Managing Generative AI in Firms: The Theory of Shadow User Innovation

Abstract

This paper explores the management challenge posed by pervasive and unsupervised use of generative AI (GenAI) applications in firms. Employees are covertly experimenting with these tools to discover and capture value from their use, without the express direction or visibility of organisational leaders or managers. We call this phenomenon shadow user innovation. Our analysis integrates literature on user innovation, general purpose technologies and the evolution of firm capabilities. We define shadow user innovation as employee-led user innovation inside firms that is opaque to management. We explain how this opacity obstructs a firm's ability to translate the use of GenAI into visible improvements in productivity and profitability, because employees can currently privately capture these benefits. We discuss potential management responses to this challenge, outline a research program, and offer practical guidance for managers.

Keywords: Generative AI, Large Language Models, User Innovation, General Purpose Technologies, Dynamic Capabilities, Shadow Innovation