Strategy

Digitizing Isn’t the Same as

Digital Transformation
by Paul Leinwand and Mahadeva Matt Mani

March 26, 2021

HBR Staff/NASA

Summary. Covid-19 accelerated the pace of many companies’ digital initiatives —

and yet many executives are expressing concern that... more

If your organization is busier than ever “digitizing,” you’re not alone.

Digital efforts have been proliferating for years as companies strive to
catch up with technological innovation. Covid-19 massively
accelerated the pace, as many of our most basic activities, from
grocery shopping to “going to work” moved online.

However, this accelerated wave of digital initiatives must not be

confused with the real business transformation needed for success in
the digital age. The former is mostly about enabling business as usual
and “staying in the game,” while the latter is about building real,
long-term competitive advantage to succeed.

Despite so much energy and investment in digitization, we are

hearing many executives express concern that they are actually falling
behind on making the important choices that lead to differentiation.
They’re right to worry, because winning in the post-Covid world will
require re-imagining not just how you work, but also what you do to
create value in the digital era. No matter how many digital initiatives
you implement, you can’t expect to win by being the same as your
competitors — and they’re are all doing similar things, albeit at
different speeds.

Instead, companies need to step back and fundamentally reconceive

how they create value. They need to reimagine their place in the
world, rethink how they create value through ecosystems, and
transform their organizations to enable new models of value creation.
The bottom line is companies need to shape their own future,
recognizing that the world has fundamentally shifted, and that they
must find their purpose in it. If you can’t answer the questions “Why
are we here?” or “What unique value do we add for our customers?”
then you are likely at best just staying in the game.

We’ve researched more than a dozen companies who have been hard
at work to transform in this way since well before the pandemic
struck. These companies have kept the momentum up amidst the
worst recession and public health crisis of our lifetime, and their
collective experiences contrast starkly with those focused on merely
digitizing what they already do.

Exhibit one is Philips, which pre-Covid had looked at the future and
decided to transform from a multi-industry, manufacturing-centric
conglomerate to a company focused on health technology services
and solutions. It shed its foundational business (lighting) and evolved
from manufacturing and distributing products at scale, to bringing
together hardware, software, data, clinical expertise and AI-enabled
insights to support the delivery of better quality and lower cost health
care.

When Covid-19 hit, Philips not only quickly designed and mass
produced a new ventilator, it complemented it with biosensors that
fed patient information into a remote monitoring platform to enable
the safe care of highly contagious Covid-19 patients. Philips also
deployed an online portal to help physicians in Dutch hospitals share
related patient data. Despite Philips’ business being challenged by the
demand crash post Covid, its new model of doing business has
supported a quick pivot to solutions that contributed to the company
ending the year with stable revenue growth.

Construction is known as a traditionally asset-heavy and “non-tech”

industry, but Komatsu has been evolving from selling construction
equipment to becoming a leader in digitally enabled smart
construction solutions. This is helping their customers dramatically
improve productivity and value realization in an industry that has
experienced virtually zero productivity increase in the last 20 years.

Komatsu initially launched construction machinery that utilizes GPS,

digital mapping, sensors, and IoT connections to enable its customers
to use Komatsu equipment more efficiently. The company has since
gone further and opened up its Landlog platform and data that allows
customers, competitors and other companies in the construction
ecosystem to better coordinate their activities and improve total
productivity across a construction project. These pre-Covid business
model innovations have since allowed Komatsu to scale up new
sources of revenue via managed services and automated platforms,
and even accelerated the rollout of new offerings after Covid hit,
despite the slump in construction activity.

Another example is Microsoft, which over the past five years has
been transforming itself from the world’s largest software vendor to
offering technology-enabled solutions (hardware, software, services
and cloud computing) to help B2B and B2C customers improve their
operations and their experience of daily living. The company totally
reinvented its legacy organization, shifting from a focus on pushing
products into the mass market, to client solution-oriented teams
charged with bringing together the many cross-functional skills
needed to tailor services to specific customer needs.

Having clarified its purpose and radically reorganized around

solution-oriented teams, Microsoft was in a position to “act as digital
first responders to the world’s first responders,” when the pandemic
hit, as Nadella noted in an email to employees. It achieved historic
levels of cloud revenue growth from solutions such as supporting
universities to move their entire “business” online. This level of speed
and responsiveness to unique customer needs had been lagging at the
Microsoft of 10 years ago, despite its legacy of digital leadership.

What we’ve learned from these three examples and the other
companies we’ve studied is that leaders who want to secure their
organization’s future must:

Reimagine your place in the world, instead of focusing on

digitizing what you already do. Companies that transform for success
in the digital age define their reason for being in terms of the bold
value they create for their customers (and their customers’
customers), and why. They take advantage of new technology not to
copy what everyone else is doing, but to advance their own missions
by investing in the differentiating capabilities that allow them to
deliver on their purpose. Filling their new place in the world with life
often requires them to shed old business models, assets, and beliefs
about value creation.

Create value through ecosystems, rather than trying to do it all

alone. Successful companies in the digital age recognize that the way
to remain relevant comes from working together with an ecosystem
of players in order to deliver the ambitious value propositions that
customers want and to quickly innovate and scale up the incredible
capabilities that are needed. Operating in this way requires leaders to
think about value creation more boldly, question what their
organization must truly own, and be prepared to open up to
competitors and give up traditional sources of revenue in order to
address some of the most fundamental customer needs.

Re-imagine your organization to enable a new model of value

creation, rather than asking people to work in new ways within the
confines of the old organizational model. Winners in the digital era
break up old power structures so that new ideas and capabilities can
be scaled more collaboratively. They put in place outcome-oriented
teams tasked with collaborating across the organization and work
with their ecosystem partners to deliver the differentiating (and often
cross-functional) capabilities they need to win.

Leaders will invariably have to contend with important questions

about how much change they should take on, how fast their existing
businesses may be disrupted, how far the strategy may stretch from
today’s capabilities, and how to best manage the transformation.

But these questions should not be used as excuses for staying with
current business models. Without a more fundamental business
transformation, digitization on its own is a road to nowhere.
Remember Peter Drucker’s famous quote: “Management is doing
things right; leadership is doing the right things.” Now is the time for
executive teams to step up, disrupt themselves, and become leaders in
the digital age.

Paul Leinwand is the global managing director for

capabilities-driven strategy and growth at
Strategy&, PwC’s strategy consulting business. He
is a principal with PwC U.S., an adjunct professor
of strategy at the Kellogg School, and the coauthor
of several books, including Strategy That Works:
How Winning Companies Close the Strategy-to-
Execution Gap (HBR Press, 2016) and the
upcoming Beyond Digital: How Great Leaders
Transform Their Organizations and Shape the
Future. (HBR Press, 2021).

Mahadeva Matt Mani leads the transformation

platform for PwC and Strategy&, advising
executives on business model transformations and
operational value creation and productivity
programs. He is a U.S. principal currently on
secondment to PwC Netherlands, and the co-
author of the upcoming book Beyond Digital: How
Great Leaders Transform Their Organizations and
Shape the Future. (HBR Press, 2021)

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