CASE Alphabet - who and what drives the strategy? EXAMPLE Phyl Johnson and Patrick Regner From Google to Alphabet - twists and turns In Google's strategy development. Google is one of the few companies whose main product's it placed between them and their shareholders and the name became so synonymous with its primary offering increased managerial freedom it offered to them to run that it has become a commonly used verb. Google, which their company their way. was renamed Alphabet in October 2015, had a market Page and Brin also recruited successful CEO Eric capitalisation of $725bn (E435bn, 6544bn) by 2016. Schmidt from Novell Inc. and, between the three of them, With a network of over one million computers worldwide. shared power at the top. Schmidt dealt with administration it was the dominant player in internet search globally (85 and Google's investors and had the most traditional CEO per cent market share, way ahead of former giant Yahoo's role. Page was centrally concerned with the social struct six per cent and Microsoft's 'Bing' and Chinese Baidu, ture of Google while Brin took a lead in the area of ethics. both with three per cent). Google's internet search-related advertising accounted for 86 per cent of Alphabet's rev- How It was enues. However, the giant's expansion faced some chat lenges. People moved to mobiles with lower-priced ads, It could be difficult to work out who was responsible for which limited growth. In contrast to expectations, the what inside Googleplex (Google's HQ) in Mountain View, You Tube video service was also unable to produce profits. California. There was a famously unstructured style of Finally, the company was slowly but surely closing down operating: Eric Schmidt claimed that their strategy was Google +, its big bet on social networking services. In based on trial and erron addition, there were questions concerning the restructure Google is unusual because it's really organised from ing of Google and renaming it Alphabet; intended as a the bottom up . . . It often feels at Google people are holding company including the Google search business pretty much doingwhat they think best and they tolerate and an increasingly diversified portfolio. having us around . . . We don't really have a five-year plan . . . We really focus on what's new, what's exciting About Google and how can you win quickly with your new idea." Google started life as the brainchild of Larry Page and With regard to product development, their approach Sergey Brin when they were students at Stanford Uni- was to launch a part-finished (beta) product, let Google versity in the USA. When Page and Brin launched their fanatics find it, toy with it, error-check and de-bug it - own search engine product, it gained followers and users an imaginative use of end-users but also a significant quickly, attracted financial backing and enabled them to release of control. Control of workflow, quality and to launch their IPO to the US stock market in 2004 raising a large extent, the nature of projects underway at any a massive $1.67bn. one time were down to employees and not management. From the beginning Google was different. Instead of Google was a famously light managed organisation. It had using investment banks as dictators of the initial share a 1:20 ratio of employees to managers - half the number price for the IPO, they launched a kind of open IPO auc- of managers than in the average American organisation tion with buyers deciding on the fair price for a share. (1:10) and considerably fewer than some European coun- Page sent an open letter to shareholders explaining that tries (France 1:7.5). Google was not a conventional company and did not Engineers worked in small autonomous teams and the intend to become one; it was about breaking the mould. work they produced was quality assured using peer review This continued as Google set up a two-tier board of direc- rather than classical supervision or clear strategic guide- tors, a model which, though common in some European lines. So there was the potential for these small work countries (e.g. the Netherlands), is rare in the USA. The teams with their freedom for self-initiated project work advantage for Page and Brin was the additional distance to create a situation of project proliferation. Moreover, 434ALPHABET - WHO AND WHAT DRIVES THE STRATEGY? engineers at Google were allowed to allocate 20 per cent 'This newer Google is a bit slimmed down, with the of their work time to personal projects that interested companies that are pretty far afield of our main them as a means to stimulate innovation and the creation Internet products contained in Alphabet instead. of new knowledge as well as potential products. However, What do we mean by far afield? Good examples are some commentators suggested that many engineers spent our health efforts: Life Sciences (that works on the more like 30 per cent of their time on such projects. glucose-sensing contact lens), and Calico (focused on Google was proud of its laissez-faire approach to man- longevity). Fundamentally. we believe this allows us agement and product development as explained by former more management scale, as we can run things inde- CEO Eric Schmidt: pendently that aren't very related. Alphabet is about 'Google is run by its culture and not by me . . . It's much businesses prospering through strong leaders and easier to have an employee base in which everybody is independence." doing exactly what they want every day. They're much Observers and analysts were somewhat sceptical to easier to manage because they never have any prob- a restructuring Google and its new name Alphabet.14 lems. They're always excited, they're always working Would it solve the recent challenges the company faced? on whatever they care about . .. But it's a very different Influenced by consumers' movement to smartphones model than the traditional, hierarchical model where with harder to see lower-priced ads, the amount adver- there's the CEO statement and this is the strategy and tisers were prepared to pay click-by-click had been fall- this is what you will do, and it's very. very measured. ing. In addition, people didn't use mobile phones to do We put up with a certain amount of chaos from that." searches to the same extent as on computers, which There were, however, some areas of rigidity built into offered the easiness of full keyboards and screens. the system. One was that of recruitment. With such a Instead of internet searches, people increasingly used highly rated employment brand, Google could afford to apps on mobiles. be choosy. Close to 100 talented applicants chased each Adding to Google's challenges was the fact that adver- job. The pay was competitive but not way ahead of the tisers had not shifted their television ad budgets to competition. However, perks, including free meals, a internet and YouTube at the pace anticipated. YouTube swimming pool and massages, all helped attract employ- accounted for about six per cent of Google's overall sales ees. So too did the 20 per cent of free time engineers in 2014 and had about one billion viewers, but no profit. could spend on their own interests. In return, Google In addition, Facebook and Twitter, which regularly send had rigid recruitment criteria and processes. Engineers traffic to the site, were building video offerings them- had to have either a Masters or Doctorate from a leading selves. Amazon and Netflix were other contenders in the university and pass a series of assessment tests and online video business. interviews. The criteria for these were derived in a highly The meteoric rise of Facebook, which also sold adver- scientific manner. In effect, Google recruited against a tising space, was a third challenge. Google's response psychometric profile of googleness and could therefore had been Google+, which former CEO Eric Schmidt had hire and hopefully retain a fairly predictable employee described as one of Google's most ambitious bets in the population: much easier to manage company's history. However, in 2015, Google+ was slowly but surely dismantled as customers did not appreciate the What It became: Alphabet company's aim to create a platform that unified its differ- ent products. It was then relaunched with an emphasis on In October 2015, Google was restructured and renamed ways to join interest groups or 'Communities' and group Alphabet, a holding company that included the Google posts by topics, called 'Collections'. search company and a range of other businesses. The It seemed that the formation of Alphabet was a company had acquired over 150 companies spending way to make each business able to operate more inde- around $23bn since its IPO in 2004. This included pendently. This could possibly help the company focus companies like YouTube, Android, Doubleclick and Nest. on the search- and advertising-related businesses without Besides all these acquisitions, Alphabet also included the being distracted by all their other businesses and vice semi-secret research and development facility Google X, versa. The change also made the company's structure focused on robotics and artificial intelligence including clearer to investors as the company would report the core the company's driverless car. Larry Page became the CEO Google business results separately in earnings reports. It of Alphabet and Google co-founder Sergey Brin President, could potentially also help manage the company's talent and senior VP Sundar Pichai became CEO of Google. Larry as its various businesses would become more prominent Page argued for forming Alphabet in his blog post: and possibly attractive for employees and new hires. 435CHAPTER 13 STRATEGY DEVELOPMENT PROCESSES In addition, the restructuring could, perhaps, persuade Primary source. B. Girard, The Google Weje How one company & crab- entrepreneurs to sell their businesses to Alphabet as they tonising management as we know it, No Starch Press, 2009. could go on developing them more independently from References Google's search business. 1. Richard Waters, 'Google's Alphabet puzzle is all about perceptions' The effects of forming Alphabet remained to be seen Financial Times, 1 October 2015, http://www.ft.com/cms/s'O'4fad4126- and it was not quite clear what strategy held the diverse 6854 11:5-2571-2166817d973f.html 2. Interview by Nicholas Carlson of Google CEO Eric Schmidt We don't portfolio together, as noted by one observer realy have a five-year plan', Washington Post Leadership series, 20 May Projecting a looser corporate structure, meanwhile, will 2009. raise the question of why Alphabet's collection of busi- 3. Robert Hof, 'The real reasons Google will become Alphabet', Forbes, & October 2015, http:/onforbes/1MZ7120. nesses belongs together. If the only things they share in 4. See also https://www.youtube.com/watch?v-bl4OPCNCsIM. common are the group's ample money and ambition, will this be enough to hold it together? All of this made the evolution of Google into Alphabet Questions feel more like part of a process than a settled corporate 1 Explain how Google's strategy has been structure. developed over the years. But as the Google CEO reminded shareholders: 2 What are the strengths and weaknesses of its "Google is not a conventional company. We do not approach? intend to become one."" 3 In what ways should Google's approach to strategy development change in the future? 436