The a16z Show - Systems Leadership for Disruptors and Incumbents

Starting point is 00:00:00 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 Braun Company, how leading organizations blend the best of digital and physical. It's by Robert Siegel, who's a lecture 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 Groves' Only the Paranoid Survive, which is sort of a theme here. And joining us are also Jeffrey Immelt,

Starting point is 00:00:49 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 joined 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 theme of systems leadership, we focus mainly on logistics, ecosystems, and partnerships

Starting point is 00:01:31 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 A6NZ.com slash 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 Imelts, and then Jeff Jordan's voice will come in after theirs. So I think there's been a false

Starting point is 00:02:04 dichotomy in Silicon Valley over the last decade. And we saw it in two of the courses that I teach to 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 problem, 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 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

Starting point is 00:02:44 they're connected. Incumbents are not doomed and disruptors are not ordained. 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. Yeah. Rob and I have taught this course together for four years, and we always teach at least one class with the manufacturing CEO. And the students look at him or her,

Starting point is 00:03:19 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.

Starting point is 00:03:37 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. You know, a lot of the companies I work with are what my partner Alex Rampel calls Odo, which is online to offline. eBay was you'd buy something online, but there was offline fulfillment. Airbnb has the same thing.

Starting point is 00:04:15 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 a cart driven by some 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. 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. You know, I think the last

Starting point is 00:05:02 40 years of strategy was about the ore, which was pick your business, stay focused. It was more about what you couldn't do or shouldn't do. The strategy today, and a key part of the system's leadership, it's about the end. 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.

Starting point is 00:05:26 Don't get into content. Yet he did them all. So I think we're in the end 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. 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.

Starting point is 00:05:48 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. 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. I would put Apple in that bucket. One is they don't do any of the manufacturing.

Starting point is 00:06:22 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. 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 and I message. 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's trying very, very hard to control things much more

Starting point is 00:07:03 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? I think you guys are both right. And in your book, you have this really great matrix, a two by two, which talks about this idea of ecosystems. And this is exactly where I want to focus for a bit of ecosystems. 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

Starting point is 00:07:42 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, 80% vertically integrated? So among those lines, let's give more texture to this exact debate because I bet you a lot of people who are 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?

Starting point is 00:08:05 Absolutely. So the matrix is actually based upon some research that was done by Professor Robert Bergelman, 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 or 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

Starting point is 00:08:35 place to be, because Apple can do whatever they want to you. If you've got like a company where that's low dependence and low influence, it's kind of almost strategic and difference. 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. And that's where you get strategic interdependence. And that's where you can actually do things better together than you could apart.

Starting point is 00:09:05 In the book, one of the things I talk about is like how Instacart, right, they've actually got a very complex foresighted market, if you think about it. They've got the grocery stores that they get the 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 the 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 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.

Starting point is 00:09:40 I mean, it's fascinating. CPG companies have monster advertising budgets and they largely, I mean, the, who is it, water maker said, 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 Inzacar can tell you if they got an offer, did they buy it? What did they buy the next time? Did they influence the long-term behavior? And so the CBG players basically got AdWords for consumer products and they love it. And that's the way leaders need to be thinking when you can't do everything yourself.

Starting point is 00:10:18 You want to actually be as strategically dominant as possible and or be strategically interdependent and avoid being strategically subordinate. So you describe 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 package 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 how that system comes together. 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.

Starting point is 00:11:11 And logistics, which historically has been a very back-end thing, becomes kind of a front-end 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 as you quickly and easily, that the person who's doing it at Target can actually do that for you as well. Anyway, there was a very big outstanding question, could they ever do it profitably? And the Instagram 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.

Starting point is 00:11:56 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.

Starting point is 00:12:20 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. Change happens slowly and then all at once. So in order to understand Instacart, you need to understand Webvan.

Starting point is 00:12:53 and all the progress. So this has been like a 20-year startup process. There are no bad ideas in venture, just bad timing. It turned out WebBend didn't have smartphones. So how can their shoppers be smart? But I would argue that that is a fundamental blind spot at this place. The dismissiveness that comes from, you know, how we talk about older industries. Oh, you're wrong. Exactly. 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 figure out that I'm Gen X. I was just going to say that. 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.

Starting point is 00:13:37 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. 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 a success. Another great example of this is government becomes more important. You might become

Starting point is 00:14:20 dominant over some players, but then all of a sudden you might become subordinate again to others who suddenly come into your ecosystem. I mean, there's some business models that the long-term evil plan is to go from subordinate to dominant. At open table, 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 operation,

Starting point is 00:14:50 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 open table 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. And the power dynamic went from 100% restaurants to 99% open table over time. I'll tell you, in 2006, job. was launching the iPhone and needed content.

Starting point is 00:15:23 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. 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 the value move from the studios into the HBO's of the world.

Starting point is 00:16:01 And 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, Druson, who said, Barry, it's already happened. The barn doors open. Yeah, that's exactly right. 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,

Starting point is 00:16:21 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 at Disney Plus, they are freaking rocking it.

Starting point is 00:16:58 And it's a great example of how, frankly, 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 won and they're kind of dominating right now, at least, many views. So what's interesting to I would argue Netflix showed the way on that, right?

Starting point is 00:17:21 Oh, no question. 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 J.P. Morgan do this or Coleman Sachs or somebody who has a deep domain, you know. 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 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 weeks ago. And getting PayPal and all the other financial players just got caught flat-footed.

Starting point is 00:18:06 Good leaders actually know where the pressure points are and try to kind of get the power as quickly as I can. I tell my students and my friends, 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 COG. 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. On this 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 a challenge is really how to bring it in. And of course,

Starting point is 00:18:53 it goes to the classic innovators dilemma, all those classic frames. 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? Yeah, look, I think it's more profound paranoia for sure. But I think it's also, what was the 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, market's 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,

Starting point is 00:19:32 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, 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, 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?

Starting point is 00:20:07 Yeah, you know, Hulu was challenged because one, you needed the breadth of time. content. And so you needed multiple studios. And 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. The Hulu mentioned 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? David Sassel. Yes, thank you. So it's kind of ironic because we're now seeing another.

Starting point is 00:20:41 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.

Starting point is 00:21:19 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? 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. 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

Starting point is 00:21:49 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 can 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. So to your question, someone, 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?

Starting point is 00:22:28 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,

Starting point is 00:22:52 you've got governments, you've got suppliers of components. 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. 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

Starting point is 00:23:30 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? 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. And 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? Back when I was at Disney, I started in the strategic planning group working ironically for Megwitman. And one of the task 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

Starting point is 00:24:13 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. So you've got to play a whole lot more offense and 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. Yeah. Rod's point was do a real third.

Starting point is 00:24:59 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 those sides of the story. We always teach a healthcare class every year because healthcare is a really complicated ecosystem.

Starting point is 00:25:25 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 health care IT companies, a company called Epic. It's old technology. They're like the main leaders in electronic medical records, EMRs. 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

Starting point is 00:26:05 disadvantage. 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. And so which is government, brains are brawned? I would argue it's a little bit of both, Jeff. I'd say mainly brawn. I was going to go in neither, but that's a...

Starting point is 00:26:34 All right, but let me see if I can 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, etc. 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.

Starting point is 00:26:57 almost. Bernard had empathy for all 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 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?

Starting point is 00:27:32 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, 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

Starting point is 00:27:55 stripe earlier. And Alex Rampel tells a story of how when you 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 going to exist, which I think is one counter to that. 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 Hollison doesn't count. Yeah, I kind of agree.

Starting point is 00:28:27 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 affected in our jobs. It's interesting, the healthcare example, because even big companies banding together, like Amazon, Berkshire Hathaway. And J.P. Morgan.

Starting point is 00:28:47 They did that effort. And, you know, we actually talked about this on our podcast. It disbanded after, like, two years. I think anybody that knew healthcare, the day that announced, yawned fundamentally, right? Totally. 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.

Starting point is 00:29:07 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 braint. 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, again, if you talk about this timing effect,

Starting point is 00:29:31 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,

Starting point is 00:29:51 of Stripe, there's 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. 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, 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

Starting point is 00:30:31 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 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.

Starting point is 00:31:03 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? You described the case of what happened when they had this question about whether to sell their service for Shopify or not. 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

Starting point is 00:31:35 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 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? Right. And you quote Christina Cordova, who we've actually had on this podcast as well,

Starting point is 00:32:12 she's brilliant too, talking about those very questions. When we talk about this spectrum from brain to run, 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? 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.

Starting point is 00:32:44 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 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. The more systematic way to think about it is what do you need to control because it's the basis of competitive advantage?

Starting point is 00:33:24 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? I think talent is destiny and a lot of the systems leadership. let's see your 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.

Starting point is 00:33:51 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 in Amazon. If your system's 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.

Starting point is 00:34:19 Oh, my God. I'm so glad you brought this up, Jeff. We had Jeff Lawson, CEO of Tuolio 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

Starting point is 00:34:32 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 I 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? I'll take it in the kind of follow up on what Jeff Lawson from Twilio said,

Starting point is 00:34:59 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 backroom.

Starting point is 00:35:35 If it's just a way to kind of make yourself more efficient, 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. 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. I agree. 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 you spend a bunch of your hard,

Starting point is 00:36:10 higher, expensive engineers time rebuilding something that is very well built unless it's a competitive advantage? 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.

Starting point is 00:36:53 But first, to kick us off, what is a systems leader? 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 a, 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, etc. They need to be able to know how to manage internally inside of the organization and externally.

Starting point is 00:37:30 It's the ability to see what happens when different parts interact with each other, 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 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

Starting point is 00:38:04 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 they can also be customized locally. 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 which we understand it that defines

Starting point is 00:38:43 how the world sees truth. And great systems leaders, they own their narrative, their 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 figure out how to kind of 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

Starting point is 00:39:16 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 at 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 leader need to do. Operate intersections, manage context, have a product manager's mindset, and go risk on during times of disruption. That's fantastic summary. Jeff Emmett, can you just

Starting point is 00:39:51 explain that phrase that truth equals facts plus context? So we live in a world without nuance, but most of leadership is nuance, 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.

Starting point is 00:40:16 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 U.S. They're going to influence the rest of the world. That's the context. So what's the truth?

Starting point is 00:40:33 Is the truth that we're at war with China, that they're the unity, things like that. 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.

Starting point is 00:40:59 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? 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.

Starting point is 00:41:29 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 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 in the classroom. 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.

Starting point is 00:42:16 And a lot of our classes just teaching students not to be afraid of it to actually embrace it. 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. Like, people are in denial that we live in this ecosystem this way.

Starting point is 00:42:39 Look, I'm one of these guys that looked at PayPal and eBay together as being stronger. I love May. 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. Oh, it did actually.

Starting point is 00:42:53 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 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.

Starting point is 00:43:10 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 way, 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, 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,

Starting point is 00:43:53 business, but, you know, partnership ecosystems, the employee ecosystem, you make one change here, and way over there, things blow up. But how do you reconcile? This is a really hard question. I don't expect you guys have an easy pat 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 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

Starting point is 00:44:34 things? 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

Starting point is 00:45:15 on it. They were also, 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 Stitchvix, 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

Starting point is 00:45:59 it can get me in trouble if I can't keep it in line. 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? I remember reading Jeff's comment on leader know thyself. I actually came to believe it wholeheartedly.

Starting point is 00:46:29 The way I've always framed it is everyone in the building knows your strength 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 hyper-growth business. How do you scale yourself as an executive and a leader? And almost all of it is self-awareness. And systems leadership in particular, because you cannot be aware of that whole worldview if it's all internally kind of narcissistically focused versus outwardly ecosystem focused. Yeah, I know. It's a system. So if you know what you're strong at and you know

Starting point is 00:47:06 what you're not strong at, you recruit for it. You get the right partner. You get the right complimentary. Completely. But you need to understand like your team 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.

Starting point is 00:47:28 You become the general manager to put the best team on the court, the best team on the field to win. Well, that's a great note to end on team. Thank you, Robert, author of the new book, The Brains and Braun 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. Thank you.

Starting point is 00:47:50 Thank you for having us. Thanks very much. It's a real honor and a privilege.

The a16z Show - Systems Leadership for Disruptors and Incumbents

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.