Competition has always been a catalyst for innovation. In highly competitive markets, such as retail, margins are low and there is much more pressure to innovate in order t¬o retain customers. Companies in less competitive markets, such as the insurance sector, have historically lagged behind when it comes to innovation. In that sector, this was rarely a problem, as clients had few other options and the barrier to switch insurers outweighed the benefits. New technological options, however, have made it impossible to rest on one’s laurels. Young companies are developing data-driven services that can suddenly turn entire markets on their head. That makes innovation an absolute necessity in every sector – which is a good thing.
By Erica D’Acunto, senior data scientist at ORTEC
Some markets are more competitive than others, and always have been. These competitive markets are usually where the most ground-breaking innovations take place, where they follow at a rapid pace, and where they sometimes even have effects that transcend their own markets. This can be explained by the fact that the pressure to innovate is simply higher in crowded markets. The more competition there is, the lower one’s margins, so companies are constantly looking for ways to organize their operations more efficiently, and therefore less expensively. They also want to offer the best possible service, in order to retain existing customers and to attract new ones. As a result, these companies invest quite a bit in innovation in order to beat their competition.
Innovation to maintain an advantage
A typical example of such a competitive market is the retail sector, with many big players competing for customers’ business. Walmart has always significantly invested in operating its stores and warehouses more efficiently. The retailer also devotes large amounts of money to the development of better services and understanding its customers. Walmart has always been forced to go along with new developments, and also now it knows how to take advantage of the new opportunities presented by data science. As this infographic shows, almost all of the innovations that the company has implemented over the past few years have been based on a data-driven concept. This constant stream of innovations has enabled Walmart to grow into one of the largest companies in the world, and to survive many disruptions in the retail sector. And every single time, the retailer has managed to maintain its advantage over the competition.
Little competition, little innovation
Let us compare the high level of innovativeness of the retail market to the less innovative insurance sector. The way we insure our property and health has remained virtually unchanged for decades, with only few options available to consumers. The only difference today is that you no longer have a consultant visiting you at home, since nowadays you can purchase any policy online. But this can hardly be considered real innovation. The sector seems to have realized that fact as well: a study by Willis Towers Watson has shown that 74 percent of insurers think that they don’t show enough leadership in digital and data-driven innovation. The lack of competition in the market – the insurance market only has a few large players – has simply meant that until recently there was no need to innovate.
New competition from unexpected direction
But in this new era, competition can suddenly appear out of nowhere. Take the way Uber has permanently changed the traditional taxi branch, for example. Or how Netflix has radically transformed how we consume series and movies. These are the most familiar examples, of course, but in fact the next Uber or Netflix could appear in virtually any sector. A few smart brains, a bunch of data, and a good idea can just be enough to make your services obsolete in no time. The traditional insurance sector gradually seems to be accepting that fact as well. The big disruptor has yet to appear in the market, but startups like Friendsurance, Lemonade and Zhong An are already nipping at the heels of the legacy players. Their data-based services, such as a peer-to-peer insurance model or an insurance policy on a monthly subscription basis, which pays out claims much faster, seem to be better attuned to customers’ demands and offer them more freedom of choice. That forces the existing players to take action, and with success: large insurers seem to understand that they will have to invest in data-driven innovation in order to maintain their position. AXA’s ‘insurance-as-a-service’ platform and the incubator set up by Allianz, Allianz X, are two good examples of this development.
The data revolution can turn any sector on its head. Disruption is lurking around every corner. As an existing player, you want to stay one step ahead of these developments, and there is only one way to do that: to heavily invest in data-driven innovation. Companies should challenge themselves to innovate, even when margins are comfortable and everything is ’hunky dory’. In the end, the entire sector – and therefore the customer too – will benefit. Legacy players also have a major advantage over new entries to the market: no matter how fast and maneuverable these potential competitors may be, they don’t yet have a massive customer database. So ‘traditional’ parties have a great starting position, which they can exploit even more by directing all efforts to data-driven innovation, like Walmart has always done. They have to challenge themselves and ensure that their customers have no reason to look elsewhere. Not because they don’t have other options, but because innovation enables companies to meet the ever-changing needs of today’s customer.