. AI applications are intended to reduce costs, improve customer
satisfaction and productivity, and increase revenues (Rijmenam, 2014). Developments in AI
industry are intended to enable economies of efficiency and scale by allowing more time to be
spent on intellectual tasks. Although the impact of AI on the economy is less easy to predict,
historically, technological advancements suggest benefits in the large scheme of things:
Historically, large breakthroughs in productivity, roughly defined as the amount of output
per worker per hour, are followed by increases in employment. Companies lay off
workers and invest in tools and innovation to make more goods with less money. This
increases profit, furthering demand for goods across the economy and necessitating the
need to hire more workers. This cycle, in part, is why more Americans had jobs at the end
of each decade of the 20th century than they did at the beginning of that decade.
Historically, new technology creates more jobs than it destroys (Tucker, 2012).

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The opposing view, according to McAfee and Brynjolfsson, is that digital technologies
advance much faster than organizations. They say that while AI and other productivity boosters
create tremendous value and accelerate technological change, so will economic mismatches,
hurting both rich and poor (Tucker, 2012). At the same time, Tucker argues that embracing the
tools with their challenges and opportunities through application of intelligence, computational
and otherwise is what bridges technological and economic alignment (Tucker, 2012). This
shows a dynamic cycle where AI feeds progress, which changes economic landscape, which then
requires further adjustments for sustainability.
The industry is attractive from standpoint of vast and scalable product realization ROI.
The high growth potential is due to AI having applications in every field of human endeavor
where intelligent analysis, precision, and automation are necessary (Phatak, 2014). Practical
applications include the self-driving car, machine translation, algorithmic trading, intelligent
personal assistants, speech recognition, autopilot mode in aviation, weather forecasting and more
(Phatak, 2014). Additionally, AI functions as a channel of ideas in other fields:
For example, basic notions of computation such as memory and computational
complexity play a critical role in cognitive psychology, and AI theories of knowledge
representation and search have reshaped portions of philosophy, linguistics, mechanical
engineering and control theory (Waltz, 1996).
Here is how a small AI startup positions up.
Viv Labs Positioning within the Artificial Intelligence Industry
Viv Labs is seeking to develop a next generation Artificial Intelligence (AI) utility for
consumer products that can complete complex voice commands and anticipate human needs
based on contextual factors (Levi, 2014). The founders of Viv were the original creators of Siri,
Apples Personal Assistant module. They have since started to work independently to build on
their successes with this new vision and platform. They do not see their product tied to a

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hardware manufacturer but as a service to be used in conjunction with other technology such as
smart phones, TVs, auto makers, or a kitchen appliance, and be licensed through symbols like
Power On, Wi-Fi, and Bluetooth (Levi, 2014). It is a large network that seems a risky
proposition, yet firms like Amazon, eBay, Microsoft and others have enjoyed such successes.
This new take on AI as a commodity (which by itself is not a high margin) makes Viv
Labs differentiate in the industry with a unique product. Yet it is still a potential. From a
resources and capabilities perspective, the company may sit in a Competitive Parity position.
Their product could be valuable, rare, and difficult to imitate. Positioning as innovators with a
strong team of great successors can potentially give the company competitive advantage as first
movers on the market. Viv comes equipped with a core competency of intellectual capital that
knows how to transform ambitious ideas into reality, based on their history. While this is
important because factors such as expertise and reputation are among the most important
organizational resources (Duhaime, et.al., 2011, p.38), these factors are also very fragile for Viv.
Startups are generally more investment vehicles than value creation systems, so there is a lot
of potential here in a unique product. And since the customer is everybody and everything,
there is also potential power. But with a strategy of all or nothing, none of that power can be
rentable until a critical mass adopts it.
Viv Labs Performance Analysis
We can only do a partial assessment, given that the company and product are still in
infancy. The engineering and design, purchasing, assembly and production, and after-sales
services in the value chain cannot be evaluated in real time yet. But a high risk for the company
is that their marketing efforts have yet to claim a significant brand around Viv Labs. So far the
only press this company has received is one Wired magazine article published in August 2014,

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meaning the general public has yet to learn more about the company itself. So far the companys
sales and marketing activities have been very limited, partly because the product is in its infancy.
It is also unclear at this time whether Viv knows how to bring products to market effectively to
drive customer satisfaction. Furthermore, it is uncertain if the market is prepared for such an
advanced AI technology that has access to vast amounts of personal data (i.e. medical, financial,
etc.). Privacy could be of major concern, which Viv would need to consider. Thus, their main
current bet is on their intellectual capitals decision-making power.
Conclusion
Viv Labs is developing cutting edge software, which may change the face of technology
in the upcoming decade, however it is still a product half-baked. The innovation, expertise, and
reputation of the firms intellectual capital are the leading perceived advantages of Vivs
strategy. From a performance perspective, Viv has to overcome challenges of integrating
multiple technological platforms and win users. However, outsiders who have seen early demos
are confident, according to the article in Wired. As Oren Etzioni, a renowned AI expert says:
The vision is very significant. If this team is successful, we are looking at the future of
intelligent agents and a multibillion-dollar industry (Levi, 2014).
Startups generally have the liability of newness and higher likelihood of failure. A
supporting strategy is usually speed, thus from an investors standpoint, seeing a sense of
urgency is important. We consider a decisional factor for this investment to be how and who in
the firm makes the important decisions. Given impending growth in the industry, we see
opportunity to realize significant returns in the Artificial Intelligence sector. Investing in Viv
Labs specifically would be a highly risky proposition (possibly moral too), given their overall
organizational strategy, but, like their developing product, it seems to have a good potential.

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7
References

Angel.co. Artificial Intelligence Startups. September 25, 2014, from

https://angel.co/artificial-intelligence
Basulto, D. (2014). Artificial intelligence is the next big tech trend. Heres why. The Washington
Post. September 24, 2014, from
http://www.washingtonpost.com/blogs/innovations/wp/2014/03/25/artificial-intelligenceis-the-next-big-tech-trend-heres-why/
CB Insights (2014). The Artificial Intelligence Ecosystem - $581M Invested Across 142 Deals in
2013. September 24, 2014 from http://www.cbinsights.com/blog/artificial-intelligenceventure-capital/
Duhaime, I., L Simpert, and J. Chesley. (2011). Strategic Thinking: Todays Business
Imperative. New York: Routledge.
Levy, S. (2014). Siris Investors Are Building a Radical New AI That Does Anything You
Ask. Wired. August 12, 2014, from http://www.wired.com/2014/08/viv/
Olson, R. (2012). Neuroevolution: an alternative route to Artificial Intelligence. Randal S. Olson.
September 25, 2014, from http://www.randalolson.com/2012/08/13/neuroevolution-analternative-route-to-artificial-intelligence/
Phatak, O. (2014). Applications of Artificial Intelligence. Buzzle. September 24, 2014 from
http://www.buzzle.com/articles/applications-of-artificial-intelligence.html
Rijmenam, M. (2014). Is Artificial Intelligence About to Change Doing Business Forever? Smart
Data Collective. September 24, 2014, from
http://smartdatacollective.com/bigdatastartups/186591/artificial-intelligence-aboutchange-doing-business-forever
Tucker, P. (2012). A.I. and the Next American Industrial Revolution. World Future Society.
September 24, 2014, from http://www.wfs.org/content/i-and-next-american-industrialrevolution
Waltz, D. (1996). Bringing Common Sense, Expert Knowledge, and Superhuman Reasoning to
Computers. Artificial Intelligence: Realizing the Ultimate Promises of Computing.
September 24, 2014, from http://homes.cs.washington.edu/~lazowska/cra/ai.html