Systems Leadership for Disruptors and Incumbents

with @robsiegel @jeffimmelt @jeff_jordan @smc90 There's been a false dichotomy in technology and management lore over the past decade, between "brain" and "brawn", digital and physical, independence and interdependence, software culture versus industrial culture… Whether you're an early startup or a Fortune 500 company, today's leaders have to think completely differently, in terms of ecosystems; and they're often in the position of having to influence but not have control. So where and when to partner, when to go it alone?

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Sonal?

  Hi, everyone. Welcome to the A6 and Z Podcast. I'm Sonal and I'm excited for us to be back after a bit of a hiatus here. We have some new and exciting things coming to this feed, so stay tuned for more. But today, we have a new episode for you, one of our special book launch episodes, the first podcast on the new book coming out next week called "The Brains and Brawn Company: How Leading Organizations Blend the Best of Digital and Physical." It's by Robert Siegel, who's a lecturer at Stanford Graduate School of Business, former startup founder and entrepreneur, and former exec at GE, Intel, and other companies. Fun fact, he was also the lead researcher for Andy Grove's

• 0:43Sonal?

  "Only the Paranoid Survive," which is sort of a theme here. And joining us are also Jeffrey Immelt, former CEO of GE, aka General Electric. And finally, we have A6 and Z general partner Jeff Jordan. The conversation that follows is a hallway-style combo between the three of them, as all of them teach on business management at Stanford Business School, and I join to ask questions from the book. And just for quick context, "The Brain and the Brawn," in the title of the book, actually argue for key qualities that companies have to have to succeed, whether you're a startup or an incumbent, including things like leveraging size and scale and more. In our conversation, which covers the

• 1:24Sonal?

  theme of systems leadership, we focus mainly on logistics, ecosystems, and partnerships because it's so top of mind for so many companies. And we also include examples of various companies briefly throughout, from Instacart and Stripe, to Apple and Android Google, to Disney and Peloton and more. On that note, as a reminder, nothing in here is investment advice. Please see a6andz.com/disclosures for more information. But we begin with the three of them jamming briefly on mindset shifts and the difference between influence and control. The first voice you'll hear is Robert, followed by Jeffrey Immelt, and then Jeff Jordan's voice will come in after theirs.

• 2:03Speaker 01

  So I think there's been a false dichotomy in Silicon Valley over the last decade. And we saw it in two of the courses that I teach at the Graduate School of Business, Systems Leadership, which I teach with Jeff Immelt and Industrial's Dilemma, where we saw that companies, no matter what you make, every product and service is going to need to blend the capabilities and competencies of organizations that do digital and do physical. And students talk about the economic rents and the profit pools that might be aggregating to the companies here in Silicon Valley. And yet, the leaders of the next two decades, they're going to be living in an increasingly complex world, where things are manufactured, how they're manufactured, how the products create ongoing relationships with customers because they're connected. Incumbents are not doomed and disruptors are not ordained.

• 2:48Speaker 01

  And so incumbents need to understand how software is changing and impacting connected products. But by the same token, disruptors and software companies need to understand what it's like to actually have to deal with hard things like logistics and supply chain, which are messy and ugly and hard. You have to think completely differently. And the notion of digitization, it's necessary, but it's not sufficient.

• 3:07Speaker 02

  Yeah. Rob and I have taught this course together for four years, and we always teach at least one class with a manufacturing CEO. And the students look at him or her like they've landed from Mars. They don't know what milling machines are and things like that. We're raising a generation of people who are completely fixated on one world, but have no affinity for the physical world. And yet, a lot of their future is going to be wrapped up with that.

• 3:37Speaker 01

  There's almost this notion of, oh, well, I can make something somewhere else, but I'll take the high-margin software stuff. But if you're going to design great products, you really need to understand how your customers use your products, how the channel uses your products, what happens when you layer software and design it into a product from the beginning. I think that the surprise is that people realize they have to see the whole system. They have to understand kind of the secondary and tertiary effects of what happens when everything's connected.

• 4:02Speaker 03

  You know, a lot of the companies I work with are what my partner Alex Rampell calls O2O, which is online to offline. eBay was you buy something online, but there was offline fulfillment. Airbnb has the same thing. Chef has the same thing. Obviously, start with brains, the online part, but there's an enormous amount of brawn involved in delivering the actual physical service. And the challenge that a lot of the companies I work with have is they don't actually control the logistics. They have to influence the logistics and enable the logistics to be successful. Instacart only works if the groceries actually show up at your door, but it's not an Instacart employee. It's Instacart driven by some very intelligent software that optimizes the experience and

• 4:45Speaker 03

  enables them to do the magic act of getting groceries in front of you within two hours from the time you order it online. But when I was at the Disney store, we put the apparel into the store. Now, the community of users is executing on the transaction.

• 5:00Speaker 02

  You know, I think the last 40 years of strategy was about the or, which was pick your business, stay focused. It was more about what you couldn't do or shouldn't do. Strategy today, and a key part of the system's leadership, is about the and. You know, it's about doing this and that. One of the CEOs we had this year was the CEO of Peloton. At every turn, his VCs told him, don't backward integrate, don't be an installation, don't get into content, yet he did them all. So I think we're in the and generation. Whether you're a legacy company or you're a startup, that's what you have to be thinking about, either as part of an ecosystem or do it yourself.

• 5:40Speaker 01

  And I think that's a key point because very few companies can do it all themselves. In fact, people will hold up Tesla and Apple and say, look, they're doing everything. That's great if you're Steve Jobs, Tim Cook, or Elon, but most companies can't do it. So you're gonna end up doing some level of partnering with other people. And so the question leaders need to ask themselves, what are the things they need to bring in-house that they need to own because it's kind of part of that core competency? But where can they more effectively partner with others to still deliver that great experience to customers? And when Jeff Jordan talked about kind of being able to influence other parts of the ecosystem, that's actually a key thing that leaders need to figure out to do. If they don't control the resources and the assets.

• 6:18Speaker 03

  I would put Apple in that bucket. One is, they don't do any of the manufacturing. All they do is design it in California and then it's fulfilled globally. And secondly, the App Store is full of third-party developers who Apple enables and takes a high cut of their sales. They're orchestrating multiple ecosystems.

• 6:37Speaker 01

  I would push back on that. Apple controls more things than most companies, right? Look at the store. Everything's got to get approved and compare it to Google Play and compare it with the open nature of that, which is more open than the Apple Store. Look at Apple designing its own silicon. Look at how they actually make people have green bubbles in iMessage. Eighty-five percent of the planet uses Android and Apple does everything they can to make sure that people who use Android have a horrible experience. Apple's trying very, very hard to control things, much more so than most companies can. And so I think one of the things leaders need to ask themselves is, do I have that level of control the way Apple can? And if not, how do I deliver a great experience to my customers?

• 7:13Sonal?

  I think you guys are both right. And in your book, you have this really great matrix, the two-by-two, which talks about this idea of ecosystems, and this is exactly where I want to focus for a bit, of ecosystems and partnerships. I mean, Jeff is absolutely right. Apple does, in fact, sit counter to many narratives at the heart of interdependent ecosystems. But to your point, Robert, it's actually about how much influence and power they have. Like, many of those players are actually more subservient in that ecosystem than they are really in control. And that's a really important distinction. And you're absolutely right when you talk about the idea of them owning most of that, as does Tesla. That's like, what, eighty percent vertically integrated? So along those lines, let's give more texture to this exact debate, because I bet you a lot of people who are

• 7:58Sonal?

  listening are at the very heart of these questions. So do you want to actually quickly give that two-by-two matrix that you have in your book?

• 8:05Speaker 01

  Absolutely. So the matrix is actually based upon some research that was done by Professor Robert Burgman, who was a colleague of the three of ours at the Graduate School of Business. And what this really gets into is you look at relationships and strategic partnering, and the two variables that matter are dependence and influence. And when you look at two organizations, is somebody dependent? You know, they've got higher-low dependence on another organization and their influence is higher-low. And in the case of someone like Apple, if you're a supplier to Apple, you're generally highly dependent upon Apple and your influence is probably pretty low. And that's a horrible place to be because Apple can do whatever they want to you. If you've got like a company where it's low dependence and low influence, it's kind of almost strategic indifference. The flip side of the Apple situation is if they have high dependence and low influence,

• 8:48Speaker 01

  which is what they have on a lot of their suppliers, they're strategically dominant. That's a great place to be. But the best quadrant to be, I would argue, is where both parties actually need each other and want each other, where there's high dependence and high influence. And that's where you get strategic interdependence. And that's where you can actually do things better together than you could apart. In the book, one of the things I talk about is like how Instacart, but they've actually got a very complex four-sided market, if you think about it. They've got the grocery stores that they get their groceries from. They've got their customers, the buyers who use the app to order the groceries. You've got the shoppers who actually then go out and pick their goods. And then you actually have the CPG companies who can now actually really understand at a holistic level where products are selling, how they're selling and why. And the team at Instacart has done a really good job of trying to understand

• 9:32Speaker 01

  where they have high dependence and where they have low dependence, where they have high influence and low influence, develop some really important strategic partnerships and relationships.

• 9:40Speaker 03

  I mean, it's fascinating. CPG companies have monster advertising budgets and they largely, I mean, who was it? Watermaker said, I waste half my advertising. I don't know which half it is. It turns out in CPG, they don't know how any of it performs. Instacart gives them a unique ability, actionable ROI-based advertising. It's basically performance marketing for the CPG players because Instacart can tell you, if they got an offer, did they buy it? What did they buy the next time? You know, did they influence the long-term behavior? And so the CPG players basically got AdWords for consumer products and they love it.

• 10:14Speaker 01

  And that's the way leaders need to be thinking. When you can't do everything yourself, you want to actually be as strategically dominant as possible and/or be strategically interdependent and avoid being strategically subordinate.

• 10:26Sonal?

  So you described those four sides of the Instacart marketplaces. You know, the customers slash buyers, the shoppers, the grocery stores slash retailers, the CPGs or the consumer packaged goods companies, which pretty much supply the shelves with all the kinds of things we eat and use. If you think about a person who has the experience of going to a grocery store. Or let's say a shopper who goes to the grocery store. The ability to easily get what someone has ordered is pretty critical. Like, that's something many people saw during the pandemic. I just want to kind of drive home the picture of how that system comes together.

• 10:58Speaker 01

  I think we see that in a couple of different ways as customers. If I'm a customer of Instacart and I want to get a particular type of lemonade or a particular type of cookie, I want to make sure that the shopper can actually get it quickly. And logistics, which historically has been a very backend thing, becomes kind of a frontend thing, right? That's where you get the system-level nature of digital plus physical blending together, where you really have to understand how all of these things will fit. And exactly to your point, to make that work, you've got to make sure that you're partnering with all the right people, that the shoppers in the stores can get things quickly and easily, to get it to you quickly and easily, that the person who's doing it at Target can actually do that for you as well.

• 11:37Speaker 03

  By the way, there was a very big outstanding question. Could they ever do it profitably? And the Instacart team, they figured out how to use software to drive efficiencies in the brawn in the stores. It was 10,000 innovations that took a penny each out of the thing. So an example for me would just be checkout, simple example. Checkout used to be the Instacart shopper who didn't have a deal with the store would go wait in line with everyone else and, you know, take 20 minutes to get to the front of the line and pay. Then they did deals with the stores and they got a dedicated shopping lane. The next step is, why do you have to go through the checkout at all? They're scanning each item as they pull them off of the shelf.

• 12:19Speaker 03

  Why don't you calculate the cost of the basket there? Obviate the need to re-checkout, because that's essentially what you're doing. And each of those steps took meaningful chunks of time off of the service. But taking time off of the service, making the shopper more efficient, can make it a better price for the consumer. And so it's this constant rolling optimization, using the digital expertise to have the physical improvement.

• 12:46Speaker 02

  Change happens slowly and then all at once. So in order to understand Instacart, you need to understand webvan. And all the progress. So this has been like a 20 year startup process.

• 12:57Speaker 03

  There are no bad ideas in venture, just bad timing. Turns out Webvan didn't have smartphones. So how can their shoppers be smart?

• 13:05Speaker 01

  But I would argue that that is a fundamental blind spot in this place. The dismissiveness that comes from, you know, how we talk about older industries.

• 13:13Speaker 03

  Oh, you're wrong.

• 13:15Speaker 01

  Exactly. And this is when they look at us and say, okay, boomer. And I'm like, no, dude, I'm like OG Gen X. And you're not even smart enough to do the math to figure out that I'm Gen X.

• 13:24Speaker 02

  I was just gonna say that.

• 13:28Sonal?

  So I totally agree that timing is everything. But the other key point, though, here is in the micro, not just on this macro scale of time. One of the points you made, Robert, in your book about that matrix is how actually Instacart started at sort of the least, like, there wasn't that much power because of how they started, which a lot of startups do. You can actually change where you are in that matrix quadrant wise as you evolve as a company.

• 13:53Speaker 01

  As a company has more success, they have the ability to have more influence on their partners, right? What might have started as a subordinate relationship can become a dominant relationship. So you kind of have to see that constant movement, not only as your role changes in an industry, but also how other players might start to pay attention to what's happening, especially as you show them the success. Another great example of this is government becomes more important. You might become dominant over some players, but then all of a sudden you might become subordinate again to others who suddenly come into your ecosystem.

• 14:25Speaker 03

  I mean, there's some business models that the long-term evil plan is to go from subordinate to dominant. At OpenTable, early on, we had to beg restaurants to use this because we didn't have a diner network. And the only value prop was operational efficiency, essentially. My partner, Chris Dixon, calls it come for the tools, stay for the network. In a city over time, as we build out a selection of restaurants using it for operational efficiency, all of a sudden it develops utility for the diner. And the diner can do lead gen and book restaurants digitally, which they love. And that means OpenTable suddenly is pushing revenue into the restaurants that use the service and taking revenue from the restaurants who aren't using the service because of the convenience of the app.

• 15:10Speaker 03

  And the power dynamic went from 100% restaurants to 99% OpenTable over time.

• 15:17Speaker 02

  I'll tell you a funny story. In 2006, Jobs was launching the iPhone and needed content and the two most desirable properties were 30 Rock and Saturday Night Live, both of which GE NBC owned. So we actually asked for the $9 price point and that was the one moment where we had power. Versus the subsequent 20 years where that power has dissipated to everybody else.

• 15:45Speaker 03

  It reminds me of Disney days, way back when I worked at Disney in the 90s. The studios were furious that cable television had been built on top of their content, just repackaging their content and all of the value moved from the studios into the HBOs of the world. And I remember Barry Diller at Sun Valley one year saying, "We're never gonna let that happen again. It's not gonna go." And he was on stage with Marc Drisson, who said, "Barry, it's already happened. The barn doors open."

• 16:14Speaker 02

  Yeah, that's exactly right.

• 16:15Sonal?

  What's also really poignant about those examples though, and this kind of goes to a point that Robert brought up earlier and brings up in his book, is this idea that incumbents don't have to be the submissives and startups don't have to be the dominance. Sometimes these things can also evolve as we talked about, but they can also flip. And one interesting example that comes to mind for me when you guys are just talking about these two examples, is how for years, people talked about how the content companies were so slow to come to streaming. And then they had, you know, efforts like Hulu and they tried these things. They weren't as successful as Netflix, but then, all of a sudden, Disney, like the oldest company in the lot, they were so slow to come to streaming. And now with Disney Plus, they are freaking rocking it. And it's a great example of how frankly,

• 17:00Sonal?

  everyone always said, "Content is king." And for a while, we were like, "No, no, technology is king." And honestly, like, you look at all these apps, they're not that great, they're not as usable as Netflix, you know, they're not as reliable or consistent on the buffering side. It doesn't matter. They have the content we want and they're kind of dominating right now, at least on many views.

• 17:17Speaker 01

  So what's interesting to me, I would argue Netflix showed the way on that. Oh, no question.

• 17:22Speaker 02

  So it can be fleeting. When I look at the whole fintech revolution and all the great companies are being created, you do sit back sometimes and say, why can't JP Morgan do this or Goldman Sachs? Or somebody who has a deep domain, you know?

• 17:36Speaker 03

  I was having the same thought as the person at eBay who bought PayPal and managed it early. How in the world does Stripe win the consumer in that world? PayPal did not provide developers with a high quality service, did not innovate in the consumer side because they wanted their payment mark versus just accepting any payment. By the way, Goldman has over 10,000 computer engineers and then finally came out with Marcus a couple of weeks ago and getting PayPal and all the other financial players just got caught flat footed.

• 18:06Speaker 02

  Good leaders actually know where the pressure points are and try to kind of get the power as quickly as they can. I tell my students and my friends that I think most of us underestimated badly the way that technology would create in almost every industry, really. I wish in 1999, I had spent a year or two in Silicon Valley before I became CEO of GE.

• 18:30Sonal?

  Jeff, can I ask you a quick aside on that because you brought it up? I think it's so compelling that you said that. Honest question. The problem with a lot of the big companies that try to innovate isn't that they don't know these things are coming. So in many ways, it's not as if you and others would not have known how important technology was. It seems the challenge is really how to bring it in. And of course, it goes with the classic innovator's dilemma, all those classic frames. And because it's not like people don't know that this is happening. And in fact, the book opens with Robert is tired of hearing companies say they must embrace digital transformation, you know?

• 19:05Speaker 02

  Yeah, look, I think it's more profound paranoia for sure. But I think it's also what was the next generation of talent? What did they look like? How do they want to be paid? And this notion that you just have to be willing to do whatever it takes to win, you know, markets rule, right? Like, I was one of the early guys with Hulu. But Comcast said, if you keep growing Hulu, this is before they owned NBC, we're going to pull the plug on all your content. And instead of saying, hey, screw you, we're going to do it anyhow. We said, okay, guys, whatever you say, we're going to hold back Hulu and let Netflix kill us, right? So you have to almost run it inside a corporate structure, but you have to give it enough autonomy to have its own currency,

• 19:49Speaker 02

  have its own culture, and that's hard to do. And that's one of the things we try to flag in the classes. Was NBC just structurally challenged to make Hulu bigger than Netflix? Or is there going to be a new generation of legacy players that actually figure out how to be some of these next generation leaders?

• 20:07Speaker 03

  Yeah, Hulu was challenged because, one, you needed the breadth of content. And so you needed multiple studios. And I remember talking to Jason Kielar before he took the job. He said, hey, I'm thinking of doing a CEO gig where I have three studios that control my destiny. That does not sound like a stable proposition.

• 20:25Speaker 02

  That's hard.

• 20:27Sonal?

  The Hulu mention is also incredibly ironic because of the recent news that Jason, who went to Warner, now Warner is bringing in Discovery. I forgot the gentleman who runs that. Do you guys remember his name?

• 20:37Speaker 02

  David Chazal?

• 20:37Sonal?

  Yes, thank you. So it's kind of ironic because we're now seeing another turn in another direction. But that was really helpful to hear, Jeffrey. I'm really glad you shared that context. Can we talk more specifically now about what are the questions that companies have to have? What I'm really hearing is that there's this huge spectrum of where, and this two by two of where companies can go. They can themselves evolve, the environment can evolve. They wrestle with these questions. When do they assert their power in an ecosystem? When do they try to shape? When do they sit back? What to do if their channel partner suddenly changes? When do you want to stay frenemies and when do you want to be enemies? These are like the existential questions that companies have.

• 21:19Sonal?

  Can you guys share some more specifics or examples from your own work or observations here? That might help our listeners navigate some of these.

• 21:27Speaker 01

  All right, let me give a couple of ways that leaders can think about it. And then we'll get into a specific example. A couple of really good tools that leaders can use is to draw both an influence map and a heat map in their industry. And in an influence map, you basically lay out everybody in your ecosystem and understand who's really driving who. When if you see that picture holistically, you understand who's really applying pressure and who's under pressure. And very few leaders, in my experience, really understand that 80,000 foot view of how everybody are interacting with each other. The second thing you could do is you can layer on top of that, what we'll call a heat map, which is like who's under stress and why? And if you can understand who's under stress and why, you can probably anticipate some of their likely reactions, rational and irrational.

• 22:11Speaker 01

  So to your question, Sunil, you asked us, what's the point that you do this or do that? There is no recipe. It's kind of one of those constant things you have to be doing as a leader. It's kind of going back, whether it's every two weeks, four weeks, six weeks, eight weeks, and asking yourself, is the world today as you think it is or has it changed? And also then how will you know? In the book, one of the things I look at is Android, because I find that just a fascinating study about shaping your ecosystem. Here you've got a company in Google and Alphabet that owns Android that basically they don't own. It's open source. Anybody can do with it whatever they want. And then they've got this complex ecosystem where you've got handset makers, you've got carriers, you've got application developers, you've got governments, you've got suppliers of components.

• 22:56Speaker 01

  And so the leadership of Android has actually a pretty advanced view of all of the players that they need to kind of shape and understand. You know, what's the market like in India? And how do they make sure that Android can be suitable for that market? How do they develop something like Pixel as a phone? It's got very small market segment share. But yet by the same token, Pixel kind of shows best practices for blending hardware and software. Software and then Google gives those learnings away to the companies so they can make their phones and handsets better. They have to think through of what happens when technology gets embedded in things like automobiles and smart speakers. Your interface to those devices might be voiced. The Android team may not control the app that controls the voice. How do they work well with them?

• 23:39Speaker 01

  And so if you kind of go back to that notion of understanding influence maps and heat maps, think of that as kind of that constant rhythm that you as a leader need to be doing. Then by the way, how has that changed over time? As Android got bigger and bigger and now has almost 85% market segment share on a global basis.

• 23:54Speaker 03

  Back when I was at Disney, I started in the strategic planning group, working ironically for Meg Whitman. And one of the tasks I was responsible with was building the annual five-year plan. And it was a shitload of work. I don't know if Disney still does a five-year plan. Of all the like 40 portfolio companies I support, not one does anything longer than an annual budget. And that's just largely for financial planning and performance management purposes. It's kind of like day or week. You are constantly revising based on new assumptions, new information. So that is a difference. Another difference is I think in the industrial economy, you get the three beer companies and the four petroleum companies and things like that. Technology is winner take all against your direct competitors, not your ecosystem.

• 24:38Speaker 03

  So you've got to play a whole lot more offense than defense. And it's trying to figure out, okay, I would rather go down in flames trying to win than settling for a middling outcome. It may not be still true on the planning horizon, but it's pretty starkly different.

• 24:56Speaker 02

  Rod's point was do a real thorough kind of who makes the money in an industry? What are the dynamics of the industry and who makes the money? And then Jeff said, some people just have a killer instinct for markets. You know who they are and they say, look, I don't care what it takes. I'm going to do it all. But it's always helpful to show both sides of the story. We always teach a healthcare class every year. Because healthcare is a really complicated ecosystem. It's also a place where the legacy players have really won so far in a big way because they know how to use complexity and scale to their advantage. You know, the leading healthcare IT companies, a company called Epic, it's old technology.

• 25:40Sonal?

  They're like the main leaders in electronic medical records, EMRs.

• 25:43Speaker 02

  Yeah, they do it town by town. They have huge barriers to entry. So you sit back at all these great companies, Google and Microsoft, they're bit players in healthcare. They really haven't penetrated at all because the incumbents know how to use scale and incumbency and all the things that go with their legacy to their advantage and not a disadvantage.

• 26:06Speaker 01

  Also regulatory capture. Jeff Immelt is fond of saying in our class, government's your new business partner. And so again, I want to come back to systems. Blending brains and brawn, you need to understand government's going to get more and more involved as software continues to get layered into everything. And if you only think of just the software, you won't see the whole picture of what's happening.

• 26:25Speaker 03

  And so which is government, brains or brawn?

• 26:28Speaker 01

  I would argue it's a little bit of both, Jeff.

• 26:30Speaker 02

  I'd say mainly brawn. I was going to go with neither, but that's a...

• 26:34Speaker 01

  All right, okay, but let me see if I can try to convince you of a different point of view. If you look at ecosystems, right, all of a sudden government is a part of your ecosystem that you need to know how to manage. And to me, that's a brawny tendency because that's about how you shape it, how you influence dependence, et cetera. The best example I gave on that, interestingly enough, is Bernard Tyson, when he was alive, the former CEO of Kaiser Permanente. In the book, we talk about radical empathy almost. Bernard had empathy for all of his doctors, his nurses, his patients, you know, the communities in which he operated. But he actually talked about empathy for government, which I found really interesting because he said when he would talk to people in Washington, whether they were Democrats or Republicans, even though he had his own political views. He knew that he had to understand that they were trying to represent the interests

• 27:19Speaker 01

  of the people that they represented to the best of their abilities. And he had to kind of put himself in their shoes. Similarly, if you're dealing with a more authoritarian government that's got a capitalist nature, you know, what are they trying to accomplish and why? You better make sure that you understand that if you're going to figure out how to lead your company in an increasingly connected world.

• 27:37Sonal?

  It makes me think of the whole debate that plays out right now between, you know, stockholders and stakeholders and sort of the rise of ESG and all these other trends that are coming out. But I do want to pull a couple more threads. So let me just go back for a moment to this idea of follow the money. But one of the anecdotes that struck me is, you know, we talked about Stripe earlier and Alex Rampell tells a story of how when he first met the Collison brothers, Patrick was sort of laying out this market that did not even exist, like there was no money. And they made this point, well, this customer doesn't actually exist yet, but it's gonna exist, which I think is one counter to that.

• 28:13Speaker 01

  No, I think you're right. Jeff talked about, you know, the people who understand markets and Patrick Collison may be the smartest guest I've ever had in a class ever. Right? So it's almost like he's 18 sigma to the right of the mean. And I almost think that Patrick Collison doesn't count.

• 28:26Sonal?

  Yeah, I kind of agree.

• 28:27Speaker 01

  And so those are outliers. The question is, the rest of us mere mortals, how can we be successful and contribute to our companies and our teams? And so the ways of thinking and the tools become ways that we can hopefully be effective in our jobs.

• 28:39Sonal?

  It's interesting, the healthcare example, because even big companies banding together, like Amazon, Berkshire Hathaway.

• 28:46Speaker 01

  And JP Morgan.

• 28:47Sonal?

  Oh, right. JP Morgan, they did that effort. And, you know, we actually talked about this on our podcast. It disbanded after like two years.

• 28:53Speaker 02

  I think anybody that knew healthcare, the day that announced, yawned fundamentally, right?

• 28:59Sonal?

  Totally.

• 29:00Speaker 02

  You've got to see healthcare from the bottom up, not from the top down. You know, I'm not saying it should be this way. It's just the way it is. There's a really complex ecosystem. That you have to align, you know, I could keep going on and on and on because it is the classic case of brains and brawn. It's a classic case of digital innovation, biotechnical innovation that has to be delivered through a government system with one doctor and one patient at one time.

• 29:28Sonal?

  But it's fascinating because again, if you talk about this timing effect and we talked about the Webvan Instacart example and the enabling factors of smartphones. And while I would never overinflate a COVID pandemic effect, there is an acceleration that comes from laying this digital infrastructure now where you can bypass these sort of hardwired physical silos through soft systems like software. Along those lines, Stripe is a great example of a company, an API economy company. You see this modular ecosystem of all these different players that has found a way to become like this digital layer, this digital supply chain connecting everything everywhere. And yet they too struggled with whether to partner or collaborate.

• 30:10Speaker 01

  Absolutely. So it used to be so hard to be able to take credit cards, whether you're building a website or an app. And the Collison brothers made it so easy for developers to drop in a few lines of code. You could then suddenly something that used to take a month to get a merchant account set up now took five minutes. And so what Stripe enabled people to do and companies to do was to serve their customers better and more quickly. And that kind of got the ball rolling. And what was hard for them in the early days was actually getting banks to pay attention to them because they were this small startup. But pretty soon they had 100,000 developers who had designed in the Stripe APIs. So the scale they were able to get to, which was so frictionless, suddenly everyone had to pay attention to them. And then the challenge that Stripe

• 30:54Speaker 01

  faced was, you know, how quickly should they focus on the core business and growing it? They called it growing the GDP of the internet versus going into adjacent areas. And that became the real systems leader challenge. Now that we've unlocked these doors because of APIs, how much do we just kind of stay focused on what's in front of us versus getting into other areas? And where do we figure out what do we want to do and where do we want to partner?

• 31:16Sonal?

  You described the case of what happened when they had this question about whether to sell. Their service for Shopify or not?

• 31:22Speaker 01

  Right. So the question they were confronting in the case is should they do a private label version of their product? And they wanted everyone to have a Stripe account, but Shopify needed certain things for its business and for its customer base. They realized that by partnering with Shopify, Stripe would actually grow so much larger because they would be kind of a product and service provider than trying to kind of have this religious mindset of we've got to have, everybody has to have a Stripe account. And so they had an assumption about how they should run their business, but they were willing to rethink it. Back to something that both Jeffs talked about earlier, it's that notion of new data will come in and in a world that's constantly evolving and software accelerates that, leaders need to step back and say, is there something that I need to do to take advantage of this new opportunity?

• 32:05Speaker 01

  And am I better off by doing that by partnering than trying to do it on my own?

• 32:08Sonal?

  Right. And you quote Kristina Cordova, who we've actually had on this podcast as well, she's brilliant too, talking about those very questions. When we talk about this spectrum from brain to brain, independence to interdependence, you know, disruptor versus incumbent, startup versus Fortune 500, you describe in your book, technology culture versus industrial culture. When do people know they're overdoing things? When are they under on their partnerships and when are they going alone?

• 32:34Speaker 01

  Because some of the competencies between digital and physical are different, most companies are going to need to partner more rather than less, especially in the early days. So for example, Target or even Home Depot on the retail side, they needed to own their e-commerce interface with the customers and the data science teams, they needed to bring them in-house to understand how, what was happening in e-commerce, how that shaped, how they not only laid out their stores, but how they built their infrastructure for logistics. That doesn't necessarily mean that they're going to build their own data centers and have their own cloud, right? The last thing I'll say is we talk about Tesla and Apple, but you can't like say, okay, Elon can do it, so therefore we should do everything. It's probably going to be one of those every century leaders that's going to do it.

• 33:18Speaker 01

  The more systematic way to think about it is what do you need to control because it's the basis of competitive advantage? Where do you have the competencies in-house? If you don't have the competencies in-house, can you like, you know, partner with somebody near-term, but make sure you're building it up long-term inside of the organization? And what's your transition plan from when you're going to partner outside and when you're going to bring it inside?

• 33:38Speaker 02

  I think talent is destiny and a lot of the systems leadership. Let's say you're Peloton and you say, "Look, I want to deliver the bikes and install them." That's a good aspiration. You can debate that in a board meeting or things like that. But if you decide to do that, you go to Bentonville and you recruit Walmart's best logistics people and put them in place, right? And that's what Jeff did at Amazon. If you're a systems leader, the human resource aspect is really critical. And you can build capability, but you have to be dedicated to talent. And where companies get in trouble is they have the aspiration, but they don't have the people that can pull it off.

• 34:19Sonal?

  Oh, my God. I'm so glad you brought this up, Jeff. We had Jeff Lawson, CEO of Twilio, on the podcast when he launched his book. And one of the points he made, which I thought was really great, is about how developers are creatives within organizations. Every company now has developers. And to really treat the talent like first-class citizens, where they're not just like getting specs thrown over the wall to build, but actually have a seat at the table early on to shape it. It was a really key message in that podcast, if you want to check that out. And I really loved your line about talent is destiny. That is such a powerful way to think about this entire question. Do you have any thoughts on some lessons learned on this question of build versus buy?

• 34:55Speaker 02

  This bit, I'll take it and to kind of follow up on what Jeff Lawson from Twilio said, which is when it's an ERP system or CRM system or some statement of record in the back room, you should buy that all day long, right? That's a no-brainer. You know, everybody can do it better than we could, et cetera, et cetera. When it touches the customer, right? When it's differentiating your product, touching the customer, determining your market share, you know, you really have to be a builder at that point, whether you hire your own developers or you take an equity stake of a company or you acquire a company. So I tended to think about it as a front room versus back room. If it's just a way to kind of make yourself more efficient,

• 35:38Speaker 02

  let's tap into the world that's out there. But where it really has to do with differentiating the customer experience, that's something I want to own.

• 35:46Sonal?

  He actually said what you're saying, and I love that you're both saying it from different vantage points. He said that in a world where the software you use is your source of competitive differentiation, the act of building is the act of listening to your customer.

• 35:58Speaker 03

  I agree with you. You want to own the critical aspects of the business and not dedicate your very scarce and valuable technology resources to the non-critical aspects. I mean, why spend a bunch of your hard-to-hire, expensive engineers' time rebuilding something that is very well-built unless it's to source a competitive advantage?

• 36:18Sonal?

  So let's talk now about what this means for how leaders think. We've talked about it from the specific components of systems, the modularity, the partnerships and not partnering, the digital-physical blending. What are the competencies? How does a systems leader really navigate this world? Like, how do they really survive and thrive? And to your point, Robert, in the book, break this dichotomy between brain versus brawn and this kind of insularity sometimes that even some of the tech folks may have around software. This really goes to the heart of this whole control versus influence question that we also talked about. It's a very new set of competencies. But first, to kick us off, what is a systems leader?

• 36:56Speaker 01

  That's actually great. That's where I was going to start. So a systems leader is somebody who kind of blends the knowledge and competencies of both, kind of, you know, what it takes to be successful in the digital world and what it takes to be successful in the physical world, and takes the best of both and puts them together. A systems leader needs to simultaneously know how to manage both for the long term and the short term, how to manage people, as well as be competent in key technologies that are coming and shaping our world, like artificial intelligence and additive manufacturing, et cetera. They need to be able to know how to manage internally, inside of the organization, and externally. It's the ability to see what happens when different parts interact with each other inside of the company. What happens when different functions do things? If sales creates a new type of, you know, they sell something to a customer, what does

• 37:41Speaker 01

  that do to your manufacturing and your supply chain? Similarly, even if you're in the finance group of your company, you need to understand what's happening outside of the four walls of your company to understand what might be shaping the numbers. So the first thing about systems leaders is really understanding kind of this duality of what happens when things interact with each other. When Jeff and I have done the class, we've talked about how there are four key attributes that systems leaders have that are strong. The first is, they have the ability to operate at intersections. They understand how to take businesses that have innovative business models and innovative technology. Like, that becomes a force multiplier when you can combine both of those things. They understand, like, how to have a platform that can operate globally, but that can also be customized locally.

• 38:23Speaker 01

  I think the second thing that systems leaders really can do is they can manage context. You know, Jeff talks about truth equals facts plus context. And that's just one of those lines that Jeff taught me that really lands strongly. It's the ability to help your team understand, yeah, we have the facts about what's happening in our business. But it's the context with which we understand it that defines how the world sees truth. And great systems leaders, they own their narrative, they're storytellers. They know how to talk about that and give context to the people around them. The third thing I think that systems leaders have is what we'll call a product manager's mindset. Do you know what customers want? Do you know how the product can be built? And do you understand what the sales organization needs to separate customers from their money? Can you, you know, figure out how to kind of track the details of where things are at the product?

• 39:08Speaker 01

  From inception to ramp to even sunset? And do you have the ability to influence resources inside of an organization? Even if you don't control those resources? Because great product managers are responsible for everything and often they own nothing. And the last thing, a mindset issue is I would say that going risk on during times of disruption. Because you know that when you come out the other side, the world's going to look very different. And a great systems leader knows that in those times of volatility, you actually have to actually play offense and not defense. So those are, I think, the four key things of what systems leaders need to do. Operating intersections, manage context, have a product manager's mindset, and go risk on during times of disruption.

• 39:48Sonal?

  That's fantastic summary, Jeff Immelt. Can you just explain that phrase that truth equals facts plus context?

• 39:56Speaker 02

  So we live in a world without nuance, but most of leadership is nuanced, right? So let's take China. Here's the facts about China. It's been a hard place to do business. Intellectual property theft has been a real concern. It's been difficult to penetrate the market. It's outsourced low-cost labor for a long time. Those are facts. What's the context? It's the world's biggest car market. It's going to be the biggest consumer of aviation products. It's going to be the biggest consumer of healthcare products. If you believe in climate change, it's going to be fixed there before the US. They're going to influence the rest of the world. That's the context. So what's the truth? Is the truth that we're at war with China, that they're the enemy, things like that?

• 40:38Speaker 02

  So I think it's always important in a world without nuance to understand the nuance. I throw the example of China, but I could go down almost any other example. And really, it's not a Republican or Democrat. I love my country. I'm an American, true and true. But no American government is going to protect you from China. If you're going to live a world in the business world, you better learn how to do business there.

• 40:59Sonal?

  I love that you talked about nuance. You know, you're the one in this room who's led like one of the world's oldest companies, very long, stable entity. Like, how do you think about systems leadership question?

• 41:12Speaker 02

  You know, so I ran a conglomerate, one of the last of its kind. And you're trained to look horizontally when you run like a multi-business structure. So you're trying to find common themes and common platforms and things you can do together that add value and scale to investors and customers. The early form of systems leadership would be a company like GE financing its own products and creating GE Capital, for instance. So I, I always kind of was trained to do it and think about it in that context. Now, the era that we live in of kind of continuous disruption. So you have to add this context of ecosystems and partnering and all the other things in this book. I think Rob captured what we've worked on the last four years, what we try to bring to the classroom.

• 41:57Speaker 02

  I would add to it that most legacy companies have been built vertically. You know, one business by functional leaders. The world today is more of a horizontal world where change is happening rapidly and you've got to be able to look outside your own industry or outside your own function to be effective. And a lot of our class is just teaching students not to be afraid of it, to actually embrace it.

• 42:24Sonal?

  That's fantastic. I love what you said. I never thought of it as a conglomerate. And I think it's really interesting you say that because in the world we're in today, I often think to myself that the future of the firm is conglomerate. It's like people are in denial that we live in this ecosystem this way.

• 42:39Speaker 02

  Look, I'm one of these guys that looked at PayPal and eBay together as being stronger. I love Ben, I love John Donahoe, I love Jeff, I've known all the players. But I look at it and say, shit, that's too bad. It actually made a lot of sense.

• 42:51Speaker 03

  Oh, it did. I actually, I agree with you, Jeff, completely. It was funny. John reached out when the activists were making his life miserable. And I asked to meet on a Saturday and I sat down and he goes, listen, I'm getting all this pressure to separate them. You're the person who managed them both. What do you think? And I was making the pitch, keep them together, keep them together. In my view, everything ends up being a system. And if you don't understand it and recognize it, it will manage you. What I loved about eBay was it was a self-contained system. eBay was as close to a perfect economy as anything I've ever encountered. And by the way, I've talked to a number of economists, including the dean of the Stanford Business School,

• 43:33Speaker 03

  who did research on eBay with respect to competition theory. You change the pricing incentives, it changes the quantity, it changes the velocity, everything, everything was connected. And so my journey as a manager is there are other systems that you need to pay attention to, not just the objective system of your business, but you know, partnership ecosystems, the employee ecosystem. You make one change here and way over there, things blow up.

• 44:02Sonal?

  But how do you reconcile, this is a really hard question. I don't expect you guys have an easy, bad answer. But how do you reconcile this conflict, this kind of recurring theme that you can't predict what's going to happen? The entire point of second and third order effects is that they are not predictable. They often emerge bottom up versus top down. At the same time, Robert, you've talked about frameworks for thinking about like how to map things and have these heat maps. And you can certainly, you know, identify signals. I guess what my question is, how do you prepare without over-preparing? And preparing for the wrong things.

• 44:35Speaker 01

  You know, it's a great question. I think the best leaders that we studied didn't presume to know the answer. What they did was they had ways of running their companies and doing their jobs that allowed them to be ready to take advantage of opportunities and challenges when they proposed themselves. The great leaders all talked about the future of work. They were all aware of the fact that the organization was going to be changing and they had to be thinking about what jobs in their company were going to be going away. How did they think about retraining their staff to keep people effective? How was technology going to be impacting everything from the front end to the back end? And they didn't just say, okay, I'm going to let the tech team handle it. They had an opinion on it. They were also, we talk in the class about being aware of one's own bias.

• 45:19Speaker 01

  The great leaders that we studied actually had people outside of the organizations that they worked with. Katrina Lake, now the chairman of Stitch Fix, had this great line. She would ask her staff every year or two, if you were hiring for your job today, would you hire yourself? And I always love that question because it kind of stops you in your tracks. Like, have you kept yourself current with what's going on? The last thing I'll say, this is something that Jeff Immelt taught me when I worked for him at GE. He talks about leader know thyself. And in my case, get me in front of the classroom. I'm running up and down the aisles. I'm having fun. Tons of energy. My passion's also my greatest development need because it can get me in trouble if I can't keep it in line.

• 46:01Speaker 01

  And so I think one of the things that leaders need to be able to do is to understand, like, what are their strengths and development needs? Can they look back at their past and say, when were they successful? When were they lucky? And when were they the right person for the job? So I don't think that there's a panacea. Like, don't try to predict the future because whatever you predict is going to be wrong. But when a global pandemic hits, do you have the tools to know what to do at a moment in time?

• 46:24Speaker 03

  I remember reading Jeff's comment on leader know thyself. I actually came to believe it wholeheartedly. The way I've always framed it is everyone in the building knows your strengths and weaknesses. When you're the leader, you might as well join the party because if you have the awareness of it, you know, there's a good chance you can do something about it. I did a blog post called Leaving It On The Field, using a sports analogy about trying to managing a hypergrowth business. How do you scale yourself as an executive and a leader? And almost all of it is self-awareness.

• 46:52Sonal?

  And systems leadership in particular, because you cannot be aware of that whole worldview if it's all internally narcissistically focused versus outwardly ecosystem focused.

• 47:02Speaker 03

  Yeah, no, it's a system. So if you know what you're strong at and you know what you're not strong at, you recruit for it. You get the right partner, you get the right complementary, completely.

• 47:12Speaker 01

  But you need to understand, like your teammates, I'll stick with a sports analogy, your teammates are going to have their strengths and their superpowers. You've got to have to make sure that you understand a bit about their superpowers so that you can blend the team together to make it work. And I think that's the real role of a leader. You become kind of that coach, you become the general manager to put the best team on the court, the best team on the field to win.

• 47:33Sonal?

  Well, that's a great note to end on, team. Thank you, Robert, author of the new book, The Brains and Brawn Company: How Leading Organizations Blend the Best of Digital and Physical. And thank you, Jeffrey Immelt and Jeff Jordan. Thank you all for joining the A6 and Z Podcast.

• 47:49Speaker 03

  Thank you.

• 47:50Speaker 01

  So thank you for having us. Thanks very much.

• 47:53Speaker 03

  It's a real honor and a privilege.