--:-- Sonal: Hi, everyone. Welcome to the a16z 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 *Only the Paranoid Survive*, which is sort of a theme here. And joining us are also Jeffrey Immelt, former CEO of GE, a.k.a. General Electric. And finally, we have a16z 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 joined to ask questions from the book.
--:-- Sonal: 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 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 a16z.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's, and then Jeff Jordan's voice will come in after theirs.
--:-- Robert Siegel: I think there's been a false dichotomy in Silicon Valley over the last decade. We saw it in two of the courses I teach at the Graduate School of Business: Systems Leadership, which I teach with Jeff Immelt, and Industrial's Dilemma. Companies, no matter what they make, every product and service is going to need to blend the capabilities and competencies of organizations that do digital and do physical. Students talk about the economic rents and the profit pools that might be aggregating to the companies here in Silicon Valley. Yet the leaders of the next two decades are 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. 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. The notion of digitization is necessary, but it's not sufficient.
--:-- Jeffrey Immelt: Rob and I have taught this course together for four years. We always teach at least one class with a manufacturing CEO. The students look at him or her like they landed from Mars. They don't know what milling machines are. We're raising a generation of people who are completely fixated on one world, but have no affinity for the physical world. Yet a lot of their future is going to be wrapped up with that. There's this notion of, "Oh, 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. The surprise is that people realize they have to see the whole system. They have to understand the secondary and tertiary effects of what happens when everything's connected.
--:-- Jeff Jordan: A lot of the companies I work with are what my partner, Alex Rampell, calls O2O, which is online to offline. eBay was you'd buy something online, but there was offline fulfillment. Airbnb has the same thing. Chegg 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. 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 very intelligent software that optimizes the experience and enables them to do the magic act of getting groceries in front of you within two hours from the time you order it online. When I was at the Disney store, we put the apparel into the store. Now the community of users is executing on the transaction.
--:-- Jeffrey Immelt: 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 systems leadership, is about the "and." 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. I think we're in the "and" generation. Whether you're a legacy company or a startup, that's what you have to be thinking about, either as part of an ecosystem or do it yourself.
--:-- Jeff Jordan: And I think that's a key point because very few companies can do it all themselves. 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 going to end up doing some level of partnering with other people. 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 part of that core competency? But where can they more effectively partner with others to still deliver that great experience to customers? When Jeff Jordan talked about being able to influence other parts of the ecosystem, that's actually a key thing that leaders need to figure out how to do if they don't control the resources and the assets.
--:-- Robert Siegel: I would put Apple in that bucket. One, they don't do any of the manufacturing. All they do is design it in California, and then it's fulfilled globally. 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.
--:-- Jeff Jordan: I would push back on that. Apple controls more things than most companies. Look at the store. Everything's got to get approved. Compare it to Google Play and the open nature of that, which is more open than the Apple Store. Look at Apple designing its own silicon. Look at how they make people have green bubbles in iMessage. 85% of the planet uses Android, and Apple does everything they can to make sure that people who use Android have a horrible experience. Apple is trying very, very hard to control things, much more so than most companies can. 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?
--:-- Sonal: 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. This is exactly where I want to focus for a bit. 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. Many of those players are actually more subservient in that ecosystem than they are really in control. That's a really important distinction. You're absolutely right when you talk about the idea of them owning most of that, as does Tesla. That's like 80% vertically integrated. Along those lines, let's give more texture to this exact debate, because I bet a lot of people who are listening are at the very heart of these questions. Do you want to actually quickly give that two-by-two matrix that you have in your book?
--:-- Robert Siegel: Absolutely. The matrix is based upon some research done by Professor Robert Burgelman, a colleague of the three of ours at the Graduate School of Business. It gets into relationships and strategic partnering. The two variables that matter are dependence and influence. When you look at two organizations, is somebody dependent? They've got high or low dependence on another organization, and their influence is high or low. 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. That's a horrible place to be because Apple can do whatever they want to you. If you've got a company where there's low dependence and low influence, it's almost strategic indifference. The flip side of the Apple situation is if they have high dependence and low influence, 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. That's where you get strategic interdependence. That's where you can actually do things better together than you could apart.
--:-- Robert Siegel: In the book, one of the things I talk about is how Instacart has a very complex four-sided market. They've got the grocery stores 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 go out and pick the goods. And then you have the CPG companies who can now understand at a holistic level where products are selling, how they're selling, and why. The team at Instacart has done a really good job of trying to understand where they have high dependence and where they have low dependence, where they have high influence and low influence, and develop some really important strategic partnerships and relationships.
--:-- Jeff Jordan: It's fascinating. CPG companies have monster advertising budgets. Largely, who was it? Wanamaker 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? Did it influence long-term behavior? The CPG players basically got AdWords for consumer products, and they love it. That's the way leaders need to be thinking. When you can't do everything yourself, you want to be as strategically dominant as possible, or be strategically interdependent, and avoid being strategically subordinate.
--:-- Sonal: You describe those four sides of the Instacart marketplace: the customers or buyers, the shoppers, the grocery stores or retailers, the CPGs or consumer packaged goods companies which supply the shelves. If you think about a person who has the experience of going to a grocery store, or a shopper who goes to the grocery store, the ability to easily get what someone has ordered is pretty critical. That's something many people saw during the pandemic. I want to drive home the picture of how that system comes together.
--:-- Robert Siegel: 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. Logistics, which historically has been a very back-end thing, becomes a front-end thing. 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. 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.
--:-- Jeff Jordan: By the way, there was a very big outstanding question: could they ever do it profitably? The Instacart team 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. An example for me would 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 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 the shelf. Why don't you calculate the cost of the basket there, obviate the need to recheck out? Each of those steps took meaningful chunks of time off the service. Taking time off the service, making the shopper more efficient, can make it a better price for the consumer. It's this constant rolling optimization using the digital expertise to have the physical improvement.
--:-- Jeffrey Immelt: Change happens slowly and then all at once. To understand Instacart, you need to understand Webvan and all the progress. This has been like a 20-year startup process. There are no bad ideas in venture, just bad timing. It turns out Webvan didn't have smartphones. So how could their shoppers be smart?
--:-- Jeff Jordan: But I would argue that is a fundamental blind spot of this place. The dismissiveness that comes from how we talk about older industries.
--:-- Jeffrey Immelt: Exactly. This is when they look at us and say, "Okay, Boomer." And I'm like, "No, dude, I'm OG Gen X. And you're not even smart enough to do the math to figure out that I'm Gen X."
--:-- Sonal: I was just going to say that. So I totally agree that timing is everything. But the other key point 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 Instacart started at sort of the least 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. As a company has more success, they have the ability to have more influence on their partners. What might have started as a subordinate relationship can become a dominant relationship. You 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 success.
--:-- Jeff Jordan: 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. There are some business models where 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. The only value prop was operational efficiency. 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. The diner can do lead gen and book restaurants digitally, which they love. 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. The power dynamic went from 100% restaurants to 99% OpenTable over time.
--:-- Jeffrey Immelt: I'll tell you a funny story. In 2006, Jobs was launching the iPhone and needed content. The two most desirable properties were 30 Rock and Saturday Night Live, both of which GE and NBC owned. We actually asked for the $9 price point. That was the one moment where we had power versus the subsequent 20 years where that power has dissipated to everybody else.
--:-- Jeff Jordan: 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. I remember Barry Diller at Sun Valley one year saying, "We're never going to let that happen again. It's not going to go." And he was on stage with Mark Driesen, who said, "Barry, it's already happened. The barn door's open."
--:-- Sonal: That's exactly right. What's also really poignant about those examples, and this 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 evolve as we talked about, but they can also flip. One interesting example that comes to mind for me when you guys are talking about these two examples is how for years people talked about how the content companies were so slow to come to streaming. Then they had 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 at Disney Plus, they are freaking rocking it. It's a great example of how everyone always said content is king. For a while we were like, "No, no, technology is king." Honestly, if you look at all these apps, they're not that great. They're not as usable as Netflix. 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.
--:-- Jeff Jordan: What's interesting is I would argue Netflix showed the way on that.
--:-- Sonal: Oh, no question.
--:-- Jeff Jordan: So it can be fleeting. When I look at the whole fintech revolution and all the great companies 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?"
--:-- Jeffrey Immelt: I'm having the same thought as the person at eBay who bought PayPal and managed it early. How in the world did Stripe win in that world? PayPal did not provide developers with a high quality service, did not innovate on 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. Again, PayPal and all the other financial players just got caught flat-footed.
--:-- Jeff Jordan: Good leaders actually know where the pressure points are and try to get the power as quickly as they can.
--:-- Jeffrey Immelt: I tell my students and my friends, I think most of us underestimated badly the wave that technology would create in almost every industry. I wish in 1999, I had spent a year or two in Silicon Valley before I became CEO of GE.
--:-- Sonal: 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. In many ways, it's not as if you and others would not have known how important technology was. The challenge is really how to bring it in. Of course it goes to the classic innovator's dilemma, all those classic frames. It's not like people don't know that this is happening. In fact, the book opens with Robert tired of hearing companies say they must embrace digital transformation.
--:-- Jeffrey Immelt: Yeah, look, I think it's more profound paranoia for sure. But I think it's also about what was the next generation of talent? What did they look like? How do they want to be paid? This notion that you just have to be willing to do whatever it takes to win. Markets rule. I was one of the early guys with Hulu. But Comcast said, "If you keep growing Hulu," this was before they owned NBC, "we're going to pull the plug on all your content." Instead of saying, "Screw you, we're going to do it anyhow," we said, "OK, guys, whatever you say, we're going to hold back Hulu and let Netflix kill us." You have to almost run it inside a corporate structure, but you have to give it enough autonomy to have its own currency, have its own culture. That's hard to do. 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?
--:-- Jeff Jordan: Hulu was a challenge because you needed the breadth of content. You needed multiple studios. I remember talking to Jason Kilar 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.
--:-- Sonal: 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?
--:-- Jeff Jordan: David Zaslav.
--:-- Sonal: Yes, thank you. 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. 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?
--:-- Robert Siegel: Let me give a couple of ways that leaders can think about it. 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. In an influence map, you lay out everybody in your ecosystem and understand who's really driving who. When you see that picture holistically, you understand who's really applying pressure and who's under pressure. Very few leaders, in my experience, really understand that 80,000-foot view of how everybody is interacting with each other. The second thing you can do is layer on top of that a heat map, which is who's under stress and why. If you can understand who's under stress and why, you can probably anticipate some of their likely reactions, rational and irrational. To your question, Sonal, you asked us, "What's the point that you do this or do that?" There is no recipe. It's one of those constant things you have to be doing as a leader. Going back 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, "How will you know?"
--:-- Robert Siegel: In the book, one of the things I look at is Android, because I find it a fascinating study about shaping your ecosystem. Here you've got a company in Google and Alphabet that owns Android, but they don't own it. It's open source. Anybody can do with it whatever they want. They've got this complex ecosystem where you've got handset makers, carriers, application developers, governments, suppliers of components. The leadership of Android has a pretty advanced view of all of the players they need to shape and understand. What's the market like in India? How do they make sure 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. Yet Pixel shows best practices for blending hardware and software. Google gives those learnings away to the companies so they can make their phones and handsets better. They have to think through what happens when technology gets embedded in things like automobiles and smart speakers. Your interface to those devices might be voice. The Android team may not control the app that controls the voice. How do they work well with them? If you go back to that notion of understanding influence maps and heat maps, think of that as a constant rhythm that you as a leader need to be doing. 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?
--:-- Jeff Jordan: Back when I was at Disney, I started in the strategic planning group working ironically for Meg Whitman. One of the tasks I was responsible for was building the annual five-year plan. It was a shitload of work. I don't know if Disney still does a five-year plan. Of all the 40 portfolio companies I support, not one does anything longer than an annual budget. That's largely for financial planning and performance management purposes. It's kind of day or week. You are constantly revising based on new assumptions, new information. That is a difference. Another difference is, I think, in the industrial economy, you get the three beer companies and the four petroleum companies. Technology is winner-take-all against your direct competitors, not your ecosystem. You've got to play a whole lot more offense and defense. It's trying to figure out, "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.
--:-- Jeffrey Immelt: Rob'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? Jeff said some people just have a killer instinct for markets. You know who they are. They say, "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. The leading healthcare IT company is a company called Epic. It's old technology. They're the main leaders in electronic medical records, EMRs. They do it town by town. They have huge barriers to entry. 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, not a disadvantage.
--:-- Robert Siegel: Also regulatory capture. Jeff Immelt is fond of saying in our class, "Government's your new business partner." 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. If you only think of just the software, you won't see the whole picture of what's happening.
--:-- Sonal: Which is government, brains or brawn?
--:-- Jeffrey Immelt: I would argue it's a little bit of both, Jeff.
--:-- Jeff Jordan: I'd say mainly brawn.
--:-- Robert Siegel: I was going to go with neither, but that's...
--:-- Sonal: 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?
--:-- Sonal: 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 his doctors, his nurses, his patients, the communities in which he operated. But he actually talked about empathy for government, which I found really interesting.
--:-- 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 of the people that they represented to the best of their abilities. And he had to put himself in their shoes.
--:-- Similarly, if you're dealing with a more authoritarian government that's got a capitalist nature, 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.
--:-- It makes me think of the whole debate that plays out right now between stockholders and stakeholders and the rise of ESG and all these other trends. But I do want to pull a couple more threads. So let me go back for a moment to this idea of follow the money.
--:-- One of the anecdotes that struck me is we talked about Stripe earlier and Alex Rampell tells a story of how when he first met the Collison brothers, Patrick was laying out this market that did not even exist. There was no money and they made this point, "This customer doesn't actually exist yet, but it's going to exist," which I think is one counter to that.
--:-- Robert Siegel: No, I think you're right. Jeff talked about the people who understand markets and Patrick Collison may be the smartest guest I've ever had in a class ever. It's almost like he's 18 sigma to the right of the mean. And I almost think that Patrick Collison doesn't count.
--:-- Jeff Jordan: Yeah, I kind of agree. 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? The ways of thinking and the tools become ways that we can hopefully be effective in our jobs.
--:-- It's interesting, the healthcare example, because even big companies banding together, like Amazon, Berkshire Hathaway, and JP Morgan. They did that effort. And we actually talked about this on our podcast. It disbanded after like two years. I think anybody that knew healthcare the day that was announced yawned fundamentally.
--:-- Robert Siegel: Totally. You've got to see healthcare from the bottom up, not from the top down. 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.
--:-- Sonal: I could keep going 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.
--:-- But it's fascinating because if you talk about this timing effect, and we talked about the Webvan Instacart example and the enabling factors of smartphones. While I would never over inflate a COVID pandemic effect, there is an acceleration that comes from laying this digital infrastructure now where you can bypass these 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 this digital layer, this digital supply chain connecting everything everywhere. And yet they too struggled with whether to partner or collaborate.
--:-- Robert Siegel: Absolutely. So it used to be so hard to be able to take credit cards, whether you were building a website or an app. The Collison brothers made it so easy for developers to drop in a few lines of code. Something that used to take a month to get a merchant account set up now took five minutes. Stripe enabled people and companies to serve their customers better and more quickly. That got the ball rolling.
--:-- 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. The scale they were able to get to, which was so frictionless, suddenly everyone had to pay attention to them.
--:-- Then the challenge that Stripe faced was 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. That became the real systems leader challenge: now that we've unlocked these doors because of APIs, how much do we stay focused on what's in front of us versus getting into other areas? And where do we figure out what we want to do and where do we want to partner?
--:-- Sonal: You described the case of what happened when they had this question about whether to sell their service for Shopify or not.
--:-- Robert Siegel: Right. So the question they were confronting in the case is should they do a private label version of their product? 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 a product and service provider, rather than trying to have this religious mindset of "everybody has to have a Stripe account."
--:-- 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: new data will come 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? And am I better off by doing that by partnering than trying to do it on my own?"
--:-- Sonal: Right, and you quote Christina 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 brawn, independence to interdependence, 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? 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 shaped how they laid out their stores and 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.
--:-- The last thing I'll say is we talk about Tesla and Apple, but you can't 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. 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 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?
--:-- Jeffrey Immelt: I think talent is destiny in a lot of the systems leadership. Let's say you're Peloton and you say, "I want to deliver the bikes and install them." That's a good aspiration. You can debate that in a board meeting. But if you decide to do that, you go to Bentonville and you recruit Walmart's best logistics people and put them in place. And that's what Jeff did at Amazon.
--:-- If you're a systems leader, the human resource aspect is really critical. You can build capability, but you have to be dedicated to talent. Where companies get in trouble is they have the aspiration, but they don't have the people that can pull it off.
--:-- Sonal: 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. 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. To really treat the talent like first-class citizens, where they're not just 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?
--:-- Jeffrey Immelt: I'll take it to follow up on what Jeff Lawson from Twilio said. 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. That's a no-brainer. Everybody can do it better than we could.
--:-- When it touches the customer, when it's differentiating your product, touching the customer, determining your market share, 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 make yourself more efficient, 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.
--:-- Sonal: 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.
--:-- Jeff Jordan: 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-aspects. Why spend a bunch of your hard-to-hire, expensive engineers' time rebuilding something that is very well built unless it's a source of competitive advantage?
--:-- Sonal: 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? 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?
--:-- Robert Siegel: That's actually great. That's where I was going to start. A systems leader is somebody who blends the knowledge and competencies of both 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 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. 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 sale to a customer, what does 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.
--:-- The first thing about systems leaders is really understanding 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.
--:-- 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. That becomes a force multiplier when you can combine both of those things. They understand how to have a platform that can operate globally, but that can also be customized locally.
--:-- The second thing that systems leaders can do is they can manage context. 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, "Yes, 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." Great systems leaders own their narrative, they're storytellers. They know how to talk about that and give context to the people around them.
--:-- The third thing 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 figure out how to track the details of where things are at the product 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.
--:-- The last thing, a mindset issue, is 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. A great systems leader knows that in those times of volatility, you actually have to play offense and not defense.
--:-- So those are the four key things: operate at intersections, manage context, have a product manager's mindset, and go risk on during times of disruption.
--:-- Sonal: That's a fantastic summary. Jeff Immelt, can you explain that phrase that truth equals facts plus context?
--:-- Jeffrey Immelt: We live in a world without nuance, but most of leadership is nuance. 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? 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. It's not a Republican or Democrat thing. 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 in the business world, you better learn how to do business there.
--:-- Sonal: I love that you talked about nuance. You're the one in this room who's led one of the world's oldest companies, a very long, stable entity. How do you think about the systems leadership question?
--:-- Jeffrey Immelt: I ran a conglomerate, one of the last of its kind. You're trained to look horizontally when you run a multi-business structure. 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 a GE Capital, for instance. So I always was trained to do it and think about it in that context.
--:-- Now, the era we live in is one 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.
--:-- I would add that most legacy companies have been built vertically. 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. A lot of our class is just teaching students not to be afraid of it, to actually embrace it.
--:-- Sonal: 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 conglomerates. People are in denial that we live in this ecosystem this way.
--:-- Jeff Jordan: Look, I'm one of these guys that looked at PayPal and eBay together as being stronger. I love Meg Whitman. I love John Donahoe. I love Jeff Bezos. I've known all the players. But I look at it and say, that's too bad. It actually made a lot of sense.
--:-- Sonal: Oh, it did. Actually, I agree with you, Jeff, completely.
--:-- Jeff Jordan: It was funny. John reached out when the activists were making his life miserable and asked to meet on a Saturday. 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. I've talked to a number of economists, including the dean of the Stanford Business School, who did research on eBay with respect to competition theory. You change the pricing incentives. It changes the quantity. It changes the velocity. Everything was connected.
--:-- 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 partnership ecosystems, the employee ecosystem. You make one change here and way over there, things blow up.
--:-- Sonal: But how do you reconcile? This is a really hard question. I don't expect you guys to have an easy pat answer. But how do you reconcile this conflict, this 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 how to map things and have these heat maps and you can certainly identify signals. How do you prepare without over preparing and preparing for the wrong things?
--:-- Robert Siegel: 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 presented 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, "I'm going to let the tech team handle it." They had an opinion on it.
--:-- We talk in the class about being aware of one's own bias. 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?" I always love that question because it stops you in your tracks. 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." 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 is also my greatest development need because it can get me in trouble if I can't keep it in line.
--:-- One of the things that leaders need to be able to do is understand 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?" I don't think that there's a panacea. 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?
--:-- Jeffrey Immelt: 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, there's a good chance you can do something about it.
--:-- Jeff Jordan: I did a blog post called "Leaving It on the Field," using a sports analogy about trying to manage a hyper growth business. How do you scale yourself as an executive and a leader? Almost all of it is self-awareness. Systems leadership in particular, because you cannot be aware of that whole worldview if it's all internally narcissistically focused versus outwardly ecosystem focused.
--:-- Jeffrey Immelt: 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 complement.
--:-- Jeff Jordan: Completely. You need to understand your teammates. I'll stick with a sports analogy. Your teammates are going to have their strengths and their superpowers. You've got to make sure that you understand their superpowers so that you can blend the team together to make it work. I think that's the real role of a leader. You become the coach. You become the general manager to put the best team on the court, the best team on the field to win.
--:-- Sonal: 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 a16z podcast.
--:-- Robert Siegel: Thank you.
--:-- Jeffrey Immelt: Thank you for having us.
--:-- Jeff Jordan: Thanks very much. It's a real honor and a privilege.
