The Strategy of Alphabet (née Google)

It is fair to say the world was caught off guard by the major reorganisation of Google last week to a holding company structure under the new name ‘Alphabet’. The move sees the company formerly known as Google now referring to just the core businesses of Search, Android, YouTube, and a handful of others, led by Google’s head of product Sundar Pichai. The non-Google part of the business looks more like venture capital than a company, with Google Auto, Google X, Nest and other R&D ventures falling under its remit. Whilst this may all come as a surprise, strategically this move makes a lot of sense.

In my recent article ‘Where was Strategy at Google IO and Apple WWDC‘ I highlighted a number of major inconsistencies in the messages presented by both companies at their respective developer conferences in relation to their strategic intent. Google’s mission to ‘organise the world’s information‘ fits nicely with its Search, Android and Youtube businesses but starts to get lost as the company invests in moonshots like Project Loon and driver-less cars.

So what is Alphabet’s strategy and what can we learn from it? 

Public markets respond well to strategic clarity

Companies that appear to have lost strategic direction often suffer in public markets. The change to Alphabet could be seen as placating Wall Street analysts who have often questioned Google’s moonshots and raised objections about the incongruence of R&D project spend with objectives of Google’s core business.  Alphabet is a sign that Larry Page and Sergey Brin will not be backing down from these projects but provide a more consistent market narrative and greater transparency to their business segments.  According to the SEC release Google will start reporting  separately on Google and Alphabet segments as early as Q4 FY16… Let’s see how the market responds now.

It can be very difficult to innovate without strategic freedom

From IBM to GE to AT&T to Microsoft or Australian companies like Telstra, incumbent tech companies are looking for ways to avoid complacency and business model disruption. Google is no different. In the recent past it has tried with Google X, now it’s trying Alphabet. Google could very easily fund ambitious projects through Google X, but launching those projects into a standalone business or Google division has proven problematic.  The Alphabet holding  company structure suits organic growth and aggressive acquisition strategies in a way the Google structure could not. A moonshot will be given more space to grow and focus with more funding options available at maturity.

An example is Google’s driver-less car program which has little in common with Google’s core business but could be extremely profitable some day. Through Alphabet, Google Auto can receive outside funding in exchange for an ownership stake or even consider an IPO to reward Alphabet investors.  This was not readily available under the previous structure.

Talent are attracted to a more focused and culturally aligned organisation

The new structure gives Alphabet and its many organisations more management and talent scale. Firstly the incentive of a potential IPO for the moonshots will serve Alphabet to keep top talent within the group. Secondly, the moonshots can start to build their own culture and incentive programs without the pervasive effect of the core. We may see moonshots adopting more ‘non-google’ like behaviour than the core business in order to achieve objectives which are separate from the core.

In an organisational and strategic ‘gear shift’ there are choices – winners and losers

In spite of the strategic clarity Alphabet will bring, some of Google’s business ventures could lose out in the organisational and strategic shake up. Of note are Google Fibre or Project Fi which are more ‘adjacent’ than core and certainly not moonshots. They are downstream to Search and additive to the advertising business (e.g. Cheaper broadband access = more Search eyeballs + more users for Google’s core (Youtube)). In this new model they may not have the attention that the core advertising business has and underperform. Google has had some success with Fiber already, it will be interesting to see if this continues under the new structure.

The success of Alphabet will be closely monitored – How does Search profit from renewed focus? When will the first moonshot IPO occur? I also look at this move as predictor of the ‘new’ structure of a technology/media conglomerate (core + moonshot) and can’t help but wonder who is next. Perhaps we will see Facebook or Amazon follow a similar strategy providing strategic clarity to their core and freedom to their many acquisitions and innovation plays.

This article is featured on strategy4telcomediatech.com.

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