Is the AI buzz creating too much noise for CEOs to cut through?

The explosion of interest in GenAI is the standout business story of 2023, with mentions of AI or GenAI in earnings calls more than doubling over the past year.

But CEOs are finding it difficult to cut through all that buzz. They are grappling with a number of AI challenges — from being overwhelmed by potential use cases, to developing a cohesive strategy. Where to invest and with whom to partner is complex as they look to hone in on the specific opportunities within their own business and sector.

Nevertheless, given the pace of developments, CEOs need to quickly understand the implications for their business, operations, industry and end markets to keep up with competitors.

The survey clearly reflects that when it comes to AI, CEOs find themselves acting with urgency. But there is a tension. Seven in 10 (70%) recognize that their organization must act now on GenAI to avoid giving their competitors a strategic advantage. At the same time, nearly the same percentage (68%) agree that the uncertainty around GenAI makes it challenging to move quickly in developing and implementing an AI strategy.

More than two-thirds (70%) of CEOs also acknowledge that GenAI will challenge them to disrupt their own business model to maintain competitive advantage.

In this context, how can CEOs maximize their chances of capturing value from GenAI? EY previously outlined guiding principles for how CEOs can place GenAI in the context of a broader AI strategy and the key initiatives they should pursue in the near-term to establish foundational AI capabilities.

This survey finds that while progress is being made across these initiatives – 92% of CEOs report having completed at least one – only 17% have completed more than half of the eight initiatives assessed. While this means there is still time for CEOs to establish the AI capabilities necessary for long-term growth, that window to get ahead of the competition may rapidly close given continued focus and investment in the space.

The survey also shows that the companies most in need of gains from AI – those anticipating declining revenue growth in 2024 compared with the prior year – are the furthest behind on adopting AI and least likely to be increasing investment.

Compared with CEOs expecting higher revenue growth, they have completed fewer initiatives to establish AI capabilities (1.9 vs. 3.4 on average) and are less likely to be increasing investment in research and development (R&D) in 2024 (35% vs. 80%).

While it makes sense that these companies have fewer resources to invest in AI, they may need to reconsider their approach. Some of the quickest gains from AI deployment are improvements in efficiency and productivity that can boost the prospects of slower-growth companies. In a separate EY survey¹, three-quarters (75%) of senior executives globally agreed that the capabilities and productivity of their employees would be enhanced by GenAI.

As CEOs define their AI strategy, they also need to be mindful of the expectations they set with stakeholders. This survey suggests that CEOs experiencing early success with GenAI may be overly optimistic about how quickly it will transform the rest of their business.

The majority (64%) of companies that have already experienced a significant impact from GenAI expect that it will redefine their entire business and operating model in two years or less — an impact that is significantly harder to achieve than early wins in revenue or efficiency.

Conversely, the majority (67%) of companies with deeper experience in AI – defined as having completed five or more initiatives to establish AI capabilities – expect it to take three to five years or more to achieve similar impacts.

This longer – and arguably more realistic – timeline suggests that AI and GenAI are unfamiliar territory for many CEOs. Setting and failing to meet lofty expectations may erode the confidence of employees and shareholders, making it more difficult to transform in the long run. To avoid this, CEOs should work closely with their Chief Technology Officers (CTOs) to ensure their expectations and strategic plans around AI are feasible given their current resources and capabilities.

As CEOs and companies gain deeper insight into the technology, their perspectives become more grounded, increasing the likelihood of investors and other stakeholders aligning with their long-term vision and strategy.

There is also a clear recognition that GenAI is here to stay and will fundamentally disrupt and reshape current operating models and competitive landscapes.

In the past four years, business leaders have had to respond to repeated shocks. These include quickly shifting consumer behaviors, resetting and reconfiguring supply chains, an upended global energy market, and rapid changes in the growth, inflation and interest rate environment.

However, most respondents anticipate higher levels of revenue growth (66%) and profitability (65%) in 2024 compared with 2023.

But while these headline figures look promising, they are set against a backdrop where real global GDP growth is expected to be 20% lower in 2024 than in 2019. Analysis of actual and estimated global GDP growth data² shows there has been a structural stepdown in global demand and output, with the next five years being on average 0.3% lower than in the five years pre-pandemic. This equates to US$300b of lower aggregate output.

With growth expectations more likely to be revised on the downside in the near term, CEOs should consider whether their own growth expectations reflect the slower global market projected over the next five years. Any strategy relying on the assumption that growth and customer behaviors will settle back to pre-pandemic patterns is unlikely to be successful and will put that company at a disadvantage against its competition.

The survey finds a clear split between companies anticipating growth in the next year and their ability to generate the free cash flow to fund investments in AI or other priorities and those not feeling as confident about their prospects in this new environment.

For companies expecting higher growth, more than two-thirds (72%) also expect higher levels of profitability, with only 3% anticipating a decline in profitability. Conversely, for those expecting lower levels of growth, more than two-thirds (68%) are also planning for lower levels of profitability. This will impact their ability to invest to reshape their business in the new cycle.

This new economic cycle is reflected in CEOs' perceptions of the biggest barrier to maximizing growth and profitability in 2024, with slower economic growth topping the list of barriers, if only slightly ahead of the others.

But for those anticipating lower growth, the percentage citing this as a major barrier increases relative to those anticipating increased growth (29% vs. 20%). It is possible that CEOs expecting higher growth have already made difficult choices during the past few years. In terms of competitive positioning and potential growth opportunities, they have likely reoriented their businesses toward areas of greatest success. For those yet to do so, challenging the existing business model based on current and anticipated market conditions is an imperative that needs immediate attention.

The EY 2023 Work Reimagined Survey reveals a “next normal” of work, detailing the contours of a rebalance in workforce realities and what factors contribute most to better outcomes. It finds that companies are no longer purely driven by the lingering consequences of the COVID-19 pandemic. Rather, employers now see their challenges through the lens of economic, labor and geopolitical pressures.

These pressures are reflected in the responses from CEOs in this survey. Most CEOs (93%) are making changes to their talent strategy to manage costs, with a majority aiming to do so without reducing headcount. That number drops for those expecting significant revenue growth. While it feels obvious that number would decline, it still feels surprisingly high; with growth on the horizon, why make workforce cuts – this may suggest anticipated profit hikes will likely stem more from curtailing talent than from improved efficiency.

Reassessing risks in a recast global landscape

CEOs are becoming more wary of the risks developing in the new environment.

More than two-thirds expect a moderate to significant impact to their business across a range of risks, from geopolitical, macroeconomic, regulatory, sustainability and technology challenges.

It’s possible that these leading CEOs, who are expecting significant growth, have helped their companies better navigate the past four years of crises and have laid a more stable foundation to navigate these risks. Companies need to embrace flexible processes, adaptive strategies, cross-functional collaboration and continuous learning from these past crises to better navigate the new environment they find themselves in.

Within this context there is clear recognition among CEOs that the new environment requires enhanced investment across the board, not just in tech and AI capabilities.

Most respondents are planning to increase investment in R&D, capex, M&A, and through corporate venture capital. Across these measures there has been a decline from the supercharged investment cycle that began in July 2020 and slowed significantly after June 2022, with 2021 being a record year for M&A and corporate venture capital, and with higher-than-average growth in R&D and capex spend. These investment levels declined in 2022 and are still to recover. But CEOs are signaling a return to higher levels of investment as uncertainties about monetary policy decrease. With markets now accepting a higher-for-longer rate environment, inflation pressures recede, and the growth outlook becomes clearer, even if at lower levels.

There is a clear difference in intentions between those anticipating higher growth in 2024 than their peers. Across all verticals, more bullish CEOs are planning to invest at higher levels, which will likely boost their advantage even further. As with investments in GenAI initiatives, those companies anticipating lower levels of growth should acknowledge that falling behind in investment now will mean they fall further behind overall. They need to keep pace with more agile competitors. And that will require hard choices to fix, sell or close unprofitable parts of the portfolio, or to exit particular markets.

The wider M&A market has firmly stabilized after the slow first quarter of 2023. The market is currently seeing roughly US$200b–US$250b of deals each month, with about 250 deals of more than US$100m announced.

Expectations are for this to continue. There could also be an uptick in more significant deals, as CEOs become more comfortable with the new environment. Average deal values have been increasing through 2023, and there are recent signs of even larger megadeals in the pipeline.

The survey finds a clear majority of CEOs (89%) are planning some form of transaction over the next 12 months. But there has been a sharp contraction in intentions to actively pursue acquisitions in the next 12 months, dropping from 59% in July to 35% in October. The major focus is now on joint ventures and strategic alliances, and divestments, which has remained steady since July, indicating a desire to reassess portfolios as well as being boosted by the reopening of Initial Public Offering (IPO) markets.

There are also more CEOs allocating capital to their M&A budgets than are expecting to actively pursue acquisitions in the next 12 months, which points to companies building their reserves in anticipation of the right acquisition target.

CEOs need to understand the new environment and act now

To achieve their maximum potential over the near- to mid-term, CEOs need to consider and act on five critical issues:

1. Be your own economist:
   While overall growth may be decelerating, each company’ s trajectory is unique. Analyze your own financial and customer demand scenarios for a clearer view of the future.
2. Build your AI strategy top down and bottom up:
   Formulating your AI strategy is only the first step. Undertaking the initiatives required for your current business model is the necessary next step.
3. Optimize or exit:
   Given anticipated stagnant economic trends over the next three to five years, there’ s no room to retain lagging assets or operate in unprofitable markets.
4. Create your own capital:
   With a higher-for-longer cost of capital, the funding for ambitious transformation will be cheaper from internal cost takeouts.
5. Don't miss out on an advantageous acquisition:
   Even in a time of great complexity, some deals are just too obvious not to do and can yield significant competitive gains.

Michael Wheelock, EY Advanced insights lead, contributed to this article.