The 4 Stages of AI Adoption—and Why Most SMBs Are Still Stuck at Level 1

The question is no longer whether AI will affect small and mid-sized businesses. It’s how—and how fast.

EXPERT OPINION BY DAVID SCHONTHAL, DIRECTOR OF ENTREPRENEURSHIP, KELLOGG SCHOOL OF MANAGEMENT @DAVIDSCHONTHAL

Illustration: Getty Images

Where are you in your AI journey?

It has been easy to focus that question on larger companies, given their scale and stakes. But it’s equally relevant for small-to-medium (SMB) businesses, from mom-and-pops to venture-backed startups. For this article’s purposes, we’re talking about companies with fewer than 5,000 employees; but we’re seeing the applicability of AI across the board—whether the business makes software or soup.

The capabilities of frontier AI models are accelerating at a pace that’s difficult to overstate. OpenAI’s GDPval benchmark finds that today’s best models are already approaching the quality of work produced by industry experts—completing professional tasks roughly 100x faster and at a fraction of the cost. And these gains aren’t incremental. Performance has more than tripled in just over a year. Meanwhile, younger professionals are already AI-native, cheerfully using these tools at work whether their bosses realize it or not. (They don’t realize it.)

It’s understandable many SMB leaders are reluctant to dive in. They’re not sure which tools or models to use, and lack dedicated AI expertise. The landscape changes what seems weekly as a new model drops with a Marvel-villain-sounding name. But it’s far better to push through the overwhelm and start somewhere than deny or delay—because competitors won’t wait. That’s especially true in the current, uncertain environment, where every efficiency gain and competitive edge matters more.

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Indeed, we’re seeing in many cases that AI-adopting SMBs are working to grow output and revenue without growing headcount (or replacing people). In other cases, AI-native founders are gaining traction with enterprise customers using Claude code, a full stack of agents, and just 2-3 employees!

This article maps 4 Stages of AI Evolution to help business leaders understand where they are and what might be holding them back.

The 4 Stages of AI Evolution

Successful integration of AI requires a structured approach. We’ve mapped four progressively more sophisticated stages to help leaders understand the value-creating roles AI can play. The goal is to locate where the business is today and consider how to move to the next level.

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