Senior Partner & Managing Director; Director of the BCG Henderson Institute
Related Expertise Growth,
When Google announced the creation of Alphabet, its new umbrella organization that separates Google’s bread-and-butter businesses such as Google Search and YouTube from riskier or noncore ventures such as Google X and Google Capital, shareholders rejoiced. As Todd Zenger writes in his recent HBR piece, “Why Google Became Alphabet,” investors had been somewhat uneasy with Google’s approach of mixing unrelated investments, acquisitions, and businesses, because it appeared to limit transparency, accountability, and discipline. There were also branding benefits to the change, as Kevin Lane Keller explained in another article.
But let’s think about Google’s move from a strategic perspective: What does the creation of Alphabet tell us about the company’s strategic motives?
Alphabet, Larry Page writes on abc.xyz—Alphabet’s new URL—stands for two things: first, a collection of letters that represent language, the substrate for Google’s indexed search results (the company’s mature business). Competitiveness in such businesses is usually driven by scale, efficiency, and incremental improvements to stay relevant.
But Alphabet also stands for alpha bets—that is, bets on alpha (investment returns above a benchmark). “Betting on alpha” refers to investing in projects that may have a low probability of success but also a very significant upside. Project Loon is such a moon shot project, providing Internet access to remote regions by equipping balloons with wireless capabilities.
Page’s distinction brings to life the idea of strategic ambidexterity: a company’s ability to explore new practices, products, and business models while exploiting existing ones at the same time—a capability that is both remarkably valuable and equally hard in practice.
As we write in Your Strategy Needs a Strategy, successful companies in today’s diverse and dynamic business environments do exactly that: they select the right approach to strategy and execution for each part of the business—and animate the resulting collage of approaches as circumstances change or each business evolves.
So what can strategy makers learn from Alphabet’s example? Alphabet’s new structure achieves three main things:
1. It allows each unit to deploy the right approach to strategy and execution. Many tech companies have innovation- and engineering-driven cultures typical of nimble, improvisatory start-ups. Many have already built maturing, multibillion-dollar core businesses, however. As parts of a business portfolio grow and develop, different approaches to strategy and execution may be needed. As the market leader in online advertisement, Google AdWords may need to follow a more classical approach to strategy, with greater emphasis on planning, scale economies, and business model optimization, whereas pioneering businesses may need to employ a visionary approach that stresses speed and persistence in recognizing and addressing an unmet need with a novel product or business model. Fast changing, unpredictable, embryonic businesses may require an adaptive approach that stresses rapid iterative experimentation and organizational flexibility. And some businesses may present an opportunity to deploy a shaping approach in which an orchestrating company builds a collaborative ecosystem around a shared platform. Attempting to apply a single approach to strategy and execution to these very different situations compromises competitiveness and performance.
2. It makes it easier to build the required capabilities in each business. In order to effectively apply different strategic approaches in different business environments, a company needs also to be able to support each with appropriately differentiated capabilities and culture. The discipline and efficiency focus of classical businesses engender very different needs compared with devolved, free-wheeling, adaptive ones, for example.
With its notorious appetite for hiring engineers and computer scientists, its famous “20% time” policy (which allowed employees to take one day a week to work on side projects), and its campus-based community approach, Google has created a highly distinctive culture.
The new modular approach to strategy and organization realized by Alphabet allows it to vary that unique recipe according to the needs of each business. Visionaries, risk takers, and engineering geniuses may fit better with moon shot companies, and disciplined doers, optimizers, and commercial types with their more mature businesses, for example. It also allows Google to employ different leadership styles and develop different cultural variations for each.
3. It lowers the hurdles to acquiring and growing companies. An umbrella organization makes forming and buying new businesses 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 flexibility and agility to reshape its portfolio of bets.
Google, now Alphabet, restructured its organization to realize an ambidextrous approach to its business, potentially benefiting both its moon-shot 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, such as tax and capital allocation, have undoubtedly also played roles, the need to apply more tailored approaches to strategy and implementation in a more diverse and dynamic business environment has been a key driver. “Separation” is not the only approach to achieving ambidexterity, but it is a very effective one for a business portfolio of moderate complexity and dynamism.