Artificial intelligence and adaptive response to market changes: A strategy to enhance firm performance and innovation

Abstract

This research examines how AI-powered capabilities can bring value to organizations by enhancing their Adaptive Response to Market Changes (ARMC). Utilizing insights from organizational agility and the dynamic capability framework, we define ARMC as an organization’s ability to promptly identify and adjust to market changes, with customer responsiveness and operational adjustment as foundational competencies. We outline three AI-powered capabilities (AI-enabled automation, AI-enabled analytics, and AI-enabled relational capabilities) as ARMC’s predictors. We posit that the strengths of these relationships depend on environmental hostility and dynamism. Additionally, we propose positive associations between ARMC and three organizational outcomes: firm performance, process innovation, and product innovation. Our research employs a two-stage design, surveying IT and business executives from firms that have adopted AI. The results demonstrate significant interaction effects of environmental hostility and dynamism on the relationships between AI-powered capabilities and ARMC. Furthermore, we find that ARMC positively influences firm performance and innovation.