Robot Adoption and Profitability: The Opportunities and Challenges Ahead

We find a U-shaped relationship between the adoption of industrial robots and profit margins. We attribute this finding to firms initially using robots for process innovation before applying the technology to product innovation, corresponding to a strategy of cost leadership and market differentiation, respectively. With recent advancements in artificial intelligence (AI), newer generations of AI-enabled robots are increasingly capable of undertaking unstructured tasks, better at coordinating with humans and with each other. These robots confer greater operational flexibility that also first reduces costs through process innovation before beginning to promote product innovation via more sophisticated customization. However, we anticipate that this trend will result in a more compressed U-shaped relationship. This is because AI-enabled robots’ replacement of tasks with greater cognitive content will free up human efforts to engage in creativity-oriented tasks that might usher in product innovation sooner and thus shorten the transition from cost leadership to market differentiation. Firms can greatly benefit from making adequate preparations for this trend with a renewed sense of urgency, training their workers and managers in digital and business-related skills in order to maintain superior profitability.