CHAPTER 1

TODAY’S TRUE COMPETITIVE ADVANTAGE

Are you tired of hearing that digital transformation is the most important issue facing companies today? Me, too. Sometimes, while someone is going on and on about it in my classroom at the Stanford Graduate School of Business, or in a pitch meeting at my Silicon Valley venture capital firm, I feel like banging my head against the wall.

Don’t get me wrong—of course, digitization is a massive and massively important trend. Leaders in every industry need to wrestle with it. But despite fervent preaching from the Silicon Valley faithful, it’s not the only kind of competency that matters. The less flashy, more grounded aspects of business, such as logistics and manufacturing, are still crucial to the success of any company, large or small. Amid the insistent drumbeat of digital transformation, those traditional, old-fashioned competencies are easily overlooked and underappreciated.

A cultural gulf has opened up between the realms I call brains and brawn. Others may call this dichotomy digital versus physical, the disruptor mindset versus the incumbent mindset, start-up world versus the Fortune 500, or tech culture versus industrial culture. Whatever terms you prefer, it’s time to bridge the gulf and reframe the dichotomy.

The sheer luminescence of digital breakthroughs exerts such a strong hold on our imaginations that many of us can’t even relate to companies that actually make stuff or move stuff around. Would most young, ambitious leaders rather take a job at Google or Ford? At Twitter or John Deere? At Netflix or Home Depot? Do we even have to ask?

This way of looking at the world is misguided. You can’t assume that the legacy giants are doomed. Some so-called dinosaurs will fail, of course, but others will thrive by blending their existing skills at making and moving products with brainy new competencies unleashed by digital technology. Likewise, some of the digital disruptors will win, but certainly not all of them.

Today’s true competitive advantage, for your career or your entire organization, is understanding how digital and physical excellence can reinforce each other, achieving more in coordination than either kind of mastery can in isolation. The idea that these worlds are in fundamental conflict is dangerous and shortsighted. Instead, think of brains and brawn as the business version of chocolate and peanut butter, or Lennon and McCartney: valuable individually, but infinitely better together. Building that powerful partnership is the most important issue facing companies today.

Hearing from the Horses’ Mouths

I reached this conclusion after some surprising observations while wearing my two hats, as an academic and a venture capitalist.

First came a series of surprises during one of my Stanford courses, The Industrialist’s Dilemma, which I’ve co-taught since 2016 with Max Wessel, the chief learning officer of enterprise software giant SAP, and Aaron Levie, the CEO of cloud company Box. When we launched the course, we planned to invite top executives from tech companies to share their insights on how they were rewriting the traditional rules of business. We also wanted some forward-thinking leaders of incumbent firms that were embracing digital transformation. And we wanted a couple of CEOs from old-line industrial firms that were struggling to respond to disruption.

But that’s not how things played out. Over the past six years, I’ve been surprised again and again by the 70-plus distinguished speakers who’ve spoken to our The Industrialist’s Dilemma class, or to the Systems Leadership class that I co-teach with former General Electric CEO Jeff Immelt. On the incumbent/Fortune 500 side, these speakers have included Home Depot CEO Craig Menear, Johnson & Johnson CEO Alex Gorsky, former Caterpillar Group President Rob Charter, AB InBev Chief Disruptive Growth Officer Pedro Earp, GlaxoSmithKline CEO Emma Walmsley, and former AT&T CEO Randall Stephenson. On the disruptor/start-up side, we’ve hosted 23andMe CEO Anne Wojcicki, Lyft CEO Logan Green, Stripe CEO Patrick Collison, and former Google Nest CEO Tony Fadell, among many others.

Over and over, these leaders confounded my assumptions about which companies are set up for future success and which are in serious trouble. While the disruptors continue to innovate, many established companies are finding creative and aggressive ways to counter them. These heavyweights are turning their size and resources, historical market presence, and institutional knowledge from surviving many boom-and-bust cycles into competitive advantages. Yet few people in the wider business community are aware of how they’re doing it.

My second key observation grew out of my work as a partner at XSeed Capital and as a venture partner at Piva Ventures, both of which are enthusiastic flag-wavers for disruption. I’ve noticed that many of the tech companies we work with, while bursting with innovation, are unable or unwilling to navigate the tedious steps that lead to long-term customer relationships. Many also struggle to build systematic management processes. As a result, their performance is often wildly inconsistent. I realized that these brainy disruptors are missing some of the key competencies that drive consistent long-run profits—and that the best way they could master those brawny skills was by studying the very incumbents they were trying to destroy.

Then very suddenly, these trends became personal.

Lessons from Lockdown

On the evening of Friday, March 6, 2020, I was having a group dinner with seven of my MBA students when we saw a news alert: due to the COVID-19 pandemic, Stanford University would be moving all instruction online as of Monday. For the rest of the academic year, all of my classroom skills, honed over 20 years of practice, would be irrelevant. I’d have to figure out how to hold the attention of up to 100 students at a time via Zoom and try to approximate their classroom experience.

Traditional teaching requires a deeply physical set of skills. You learn to read the room by looking into the eyes of your students, decoding which ones are engaged, bored, or completely lost. You also learn how to read body language—who’s slouching, who’s leaning forward—and the auditory clues of laughing or groaning, depending on how terrible my jokes are that day. But now my only feedback was 100 tiny faces on a monitor that I couldn’t see clearly while looking into a camera. And they were on mute, except for a tiny icon of a blue hand that would light up when someone wanted to ask a question or respond to one of my prompts.

This was a shock not just to me but to our entire faculty, as it was to teachers at every level worldwide. We all had to adapt, far more quickly and completely than any of us were comfortable with. We had no choice.

After grinding it out for a week, I was grateful to have a two-week break without classes before the next quarter would begin. I devoted that time to improving my virtual game. I invested in a bigger computer monitor, a higher-quality camera, and backup internet connections in case one went down during a class. I huddled with my teaching assistants about how we could keep the energy levels up and encourage more participation. I rearranged my home office so I could stand up and roam around a bit without stepping out of camera range. I redecorated to turn the space into a Stanford-themed studio. I prepped our upcoming guest speakers on how to make the most of their video sessions.

As our classroom experiences improved during the following quarter, I had an epiphany: the digital teaching skills that my colleagues and I were learning would come in handy for the rest of our careers, not merely during the pandemic. I also ran several remote sessions for global companies based in South America, Europe, Southeast Asia, and the Middle East. These experiences convinced me that education will never fully return to the days of one person standing in front of a lecture hall. Video and communication technology will continue to improve, and people will keep finding creative new ways to apply them. Within a few years, teaching will probably be seen as a hybrid profession, requiring the ability to hold attention and communicate effectively both in a classroom and over video.

Every week—sometimes every day—I saw a new phase in the metamorphosis of my field. I watched a transformation blending the best aspects of digital and physical. And as my frustrations at adapting to the new world gave way to excitement over its possibilities, I realized that my own experience was an “up close and personal” lesson in exactly what I’d been teaching. I had joined the hundreds of companies and organizations that were rewriting the traditional rules and embracing digital transformation.

The Best of Both Worlds

What’s true for teaching is increasingly true for every industry: nothing is exclusively digital or physical anymore. Brainy fields like biotech, video games, and software depend in part on their mastery of channel partnerships, supply chains, customer service, and quality control. Brawny fields like scrap metal recycling, physical retail, and construction now have to process and act on mountains of data and coordinate complicated machinery via artificial intelligence and cloud computing.

At the individual level, someone with a traditionally brainy job, like a product manager for Apple’s AirPods, needs a strong grasp of the details of global manufacturing and distribution. And someone with a traditionally brawny job, like a factory floor supervisor at General Motors, now needs the skills to handle more sophisticated technology than a NASA engineer was given a few decades ago.

At the organizational level, similarly, success increasingly demands the best of both worlds: the speed, nimbleness, and risk tolerance that are the hallmark of digital start-ups, and the attention to systems, best practices, and long-term customer relationships that are more natural to large incumbents.

If you’re still not convinced that we’re living in a brains and brawn world, consider this question: What’s the most powerful, most disruptive, most dangerous company on the planet? The only one that can cause sheer terror among the incumbents of any sector (healthcare? banking? groceries? television?) merely by considering entering it? It’s Amazon, of course—which happens to be the only company with nearly perfect mastery of all 10 of the Brains and Brawn competencies that I’ll explore more deeply in the chapters ahead.

The Brains and Brawn Basics

The Brains and Brawn framework analyzes a company’s core capabilities along 10 attributes—5 each for the digital and physical worlds. Here’s a quick preview of the five competencies on the brainy side.

The Left Hemisphere: Using Analytics

With big data increasingly available for all kinds of products and services, every company needs a strategy to use all this information to serve customers better, improve their offerings, and control costs. I’m calling this capability the left hemisphere, after the brain’s center of logical thinking.

The featured example is mammoth financial services provider Charles Schwab. With over $7 trillion in assets under management, Schwab has access to a staggering amount and variety of customer data. It has found smart ways to draw insights from all that data, while also taking a cautious, values-driven approach to protecting privacy and promoting customer trust.

The Right Hemisphere: Harnessing Creativity

As companies grow, they usually develop systems and processes that enable efficient scaling and operational excellence. Unfortunately, these systems often make it harder to innovate consistently. But some growing companies keep finding creative ways, large and small, to meet customer needs and anticipate new trends. The right hemisphere is shorthand for harnessing this kind of creativity in developing new business models along with new products.

The featured example is Align Technology, the inventor of Invisalign, a method for straightening teeth using clear plastic aligners instead of traditional braces. Align’s key innovation was combining digital imaging with 3D printing to customize removable, unobtrusive, easy-to-wear aligners. Just as important, Align found an innovative business model by partnering with dentists as well as orthodontists—a previously untapped way to reach many more potential customers.

The Amygdala: Tapping the Power of Empathy

Empathy is symbolized by the amygdala, the seat of emotional processing. A management team with a strong amygdala will be good at understanding and connecting authentically with customers, employees, and outside partners alike.

The featured example is Kaiser Permanente, the managed care titan that was led brilliantly by CEO Bernard Tyson until his death in November 2019. While the managed care industry is usually depicted as inflexible and cold, Tyson always projected warmth and generosity. He inspired employees to focus on empathy for patients, reminding them that they were really selling health, not healthcare. Kaiser uses technology to study what its doctors and nurses really need and aligns incentives for all of its stakeholders to deliver the best possible care.

The Prefrontal Cortex: Managing Risk

The prefrontal cortex is the part of the brain that evaluates and makes decisions about risks. Humans are naturally risk averse because our hunter-gatherer ancestors lived in a world full of mysterious dangers, where any novelty might reveal a new threat. But for many companies today, especially the biggest, risk aversion is a serious disadvantage. Incentives like promotions and raises tend to reward those who support the status quo, instead of doing something bold but uncertain.

The featured example is AB InBev, the world’s largest producer of alcoholic beverages. When CEO Carlos Brito realized that the company had become too risk averse, he took the unusual step of appointing a chief disruptive growth officer—a rising star named Pedro Earp. Interestingly, Earp’s metric of success was how fast he could make his own job obsolete, by spreading a culture of risk-taking across AB InBev.

The Inner Ear: Balancing Ownership and Partnership

Every company faces a fundamental strategic question: Which functions should it own and manage directly, and which should it pay outsiders to manage? The rise of mobile computing, the cloud, data analytics, and AI have made it impossible for any company to provide all parts of a technical solution. Owning more aspects of the technology stack can increase customer intimacy, while owning fewer makes it easier to master the ones that matter most. My metaphor for this balancing challenge is the inner ear, which controls our ability to balance. (Technically the inner ear is outside the brain, but please cut me some slack.)

The featured example is Instacart, the gig-economy start-up that has jumped into the lead in home delivery of groceries. Under the savvy leadership of founder Apoorva Mehta, it has developed a sophisticated approach to balancing its many partnerships, especially with the supermarket chains that can make or break the quality of Instacart’s offerings. The company has had to keep recovering its balance in the face of repeated disruptions, such as Amazon’s acquisition of Whole Foods (which removed a key Instacart partner) and the sudden, exponential surge in home delivery orders during the coronavirus pandemic.

Now here’s a preview of the five competencies on the brawny side.

The Spine: Logistics

Conventional wisdom holds that being an expert in logistics, supply chains, and getting the right things to the right places at the right times will never get you on the cover of Fortune—unless you’re Tim Cook and your talents get you promoted to CEO of Apple. But a strong spine is essential to delivering great experiences to customers, even in sectors that are rapidly going digital.

This chapter features three major retail chains—Best Buy, Home Depot, and Target—that have defied the so-called retail apocalypse by adding brains to their brawn. All strengthened their spines by blending the best aspects of physical retail with innovative new approaches to e-commerce. These supposed dinosaurs each have far-sighted leadership teams that have leveraged superior logistics to deliver flexible and satisfying customer experiences, unmatchable by Amazon or other rivals.

Hands: The Craft of Making Things

During the wave of globalization that accelerated in the 1990s, many manufacturing companies moved their factories to lower-cost parts of the world, especially Southeast Asia and Mexico. But with the rise of new technologies such as additive manufacturing, robot assembly lines, and 3D printing, it’s now possible to design and make things cost-effectively in a high-wage country like the United States. Smart companies are improving their hands by finding innovative ways to enable high-volume yet affordable production.

The featured example is Desktop Metal, a Massachusetts company that uses 3D printing technology to help its customers make their own high-quality metal parts, from prototyping through mass production. Desktop Metal works closely with its customers to produce customized solutions. It builds long-term relationships as a trusted partner whose services are worth a premium price.

Muscles: Leveraging Size and Scale

Economies of scale are still a huge advantage, but in some ways it’s harder than ever to manage a sprawling organization across regions, countries, or continents. It takes strong and agile muscles to act “glocally”—making the most of both global scale and local expertise in challenging, distinct markets.

The featured example is Michelin, a 130-year-old tire manufacturer that operates in 175 countries with 130,000 employees. Michelin benefits from the global scale of its manufacturing and engineering while empowering its local managers to customize offerings for their regions. For instance, its Chinese tires have to be much less expensive to produce than those in Europe and North America, or else Michelin would be priced out of the Chinese market.

Hand-Eye Coordination: Managing Ecosystems

A business ecosystem is an interconnected group of organizations that align for their mutual interests. The relationships among suppliers, channel partners, investors, regulators, and competing firms are frequently in flux, requiring a juggling act to address every ecosystem member’s competing needs. Like any juggling act, doing it well requires great hand-eye coordination.

Managing in a fluid and uncertain environment raises a host of questions for leaders. When should you be tough and assertive in attempting to shape the ecosystem? When should you hang back and let others take the lead in how your industry evolves? What can you do if you have a very different vision for the future of your market compared to your channel partners or key competitors?

The featured example is Google’s Android division, which makes the operating systems that power about four out of five of the world’s smartphones and tablets. While Android is a unique business within a unique industry, its success at managing its complex ecosystem offers powerful lessons for the rest of us.

Stamina: Surviving for the Long Run

Longevity is the ultimate challenge for any business, and no short-term success can guarantee it. It takes stamina to manage an organization’s reputation and brand through both good times and bad.

The featured example is Johnson & Johnson, which has evolved continuously since its founding in 1886. Johnson & Johnson still relies on its famous Credo, written by chairman Robert Wood Johnson in 1943, to make decisions in line with its core values. It sees new technology as a tool, never a panacea, as it fights to stay competitive across a huge range of markets—from talcum powder to Tylenol to experimental cancer treatments. The company is now facing some daunting legal and public relations challenges that will further test its stamina.

The Systems Leader: Driving Constant Progress on Brains and Brawn

The final chapter of this book explores what I call Systems Leadership—the art of maximizing both the brains and the brawn of an organization.

Traditionally, executives rose to senior management through expertise in a particular function, such as operations, marketing, engineering, sales, or finance. As long as they had teammates who could fill in the blanks in their knowledge, they could succeed while seeing the company and its ecosystem from a limited perspective. But today’s leaders need a much broader range of expertise and skills, including the ability to focus on apparent contradictions at the same time: physical and digital, the big picture and essential details, generic solutions that can scale horizontally and customized solutions that can win deep customer loyalty. Systems leaders require the IQ to understand the technical stack as well as the EQ to build effective teams and inspire them to new heights. They hit their financial targets this year while driving changes that may not pay off for five years.

Two additional Systems Leaders are profiled in this last chapter, among them Katrina Lake, the founder and executive chairperson of online clothing retailer Stitch Fix. She has mastered all the major aspects of her company, including fashion, big data, creative branding, and workplace culture. Lake is the driving force behind innovations like detailed questions at checkout (“Why did you not purchase that item?”) and an HR obsession with both culture fit and “culture add.” She also exemplifies a willingness to run toward disruption, even when you might be tempted to run the other way.

Brains + Brawn = Optimism

These are tough times for all kinds of businesses, between the economic turmoil caused by the coronavirus pandemic, ever-increasing global competition, and never-ending technological changes. But my research for this book has reinforced my natural impulse toward optimism. It’s simply not true that every old, established company will end up like Blockbuster Video, disrupted and destroyed by a digital start-up. Nor is it true that every hot start-up will end up like WeWork, overextended and struggling with an unclear path to sustainable profitability.

Instead, the door is open for traditionally brawny companies to vastly improve their brainy competencies, while brainy companies boost their brawny competencies. I hope that the chapters ahead will convince you that no person or organization need be trapped in an old mindset. At any level—as individuals, teams, departments, companies, or entire industries—there are opportunities to bridge the gap between brains and brawn, creating a durable competitive advantage.