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McKinsey –The legacy threat

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Article Synopsis :

This edition of the McKinsey quarterly Five Fifty looks at legacy threat for those who are worried about the effects of new digital entrants and reinvented incumbents.

 The Digital Insurer reviews McKinsey’s Report on McKinsey –The legacy threat

Legacy firms must disrupt old models in order to succeed 

Traditional incumbents are seeing their business being undermined by 60% – that’s 30% from digital new entrants, but also 30% from reinvented incumbents.

Renewed vigour

Reinvented legacy companies are investing in acquiring digital and becoming more disruptive if as a result, they’re more willing to cannibalise their core. Twice as much, according to the McKinsey data.

These businesses typically invest three times more in digital than traditional incumbents, are two and a half times more likely to acquire digital businesses and be four times more likely to use artificial intelligence (AI) in at least one business unit.

This is disruptive and they’ve done this for a reason. Reinvented incumbents are seeing;
– revenue growth of more than two and a half times;

– EBIT improved twofold;

– and a doubling of the ROI from digital spend.

Old dogs learn new tricks

Traditional companies can achieve this as well, but they need to sort themselves out. While the McKinsey data shows that

– 86% of the respondents have a high level of a strategic response to digital change within products and distribution;

– 78% in ecosystems;

– 80% in processes; and

– 70% in the supply chain.

However, only 35% of the company’s revenues worldwide are digitised. And despite that, only 5% of respondents saw their products is fundamentally digital, with only 6% stating that all their major business processes are highly digitised.

New entrants have already seized a considerable amount of revenue – around 17% across regions and industries – and are eating the incumbents’ lunch. These new entrants get a jump from the new models they create, leaving the old guard to catch up. If they can.

Disruption comes in loops

McKinsey has identified two loops of disruption. The first is that digital entrants are challenging incumbents. China’s Alibaba has become the biggest seller of money market funds in a seven month period and in 2016, Facebook became licensed by the Central Bank of Ireland to issue e-money like payment services such as credit transfers.

This disruption doesn’t just take market share, but forces down prices and changes the way customers perceive the value they receive from the industry players.

The bottom line is the less sophisticated digitally and the industry is the bigger the negative impact on the incumbents that don’t catch up. Slow growing companies are hit hardest, with the bottom quarter of companies seeing their annual revenue growth fall three times faster than those in the top quartile.

Competition can be dangerous

The second loop is the danger of the ‘Red Queen’ scenario, whereby competitors engage in aggressive imitation in order to compete. This has been witnessed as a digital tit for tat between parcel services in the US, funeral homes across a number of countries and the automotive industry launching various digital ventures. These all increase competition, but compromise profitability.

These two loops are the greatest contributors to the erosion of profit margin and revenue among incumbents. At the time the survey two thirds the executive said their companies had not made any fundamental changes to corporate strategy and only 20% had begun to engage for significant transformation.

A long way to go

Fewer than 8% of companies had begun to integrate digital strategy fully into the corporate strategy and this is a huge missed opportunity.

The report summarises that businesses that take bold measures to change will generally benefit more than those who take a more measured – or less committed – approach. It will be twice as effective, says the data.

Digital Insurer's Comments

Companies integrate digital strategy into their corporate strategy – and fast. This will require them to develop new customer segments, introduce new business models and redefine the value chain.

There are opportunities to be had, but insurers need to react.

If they fail to act soon, they will take a major hit.

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