Why Legacy Companies Must Reinvent—or Die

September 24, 2018, 11:00 AM UTC
Aerial view of Ping An International Finance Centre in Shenzhen, Guangdong province, China.
SHENZEN, GUANGDONG, CHINA - 2016/12/17: Aerial view of Ping An International Finance Centre, also known as the Ping An IFC is a 115-story tall skyscraper in Shenzhen, Guangdong province, China. (EDITORS NOTE: Image has been created using a drone.). (Photo by Stephen J. Boitano/LightRocket via Getty Images)
Stephen J. Boitano—LightRocket via Getty Images

So, who’s winning? The disruptors or the incumbents? While incumbents often get a bad rap, the truth is that for every sector where technological change has enabled fleet-footed digital disruptors to innovate business models, there are even more where established players still prevail. (As an example of the latter, try to name your favorite web-based pharma giant.)

As the next major technological wave rolls forward—think artificial intelligence, the Internet of Things, blockchain—we believe many incumbents stand a good chance of prevailing yet again, provided they move fast and at scale.

The data is pretty clear on this score. McKinsey’s 2017 Global Digital Survey of over 1,600 executives identified a group of “reinvented incumbents” (companies embracing disruptive technologies). They invest three times more in the new wave of disruptive technologies than traditional incumbents do (Exhibit 1).

Exhibit 1—McKinsey & Company
McKinsey & Company

And it seems to be working. These reinvented incumbents are using many of their established advantages of scale and access to capital to achieve greater economic returns compared with their traditional counterparts (Exhibit 2).

Exhibit 2—McKinsey & Company
McKinsey & Company

While the first phase of Internet disruption was largely about removing unnecessary intermediaries from markets and creating digital-only businesses, the new wave can be boiled down to combining technologies to do radically new things. This multiplier effect is possible thanks to a perfect storm of hardware and software—such as sensors, deep learning, AI, next-generation chipsets, and virtual reality—that has reached sufficient maturity to enable new things (for example, autonomous vehicles) and new business models (such as virtual warehousing). The exponential growth in foundational technologies has led to cheaper computing power, data storage (Exhibit 3), and hardware components (Exhibit 4), making this new wave of technologies (relatively) accessible.

Exhibit 3—McKinsey & Company
McKinsey & Company
Exhibit 4—McKinsey & Company
McKinsey & Company

Incumbents are already driving new value by focusing on activities that these new technologies do well, primarily radical improvements in productivity, accuracy, and speed:

  • Machine learning improves the accuracy of predicted outcomes or provides better recommendations. For example, a Danish software company has developed an AI tool that helps 911 dispatchers detect cardiac arrests more accurately (93% versus 73%) and more quickly (over 30 seconds on average) than humans can.
  • Industrial IoT enables efficient asset management. One mine operator with a large mining fleet deployed IoT sensors and sophisticated analytics that could prevent breakdowns by identifying, for example, problematic increases in engine temperatures. For each breakdown avoided, the company potentially could save $2-4 million a day.
  • Autonomous and connected vehicles make the transportation of goods and people more efficient and safer. One heavy machine manufacturer developed autonomous trucks that improved productivity by 30%. These trucks could travel to destinations, haul material to dump points, and even report to maintenance autonomously.
  • Virtual and augmented reality enables just-in-time access to crucial information. One aerospace manufacturer displayed detailed wiring instructions on smart glasses given to its technicians as part of a pilot program, reducing assembly time by 25% and decreasing production error rates significantly.

These technologies are poised to shift the competitive dynamics across all sectors in three ways.

Exponentially increasing the pace of competition

These new technologies are enabling massive changes across the board—from product delivery to business model reinvention—to happen very quickly. In its two years of independence, for example, Waymo has emerged as a pioneer of self-driving technology, combining sensor and AI technology to offer public access to self-driving cars. It is already poised to change the dynamics of the auto industry.

Rewarding interconnectivity

Complex configurations of technologies will require a corresponding need to bring together new kinds of partners. UPS, for example, partnered with SAP and Fast Radius to offer on-demand 3D printing services that compete with those of traditional manufacturers. This enables virtual warehousing, in which products ranging from auto parts to medical devices can be printed and shipped on the same day.

Blurring boundaries between industries

Combining these new technologies will allow companies to move aggressively into new areas—provided they act like startups and are deliberate in evaluating opportunities outside of their traditional sectors. Ping An began as a Chinese insurance provider, then expanded into auto, entertainment, health care, and housing services. After building a user base of more than 350 million accounts, Ping An then converted many of these users into insurance customers, thereby becoming the world’s most valuable insurance brand.

The winners of the next wave of innovation will be those companies that can skillfully combine new technologies into new businesses and scale them quickly. That’s something incumbents should be well placed to do.

Daniel Pacthod is a senior partner for McKinsey in the New York office, Kevin Sneader is the senior managing partner of McKinsey based in Hong Kong, and Anand Swaminathan is a senior partner in McKinsey’s San Francisco office. Gautam Lunawat and Vibhu Singh assisted in research for this article.

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