Mr. Saffo, let’s start with a definition. What is digital transformation? Or is it a catch-all term like artificial intelligence that’s open to interpretation? Digital transformation is not so much a definable term as a polite expression of the terror companies are going through right now. It’s a moment in time where digital technology is changing everything, and as people are trying to understand it they throw a label on top of it. Digital technology is the solvent leeching the glue out of our business infrastructures, our organisations and our governmental entities. This moment reminds me of the early 16th century with the invention of moveable type and the publication of the first book. Print technology launched a revolution that transformed business and culture across European society. Today, the equivalent is bits. Digital technology, which was launched just about 70 years ago, is gaining traction now, and the revolution in terms of impacts is beginning.

How much of that is a shift in mindset and how much is a technological change? First we invent our technologies, then we turn around and use them to reinvent ourselves as individuals, communities, and cultures. The anxiety, uncertainty, and opportunity we see stem from how we respond to the opportunities presented by those technologies.

Make no mistake, this is a business revolution. And revolutions have losers and turbulence. We’ll see lots of businesses go out of existence, and we’ll see lots of businesses emerge that were never possible, as well as that third category – the incumbents who survive are the businesses who transform.

When people talk about digital transformation, they often use the word disruption in the same breath. Does transformation require disruption, or does disruption require transformation?Disruption is what you hope happens to your competitor; transformation is what you hope happens to you. These are words that draw our attention to things that are otherwise overlooked. So the words have less meaning than they have value as an indicator of something to watch out for.

When most people think of digital transformation, they probably think of companies such as Google, Facebook, Apple, Amazon. Does Silicon Valley play a crucial part in that transformation? The interesting thing about Silicon Valley is that it reinvents itself about every decade or decade and a half. That’s how it manages to stay at the centre of the revolution even though each phase of the revolution is very different. The Valley is typically the first place to take advantage of new, inexpensive technologies because innovators are the first to understand what they really are good for.

In the 1970s, microprocessors got really cheap. The result was the personal computer revolution, and that lasted for about a decade. The next phase was ushered in by the arrival of cheap lasers in the late 1980s, which led to the networking revolution of the 1990s. The poster child for this access revolution was the world wide web. The transformation today is about something very different. It’s not about commerce, and it’s not about the Internet at all.

• Case study

  Digital frontrunners and laggards

  Digital pioneer Paul Saffo puts things very clearly for be top: He gives examples of companies that have recognised and harnessed the potential of the digital transformation – and those struggling to adapt. Digital frontrunners have one thing in common – they have the courage to break away from old approaches in favour of true innovations.

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  Saffo's case study

  American Airlines – The pioneer

  One of my favourite examples of a successful digital transformation is Bob Crandall of American Airlines. He was working there in the 1950s, when the company developed its first digital reservation system, and played a crucial role in ensuring American Airlines continued expanding this technology through the 60s and 70s. He eventually became CEO of the airline.

  During the oil crisis in the 70s, American Airlines made a loss with every seat sold due to high fuel prices. But they had this new reservation system, called SABRE, and that helped them make money on every booking. It was then that Bob realised that his business had actually become a computer company. The airline was making losses so that it could generate sales with its IT systems.”

  SABRE (short for ‘Semi-automated Business Research Environment’) separated from its parent company American Airlines in 2000 and is now an independent company that processes bookings for 400 airlines, 220,000 hotels, 42 rental car companies, 38 railways and 17 cruise lines. SABRE describes itself as an ‘innovative technology company’.

   

So, what is it about? This moment in time is being shaped by cheap, ubiquitous sensors. We’re connecting our computers and our networks to the physical world. We’re asking them to observe and manipulate it on our behalf. The real driver of the next wave of business transformation is how to integrate environmentally aware machines into your business – whether it’s in the form of output devices like 3D printers or input devices like sensor networks… it all comes down to that nexus.

Artificial intelligence (AI) today is about creating software that connects with vast sensor networks and does what we could call cognitive computing. I’m always wondering when the first company will be listed on a stock exchange that has no employees and is run by such autonomous software.

How far are we from this sensor-rich world powered by AI? This is not a forecast, this is present tense. It’s happening today. Think about it. We are replacing our incandescent, fluorescent lightbulbs with LED-based lighting. An LED is not merely a device that emits photons. Every LED is capable of also being a sensor. Every light that goes into a business or a house will also be a sensor doing other things. So we’re talking about a very deep, tightly woven mesh of sensor technologies and computers that will be surrounding us.

Are today’s successful tech companies just providing the tools for this next transformation, or are they also transforming themselves? The companies that look like they’re on the lead to this transformation are actually doing exactly what all the rest of us are doing – they’re trying to flee into the future as fast as they can. They have no idea whether they will succeed. But the one thing they know is they better not slow down.

So it comes down to timing… Since we are in sunny California, I want to say that I was, once upon a time, a surfer. Playing with digital transformation is a little like catching a wave. If you start paddling too soon you will be tired by the time the wave arrives. It will leave you behind and you’ll look ridiculous. On the other hand, if you’re not paying enough attention and you don’t happen to notice the wave until it’s almost on top of you, you will get crushed by it. So paying attention to how the technologies arrive and when they arrive is crucial.

Keep in mind that sensors, the modern wave of sensors, started in 1994, but it hasn’t really had an impact until the last decade. The transistor was invented in 1947 and it didn’t even start deploying until the early 1950s, and the computer revolution was two decades later. If you want to understand the technology origins of the wave that will eventually reach you, look for the technologies in the early phase and add 10 to 15 years and say: I know it will take that long. What will it mean for me in 10 to 15 years?

Doesn’t surfing require a certain level of youthfulness, agility and flexibility? What about old companies that have large supply chains and bureaucracies? Being a good surfer, like many sports, is about being good at physics and not about youth and strength alone. The same is true for business. It’s all about frame of mind and understanding the physics of innovation. The challenge with established business is more often than not that they know exactly what’s ahead, they can hear the sound of the downstream waterfall that their boat is about to go over. They think, we’re going to get out, shift over, but let’s just make a little bit more money out of our existing line of business. That’s the most dangerous thing a company can do.

• Saffo’s case study

  Apple – The ruthless one

  Anyone who owns a profitable business, shouldn’t have any qualms about divesting it. In other words – sacred cows make the best burgers. Companies should take a close look at what is at the core of their business and understand what makes it so valuable. After all, that’s exactly what a competitor is looking to imitate. Therefore, it’s better to slaughter your sacred cow before someone beats you to it.

  My favourite adopter of this approach is the founder of Apple, Steve Jobs. Let’s think back to 2007 when the iPhone was unveiled. At this time, the Apple iPod was the best-selling product with steadily growing sales figures. And what does Steve Jobs do? He puts all the iPod’s functions into the new iPhone, essentially destroying his iPod business in one fell swoop. But he knew he had to act before someone else beat him to it, and this allowed Apple to siphon off this revenue. That’s how ruthless you have to be with old business – regardless of how profitable it may be.”

  When the iPhone was launched in January 2007, the mass market for smartphones with touchscreens was created overnight – a concept that every mobile phone manufacturer then emulated. Over the next decade, Apple sold over a billion of these devices and, despite growth reaching a plateau, the iPhone still accounts for 90 per cent of the profit of the entire mobile phone industry.

  Established: As Apple Computer Company in 1976, Apple Computer Inc. in 1977, and Apple Inc. since 2007

  Head Office: Cupertino, California

  Sales: 265.8 billion US-Dollar

  Employees: 132,000

   

How would you counsel a medium-sized business that doesn’t think of itself as closely connected to Silicon Valley and cutting-edge technology? This applies whether you’re a large company, a medium company, or a very small company. A family business, a mid-size enterprise, or public company. It’s all the same. The answer is to think like a competitor, and especially think like a competitor who’s an innovator. Looking over the fence at your own business saying, I want a piece of those revenues and I’m going to get it not by competing against them but by completely transforming the playing field. Apply that to your own business.

What does that mean in practical terms? There are lots of different ways to do this. Pick a small team, what in the military is called a red team, to look at your business and say how would they compete against it. Try whatever works with your culture. But at the same time, do not overplay the belief that those folks are actually going to get the answer.

Innovation is a very difficult process. In the biological world, the term for innovation is mutation. And mostly it’s lethal. And that’s why species only do it when they’re under stress. The challenge of digital transformation faces every company from the very largest to the smallest little start-up.

• Saffo’s case study

  Federal Express – The expedient one

  While studying economics at Yale, Fred Smith, who founded Federal Express in 1971, wrote an essay that has since become famous because it essentially outlined the business plan for a company called Federal Express. His ingenious idea was to apply digital transformation to logistics – in other words, treating packages like bits. All conventional courier services took a somewhat different approach – they transported deliveries from a small town to a central hub in a major city then to a regional centre, meaning each package often had to be unloaded and reloaded unnecessarily often on its way to its destination.

  It suddenly occurred to Smith that loading goods onto a plane was the biggest cost factor, and so he developed a ‘hub and spokes system’. If I ship all packages by air to a central hub – in Memphis, for instance – and then distribute them directly to the destination from there, then I’ve completely reinvented the courier business.”

  Federal Express is now one of the world’s largest providers of logistics services, delivering over 15 million packages in over 220 countries and territories every day. Like its competitors, the company has refined a data-driven hub and spokes system that benefits from the enormous growth in online commerce.

   

Is there such a thing as a playbook for how a company can approach transformation? There’s no playbook for this. There might be playing cards with ideas on them that you can shuffle around and organise for your organisation. At the end of the day, the most important quality, in my opinion, for an executive, or even a young employee, is intuition.

The whole point of understanding the history of earlier innovations and the environment the company’s in and the potential changes is to get yourself to a place of robust, well-informed intuition where you can make the right decision based on incomplete information and act without looking back. Knowing that moment when you have to decide there’s no turning back and you have to move quickly – that is the single most important skill a senior executive can have.

Doesn’t the size of the company make a difference when arriving at such a momentous decision? I don’t believe there’s a huge difference between big companies and small companies, but there is a major difference between a company that’s led by a founder versus a company that’s led by professional management. You can have professional managers and CEOs who are as visionary and as brilliant as founders, and in fact often they are more visionary or more brilliant.

But a founder, whether they’re right or wrong, has one advantage that professional management never has. And that is everybody in that company knows – no matter how hard they’re working and how much they have at stake – the founder has more at stake than they do. Therefore, they will be inclined to not question what the founder says and follow the founder’s intuition more readily than if you have a big-bucks CEO dropped into a company to lead digital transformation.

• Saffo’s case study

  Kodak – The Radical One

  No one uses Kodak digital cameras anymore because we all have smartphones. But Kodak was a digital pioneer – however unbelievable that may sound. It developed the first digital camera and manufactured the world’s most advanced CCD chips. What brand comes to mind when you think of high-performance photography? Leica! The Leica M9 camera had a Kodak chip – and that was already a decade ago. That’s how well Kodak understood this technology.

  Its fatal mistake was the transformation of its business model. When the CEO decided to develop the first digital camera, he knew that the days of emulsion film were numbered. The managers that followed him were also in favour of the digital transformation and had a team of innovators, who developed a solution for this. Kodak was ultimately doomed by the lack of understanding of middle management employees, who were reluctant to give up on film. Kodak had the technology, the vision, the right leaders, and ideas for new products. But there were many mid-level employees who didn’t want change and stood in its way.”

  As early as 1900, Kodak launched the first mass-market camera – the “Brownie”. It went on to become a global sensation, enjoying decades of success – until the fatal decision was made in the 70s and 80s to forgo the digital camera so as not to jeopardise the company’s core analogue business. The transition to digital photography came too late. Kodak went into administration in 2012 and is now trying its hand as a printing specialist.

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  Established: 1888

  Head Office: Rochester, New York

  Sales: 1,5 Milliarden US-Dollar

  Employees: 5.800

   

Digital transformation often creates resistance in an organisation because employees are worried. How can a company best address these fears? Human resistance to change is the biggest problem – because change is terrifying. The secret to Silicon Valley’s long-term success is that we’ve made it a safe place to fail. Failure has consequences but they’re not lethal. In companies, if you can make it a place where it’s safe enough to fail, that people don’t freak out, then change will go a lot more smoothly. But you have to start at the point of admitting that “I know people hate change.”

If you can take something strange and make it seem familiar, that helps for acceptance. But then also to turn around and take something that is already familiar and make it seem strange. Here’s this new technology, it’s actually tied to our business, it’s more familiar than you might think. Then take a familiar thing, that line of business that’s been a cash cow for generations and say: Hey, it’s actually not what we think it is and not what our business is. Do those two things at once, and it knocks people off balance so you can effect change.

Why should companies under pressure to transform focus on those intangible values? We are at a moment in the 21st century where velocity and rapid response are everything. I think advantage goes to the companies that can accommodate all that short-term stuff, but hold the longest timeframe as their private goal. How do we do things today that won’t pay off for 20 years? But do it in a way that we will still be here in 20 years when they do pay off. That’s the hardest management challenge of all. At the end of the day, it’s the only challenge that matters.n