Alphabet: who and what drives strategy

Case example
Alphabet: who and what drives strategy
Patrick Regnér and Phyl Johnson
From Google to Alphabet to ‘moonshots’ – twists and turns Page and Brin also recruited successful CEO Eric
in Google’s strategy development. Schmidt from Novell Inc. and, between the three of them,
Google is one of the few companies whose main shared power at the top. Schmidt dealt with administra-
product’s name became so synonymous with its primary tion and Google’s investors and had the most traditional
offering that it has become a commonly used verb. CEO role. Page was centrally concerned with the social
Google, which was renamed Alphabet1 in October 2015, structure of Google while Brin took a lead in the area of
had a market capitalisation of $750bn (£450bn; €565bn) ethics based on the Google motto ‘Don’ be evil’: a code
by 2018. It was the dominant player in internet search of conduct applying to customers and employees alike.
globally and had managed to transfer this dominance to
mobile and smartphones (85 per cent world-wide market Google’s early years
share, way ahead of former giant Yahoo’s 4 per cent and
There was a famously unstructured style of operating at
Microsoft’s ‘Bing’ 7 per cent and Chinese Baidu with 1
Googleplex (Google’s HQ) in Mountain View, California;
per cent). Alphabet thus dominated digital advertising,
Eric Schmidt claimed that their strategy was based on trial
way ahead of Facebook, Amazon, Alibaba, Baidu, Twitter
and error:
and others, and the search-related advertising busi-
ness accounted for over 85 per cent of Alphabet’s reve- ‘Google is unusual because it’s really organised
nues. Some outside observers, including investors, were from the bottom up.  .  .  It often feels at Google
concerned over this dominance as their other businesses people are pretty much doing what they think best
in broadband networks, driverless cars, biotech, etc. had and they tolerate having us around.  .  .  We don’t
not yet paid off. Regulators had another perspective on really have a five-year plan. . . We really focus on
Alphabet’s dominance and there were clear political what’s new, what’s exciting and how can you win
threats of regulation. quickly with your new idea.’2

Regarding product development, their approach was

The start-up to launch a part-finished (beta) product, let Google
Google started life as the brainchild of Larry Page and fanatics find it, toy with it, error-check and de-bug it – an
Sergey Brin 1998 when they were students at Stanford imaginative use of end users but also a significant release
University in the USA with the mission ‘Organize the of control. Control of workflow, quality and to a large
world’s information and make it universally accessible and extent the nature of projects underway at any one time,
useful’. Their search engine gained followers and users were down to employees and not management. Google
quickly, attracted financial backing and enabled them to was a famously light-managed organisation.
launch their IPO to the US stock market in 2004, raising a Engineers worked in small autonomous teams and
massive $1.67bn. the work they produced was quality assured using peer
From the very beginning Google was different. Instead review rather than classical supervision or clear strategic
of using investment banks as dictators of the initial share guidelines. Moreover, initially engineers at Google were
price for the IPO, they launched an open IPO auction with allowed to allocate 20 per cent of their work time to
buyers deciding on the fair price for a share. Page sent personal projects that interest them as a means to stim-
an open letter to shareholders explaining that Google ulate innovation and the creation of new knowledge as
was not a conventional company and did not intend to well as potential products. The aim was ‘moonshots’ – big
become one. This continued as Google set up a two-tier and risky ideas and bets with a high likelihood of failure,
board of directors, a usual model in the USA. The advan- but with a small potential to become a huge success.
tage for Page and Brin was the additional distance it Google Maps came out of this way of innovating.
placed between them and their shareholders and the Google was proud of its laissez-faire approach to
increased managerial freedom it offered to them to run management and product development as explained by
their company their way. former CEO Eric Schmidt:

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Chapter 13 Strategy development processes

Google’s strategy development into Alphabet

Alphabet

Calico Google X Fiber

Fights age-related Working on big Providing super-fast

disease breakthroughs internet

Google Ventures Google Capital

Funding for “bold new Invests in long-term

companies” tech trends

Nest Google

“Smart home”
products

Android Search YouTube Apps Maps Ads

Alphabet’s multiple companies and ventures

Source: CNN Money: https://www.google.se/search?q=alphabet+google&rlz=1C1FLDB_enSE578SE578&source=lnms&tbm=isch&sa=X&ved=
0ahUKEwjdntfJhI3SAhVDkiwKHa3VCq4Q_AUICCgB&biw=1152&bih=590#imgrc=wYhkRB24uBoBbM.

‘Google is run by its culture and not by me. . . It’s of googleyness and could therefore hire and hopefully
much easier to have an employee base in which retain a fairly predictable employee population: much
everybody is doing exactly what they want every easier to manage.
day. They’re much easier to manage because they
never have any problems. They’re always excited,
they’re always working on whatever they care Continued growth and expansion:
about. . . But it’s a very different model than the Alphabet
traditional, hierarchical model where there’s the Based on their unorthodox approach Google succes-
CEO statement and this is the strategy and this is sively expanded into a variety of businesses and evolved
what you will do, and it’s very, very measured. We into a very different company compared to the early
put up with a certain amount of chaos from that.’2 years. As Google’s revenues soared new businesses
There were, however, some areas of rigidity built into the were added, and multiple companies were acquired.
system: recruitment. With such a highly rated employ- The company had acquired over 150 companies,
ment brand, Google could afford to be choosy. Close to spending around $23 billion since its IPO in 2004. This
100 talented applicants chased each job. In return Google included companies like YouTube, Android, Doubleclick
had rigid recruitment criteria and processes. Engineers and Nest:
had to have either a Masters or Doctorate from a leading ‘People thought we were crazy when we acquired
university and pass a series of assessment tests and inter- YouTube and Android and when we launched
views. Google recruited against a psychometric profile Chrome, but those efforts have matured into major

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 Alphabet: who and what drives strategy

platforms for digital video and mobile devices and Financial Times before restructuring Larry Page had replied:
a safer, popular browser.’3 ‘I think we’re still trying to figure that out.’6
Eventually Google was restructured and renamed Besides the queries about restructuring into Alphabet
Alphabet in 2015, a holding company that included the the total dominance of online advertising was of concern
Google search company and a range of other businesses. for some investors as ‘other revenue’ businesses did only
Besides all the acquisitions Alphabet included the semi-se- marginally contribute and ‘other bets’ still ran at a huge
cret research and development facility Google X, which loss. They were also worried about a continued political
included the experimental moonshots ventures including and regulatory backlash; the European Union had already
broadband networks, robotics and artificial intelligence. hit Google with a record antitrust fine of € 4.34 billion
Larry Page became the CEO of Alphabet and Google euro ($5 billion) for abusing its dominance. The biggest
cofounder Sergey Brin President, and senior VP Sundar risk was privacy regulation and Alphabet’s monopolistic
Pichai became CEO of Google. Larry Page argued for control over certain segments.7
forming Alphabet in his blog post:6 The meteoric rise of Facebook, which also sold adver-
tising space, was another challenge. Google’s response
‘This newer Google is a bit slimmed down, with the had been Google+, which former CEO Eric Schmidt had
companies that are pretty far afield of our main described as one of Google’s most ambitious bets in the
Internet products contained in Alphabet instead. company’s history. However, Google+ had to be slowly
What do we mean by far afield? Good examples but surely dismantled as customers did not appreciate
are our health efforts: Life Sciences (that works the company’s aim to create a platform that unified
on the glucose-sensing contact lens), and Calico its different products. Yet another advertising concern
(focused on longevity). Fundamentally, we believe was the increased traffic acquisition costs (the money
this allows us more management scale, as we can Google pays to phone manufactures, like Apple) and the
run things independently that aren’t very related. decreased margins for the harder to see lower-priced
Alphabet is about businesses prospering through smartphone ads.5
strong leaders and independence.’4 In addition, advertisers had not shifted their television
The change made the company’s structure clearer to ad budgets to Internet and YouTube at the pace antici-
investors as the company reported the core Google busi- pated and in contrast to expectations there was no sign
ness results separately in earnings reports. It was separ- of profits from the widely popular video sharing service.
ated from an ‘other revenues’ category, which included Facebook and Twitter, which regularly send traffic to the
its cloud business and hardware sales and ‘other bets’, site, were also building video offerings themselves and
which included the moonshots ventures like health- Amazon and Netflix were other contenders in the online
care company Verily, internet service provider Fiber, and video business.
self-driving car company Waymo.5 Although search advertising continued to succeed,
The formation of Alphabet was thus a way to make the effects of forming Alphabet and getting the moon-
each business able to operate more independently; shots to pay off remained to be seen and it was not quite
focusing on the search and advertising related businesses clear what strategy held the diverse portfolio together, as
without being distracted by all the other businesses and noted by one observer:1
vice versa. Some saw it as a way to increase discipline ‘Projecting a looser corporate structure, meanwhile,
in the ‘other businesses’ categories with more focus on will raise the question of why Alphabet’s collection of
profits over innovation. Others emphasised the impor- businesses belongs together. If the only things they
tance for talent management and recruiting and persua- share in common are the group’s ample money and
sion of entrepreneurs to sell their businesses to Alphabet ambition, will this be enough to hold it together?
as they could go on developing them more independently All of this made the evolution of Google into
from Google’s search business. Alphabet and further feel more like part of a process
than a settled corporate structure. But as the Google
CEO reminded shareholders: “Google is not a conven-
The future tional company. We do not intend to become one.”’
Observers and analysts had been somewhat sceptical when
Google was restructured into Alphabet.1 What was the Other sources: L. Rao, Google gets disciplined, Fortune, 15 September
2016 and B. Girard, The Google Way: How one company is revolu-
purpose, and would it solve the challenges the company tionising management as we know it, No Starch Press, 2009. See also:
faced? In fact, when asked about Alphabet’s mission in the www.youtube.com/watch?v=blAOPCNCszM.

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Chapter 13 Strategy development processes

Questions 3. Alphabet 2017 filing with the US Securities and Exchange

Commission.
1 Explain how Google’s strategy has been developed 4. Robert Hof, ‘The Real Reasons Google will become Alphabet’,
Forbes, 8 October 2015: http://onforb.es/1MZ7T2Q
over the years. 5. J. D.’Onfro, ‘Alphabet jumps after big earnings beat’, CNBC.com,
July 2018.
2 What are the strengths and weaknesses of its
6. R. Waters, FT interview with Google co-founder and CEO Larry
approach? Page, Financial Times, 31 October 2014.
7. R. Waters, ‘For Google all road lead back to search’, Financial Times,
3 In what ways should Google’s approach to strategy
30 October 2018.
development change in the future?

References
1. Richard Waters, ‘Google’s Alphabet puzzle is all about percep-
tions’, Financial Times, 1 October 2015: www.ft.com/cms/s/0/
4fad4fa6-6854-11e5-a57f-21b88f7d973f.html#ixzz3x4wOrBq3
2. Interview by Nicholas Carlson of Google CEO Eric Schmidt: ‘We
Don’t Really Have A Five-Year Plan’, Washington Post Leadership
series, 20 May 2009.

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