Why Google’s new Alphabet is a corporate game-changer
Only Google could change the meaning of the word “alphabet” in one day. The tech giant announced yesterday that it has re-organized the company’s corporate structure under a newly formed umbrella company it is calling Alphabet Inc.
This is big news. When a company of this magnitude makes such a substantial move, it is sure to be subjected to much scrutiny as to the motivation and merit of the new plan.
Under the new model, Google’s more mature businesses, such as search and advertising, Google Maps, YouTube, Chrome and Android will remain under Google Inc., which will be managed by Sundar Picha (who had been running Android and Chrome). Google co-founder and current CEO Larry Page will manage Alphabet.
The companies that are not part of Google Inc. will be the more innovative bets such as Life Sciences (a glucose-sensing contact lens project) and Calico (focused on aging), Google X, Nest, Sidewalk, Fiber and Wing (the drone delivery project) as well as Google Ventures and Google Capital.
Here are some of the justifications provided by Larry Page for the reorganization.
- “Our company is operating well today, but we think we can make it cleaner and more accountable.”
- “Sergey and I are seriously in the business of starting new things.”
- “We also like that it means alpha‑bet (Alpha is investment return above benchmark), which we strive for!”
One explanation for the move, provided by New York Times, is that the change is primarily driven by a desire to maintain Google’s lead as an innovator. Another perspective from TechCrunch says that the change in structure makes it easier for Google to retain top talent.
The Wall Street Journal, on the other hand, suggests that the creation of Alphabet combined with Page’s commitment to continue to report on Google’s results provides investors with a better understanding of the business, with a nod to investor darling Berkshire Hathaway’s management model (strong CEOs in place for each of their operating entities).
Google and the three innovation horizons
My interest in Google is primarily because of its leading position as an innovative organization. With its many “moonshot” initiatives—ideas that tackle huge problems with radical and breakthrough solutions—Google has long been a model organization for its ability to balance profits in the core business with forward-thinking investments in the future. Using McKinsey’s Three Horizons framework, Google’s portfolio investment strategy has often been described as the ideal 70/20/10 distribution, where:
- 70% of resources is spent on Horizon 1 – Defending and extending the core business.
- 20% is spent on Horizon 2 – Emerging businesses.
- 10% is on Horizon 3 – Disruptive businesses.
Google is also where organizational concepts such as “Google time”—where employees are encouraged to spend 10% of their time on a pet project—became a manifestation of innovative culture.
The reality is that most corporations struggle with consistent allocation of funds to moonshot ideas or staff time for pet projects, and that is why Google is such an interesting case from a corporate innovation perspective.
The ambidextrous organization
This 2004 article on the “Ambidextrous Organization” by Charles A. O’Reilly III and Michael L. Tushman offers a different perspective on the Google restructuring.
In short, O’Reilly and Tushman found that companies that organize their moonshot initiatives in structurally independent units (separate processes, cultures and structures, but integrated with the mothership at the senior executive level) fared much better at launching breakthrough innovations while maintaining performance in their core business, compared with businesses that maintain innovation within existing organization and management structure.
The main reasons ambidextrous organizations showed superior performance was that they promote cross-fertilization among innovation initiatives while avoiding cross-contamination, essentially avoiding exposing breakthrough initiatives to the processes and management practices required to run the core business.
Cooking Alphabet soup (you had to see this coming)
So, has Google now become the ambidextrous organization? As always, it depends.
It mainly depends on how founders Sergey Brin and Larry Page decide to run their non-Google Inc. portfolio of initiatives. Is there room and encouragement for cross-fertilization? Are they able to avoid moonshots from being contaminated by the efficiency-oriented culture required to run the core business while still maintaining a focus on exploration, learning and experimentation within the rest of the Alphabet companies?
Yesterday’s announcement seems to suggest that the latter certainly is part of the founders’ motivation for the change to the Alphabet structure; we’ll have to see about the former.
Meanwhile, other corporations that are seeking to improve their innovation outcomes should consider whether an ambidextrous model is right for them. At MaRS, we work with many corporations that seek improved innovation outcomes, and a clear understanding of how organizational structure fosters and supports their innovation efforts is required to succeed.
Jon E Worren
Jon E Worren is the senior director of venture and corporate programs at MaRS. He is responsible for identifying new innovation and entrepreneurship practices and creating tools and resources that help both intrapreneurs and entrepreneurs to be more successful. Jon is also an instructor in Entrepreneurship at University of Toronto School of Continuing Studies. He holds a Master of Science in Media & Communication from London School of Economics and a Master of Science in Business and Economics from the Norwegian School of Management. See more…