The new structure separates Google’s “bread and butter” businesses like Google Search and YouTube from riskier or non-core ventures like GoogleX and Google Capital. That makes shareholders happy, as The Economist writes: “The new corporate structure could help streamline Google’s businesses and make shareholders calmer about how much Google is spending on its “moonshot” projects.”
What does Google’s move say about the need for companies today to think differently about their approach to strategy and execution?
In “Your Strategy Needs a Strategy” we make the argument that one approach to strategy and execution doesn’t fit all situations. Based on our research, we conclude that successful companies need to select the right approach for each part of the business – and must modulate this collage of approaches as circumstances change.
Google’s move helps bring this idea to life. Google’s move is driven by the diversity and dynamism of the business environments it faces. By creating Alphabet, Google has fostered ambidexterity — the ability to explore new practices, products and business models and exploit existing ones at the same time.
1. An umbrella structure makes it easier to both experiment and protect brands.
Have you noticed how internet companies sometimes call nearly everything new “beta,” even after it has proved marketable? Essentially, this can serve as a “disclaimer” that these companies put on new and potentially risky projects to label them as early-stage. In effect, they downplay the riskiness of a new venture in order to “protect” its core brand. In contrast, the new structure allows for unabashed experimentation without risking the core brand.
For example, imagine that a self-driving car (or some other bold venture) should cause a fatal accident in the first weeks of its launch. This horrific outcome would surely affect the auto vertical, but would have minimized the effect on the core search brand. On the other hand, success in the car venture could bring positive shine on the other verticals. The new structure allows them to act small while staying big.
2. The new structure lowers the hurdles to acquiring and growing companies.
The new company structure makes forming and buying new companies a lot easier, too. Transparent reporting will give shareholders what they are looking for. And a modular structure means that integration challenges are minimized. Forming, buying and selling subsidiaries are hallmarks of experimentation by acquisition. An umbrella structure increases a tech company’s M&A “ambidexterity” – it increases its flexibility and agility.
3. It allows subsidiaries to develop and deploy the environment-specific capabilities they need.
Many tech companies have innovation and engineering driven cultures typical of start ups. Many now have multi-billion dollar core businesses however. As some of Google’s businesses like AdWords mature, a different approach to strategy and execution may be needed. As the market leader in online advertisement, AdWords may need to follow a more classical approach to strategy, with greater emphasis on planning, scale economies and business model optimization.
Google, now Alphabet, restructured its organization to realize an ambidextrous approach to its business, potentially benefitting both its moonshot projects, its nascent businesses and its mature core business. Google’s move is part of a broader trend towards the “fission” of bloated business structures, as evidenced by the increasing incidence of corporate splits and spins. While other factors, like tax and capital allocation, have certainly also played a role, the need to apply more tailored approaches to strategy and implementation in a more diverse and dynamic business environment has been a key driver.
To learn more about ambidexterity and the art of balancing exploration and exploitation, visit the interactive feature Atlas of Strategy Traps. To learn about ways to build ambidexterity into corporate strategy, read “Your Strategy Needs a Strategy” (Harvard Business Press, 2015).
Martin Reeves is a Senior Partner and Managing Director at Boston Consulting Group and Director of the Bruce Henderson Institute. He is also co-author of Your Strategy Needs a Strategy: How to Choose and Execute the Right Approach (Harvard Business Review Press, 2015).