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Case 12 Google Is Now Alphabet— But What’s the Corporate Strategy?*
On August 10, 2015, Google’s CEO, Larry Page, announced that Google Inc. would become Alphabet Inc., a holding company of which Google (comprising the compa- ny’s search and internet businesses) would be the biggest operating company. Extracts of the announcement are reproduced in Exhibit 1.
The creation of Alphabet was widely viewed as Google’s top management finally conceding to investors’ demands for greater transparency by separating Google’s pri- mary source of profits, its search business, from Google’s other businesses. It was also a confirmation by Google’s founders, Larry Page and Sergey Brin, that their company was no longer simply a search company. The announcement reaffirmed the company’s commitment to developing and commercialization of revolutionary technologies. This quest had already led Google beyond search, beyond the provision of information, and beyond software into mobile devices, home appliances, life sciences, self- driving cars, broadband services, digital eyewear, and a host of other ventures.
Soon after its founding, Google had proclaimed “Ten Things We Know To Be True”— a set of business principles that would guide the company’s development. Second on the list was, “It’s best to do one thing really, really well,” to which the response was: “We do search.”1
By 2012, five years after establishing its new identity, it was clear that Alphabet was no longer a search company. But what was it?
Founders Brin and Page had consistently emphasized that the essence of their company was applying technology to improving the lives of people. Page had declared, “The societal goal is our primary goal,” the challenge being to: “. . . use all these resources . . . and have a much more positive impact on the world?”2
If Alphabet was to be described by technology— then which technologies? From the beginning, Google/Alphabet has been about algorithms— initially, its PageRank algorithm, but increasingly artificial intelligence algorithms that model the functioning of the human brain. By combining machine learning and artificial intelligence, Alphabet has identified areas where machine intelligence can be superior to human intelligence. The scope of these applications— from autonomous driving to medical diagnosis, to facial recognition, to education— seems limitless.
The diversity of Alphabet’s business and technology initiatives also fueled suspi- cions about the motives of the founders, Brin and Page. Despite their proclamations to pursue the good of society and to “do no evil,” it seemed to some that Google was locked in battle with Apple, Amazon, Facebook, and Microsoft for the control of cyberspace.
* This case was prepared by Robert M. Grant. ©2021 Robert M. Grant.
Case 12
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CASE 12 GOOGLE IS NOW ALPHABET— BUT WHAT’S THE CORPORATE STRATEGY? 463
Investors’ perceptions of Alphabet were shaped more by its financial performance than by its technology. Given that advertising accounted for more than 80% of revenues and all of its operating profit: “Alphabet is essentially an advertising company.”3 Most of Alphabet’s businesses that did not carry advertising were sources of information that could be utilized to better target advertising.
The confusion over Alphabet’s corporate strategy was no recent phenomenon. In 2009, San Jose the Mercury News observed:
Google increasingly feels like a company running in a thousand different directions at once . . . The problem is that in expanding into so many different areas, the identity of Google itself has become muddled . . . it’s getting harder every day to articulate what Google is. Is it a Web company? A software company? Something else entirely?4
Although comparisons have been made with other diversified giants— the Economist proclaimed Alphabet to be “the new General Electric” and Alphabet’s Chairman Eric Schmidt likened it to Berkshire Hathaway— ultimately, it seemed that Alphabet truly was “a different kind of company.”5
EXHIBIT 1
Google Announces Plans for New Operating Structure August 10, 2015
As Sergey and I wrote in the original founders’ letter 11
years ago, “Google is not a conventional company. We
do not intend to become one.” . . . From the start, we’ve
always strived to do more, and to do important and
meaningful things with the resources we have.
We did a lot of things that seemed crazy at the time.
Many of those crazy things now have over a billion
users, like Google Maps, YouTube, Chrome, and Android.
And we haven’t stopped there. We are still trying to do
things other people think are crazy but we are super
excited about.
We’ve long believed that over time companies tend
to get comfortable doing the same thing, just making
incremental changes. But in the technology industry,
where revolutionary ideas drive the next big growth
areas, you need to be a bit uncomfortable to stay relevant.
Our company is operating well today, but we think
we can make it cleaner and more accountable. So we
are creating a new company, called Alphabet. I am really
excited to be running Alphabet as CEO with help from
my capable partner, Sergey, as President.
What is Alphabet? Alphabet is mostly a collection of
companies. The largest of which, of course, is Google.
This newer Google is a bit slimmed down, with the com-
panies that are pretty far afield of our main internet prod-
ucts contained in Alphabet instead. What do we mean
by far afield? Good examples are our health efforts: Life
Sciences (that works on the glucose- sensing contact
lens), and Calico (focused on longevity). Fundamentally,
we believe this allows us more management scale, as we
can run things independently that aren’t very related.
Alphabet is about businesses prospering through
strong leaders and independence. In general, our model
is to have a strong CEO who runs each business, with
Sergey and me in service to them as needed. We will rig-
orously handle capital allocation and work to make sure
each business is executing well. We’ll also make sure we
have a great CEO for each business . . .
Larry Page, CEO, Alphabet
Source: Larry Page, Google Announces Plans for New Operating Structure. Retreive from https://abc.xyz/investor/news/ releases/2015/0810.html, accessed March 21, 2018.
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464 CASES TO CONTEMPORARY STRATEGY ANALYSIS
The History of Google, 1996–2021
The Google Search Engine
Larry Page and Sergey Brin met as Ph.D. students at Stanford University. Their PageRank algorithm was the basis of their search engine “Google” and, in September 1998, Google Inc. was founded.
Among the early web search engines such as WebCrawler, Lycos, Excite, Infoseek, Inktomi, Northern Light, and AltaVista, Google attracted a rapidly growing follow- ing because of its superior page ranking and simple design. In 2000, Google began selling advertisements— paid web links associated with search keywords. Its AdWords placed “sponsored links”— brief, plain text ads with a click- on URL— which appeared alongside web search results for specific keywords. Advertisers bid for keywords; it was these “cost- per- click” bids weighted by an ad’s click- through rate (CTR) that determined the order in which the paid listings would appear. By 2004, Google became the US market leader in web search; between 2010 and 2021, its share of web search fluctuated between 85% and 91%.
Google became a public company on August 19, 2004. However, founders Brin and Page retained control by owning 51% of shareholder votes.
Organizing the World’s Information
Google’s expansion beyond web search was a reflection of its mission “to organize the world’s information and make it universally accessible and useful.” Google’s IPO pro- spectus elaborated this intent:
We serve our users by developing products that enable people to more quickly and easily find, create and organize information. We place a premium on products that matter to many people and have the potential to improve their lives, especially in areas in which our expertise enables us to excel.
Search is one such area. People use search frequently and the results are often of great importance to them. Delivering quality search results requires significant computing power, advanced software and complex processes— areas in which we have expertise and a high level of focus.6
Between 2001 and 2006, Google launched a series of new products that allowed access to information from diverse sources. These included images (Google Image Search), maps (Google Maps), academic articles (Google Scholar), books (Google Book Search), satellite imagery (Google Earth), street photographs (Google StreetView), news (Google News), patents (Google Patents), video (YouTube), finance (Google Finance), weblogs (Google Blog Search), and many more.
However, Google’s entrepreneurial and technological dynamism led it well beyond the accessing and organizing of information. Beginning with Gmail in 2004, Google introduced a widening array of software and services for communicating, creating and manipulating images, producing documents, creating web pages, managing time, and social networking.
These new products expanded Google’s advertising revenues by providing addi- tional opportunities for carrying ads and improving Google’s ads targeting. Google’s primary source of advertising revenue was AdWords, launched in 2000. Advertisers
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CASE 12 GOOGLE IS NOW ALPHABET— BUT WHAT’S THE CORPORATE STRATEGY? 465
specify the keywords that should trigger their ads and the maximum amount they are willing to pay per click. When a user searches google.com, short text advertisements appear on the screen. The rank ordering of ads is determined by advertisers’ cost- per- click bid and the “ad quality” (its relevance to the user). The advertiser then pays Google according to the number of clicks on the advertisement.
AdSense uses an advertisement placement technology developed by Applied Seman- tics (acquired in 2003) that allows Google to place ads on third- party websites. Table 1 shows Alphabet’s revenues from advertising and other sources.
In 2007 and 2008, Google’s diversification efforts took a dramatic new turn with Google’s entry into mobile telephony and web browsers.
Android and Mobile Telephony
Google acquired Android Inc. in 2005 and in November 2007 launched the development of its Android software platform, a Linux- based operating system for mobile devices. According to Google: “Android is being developed . . . with the goal of providing con- sumers a less expensive, richer and more powerful mobile experience.”7 Most observers thought that Google’s primary concern was the threat that the shift from desktop to mobile devices posed to Google’s advertising revenues.
Android was a spectacular success: in establishing market leadership (Table 2), it prevented Apple from dominating the smartphone and tablet market. By offering Android as a free, open- source, mobile operating system, it was able to attract a large number of handset manufacturers (the most important being Samsung) and an army of application developers— at the end of 2020 there were 3 million Android apps available on Google Play.
TABLE 1 Alphabet’s revenue sources, 2008–2017 ($bn.)
2020 2019 2018 2017 2016 2015 2014 2013 2012
Google Search 104.1 98.1 85.3 69.8 63.8 52.4 45.1 37.4 31.2
YouTube ads 19.8 15.1 11.2 8.2
Google network members’ properties 23.1 21.5 20.0 17.6 15.6 15.0 14.0 13.1 12.5
Google total advertising revenue 146.9 134.8 116.5 95.6 79.4 67.4 59.6 51.1 46.0
Google othera 21.7 17.0 14.1 10.9 10.1 7.2 6.9 5.0 2.4
Google Servicesb 168.6 151.8 130.5 110.5 79.4 67.4 59.6 51.1 46.0
Google Cloud 13.1 8.9 5.8 4.1 n.a. n.a. n.a. n.a. n.a.
Other Bets revenuesc 0.7 0.7 0.6 1.2 0.8 0.4 n.a. n.a. n.a.
Total revenuesd 182.5 161.9 136.8 110.9 90.3 75.0 66.0 55.5 46.0
Notes: a Includes revenues from Google Cloud prior to 2017. b Google advertising revenues prior to 2017. c Revenues from Other Bets were included in Google Services revenues prior to 2015. d Includes gains and losses from hedging. Source: Modified from Google Inc. and Alphabet Inc. 10- K reports, 2017.
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466 CASES TO CONTEMPORARY STRATEGY ANALYSIS
Chrome
Google’s Chrome web browser announced on September 2, 2008 generated huge pub- licity, but little surprise. Sundar Pichai, then Google’s head of product development, explained: “Google’s entire business is people using a browser to access us and the web.” Google’s website added: “Google Chrome is a browser that combines a minimal design with sophisticated technology to make the web faster, safer, and easier.” By contrast, Microsoft’s Internet Explorer (IE) was constrained by the legacy of its 15- year history.
Google’s goal for Chrome was not simply a superior user experience. Version 8 of Microsoft’s IE launched in 2008 allowed an “InPrivate” protection mode that would delete cookies, making it more difficult to track users’ browsing habits. This would limit Google’s ability to use such information to target consumers with advertising.
Others saw Google’s primary intention as, not so much to protect its search engine, but more to attack Microsoft’s dominance of personal computing and to speed the transition of computing to a new online environment. Wired magazine viewed it as: “an aggressive move destined to put the company even more squarely in the crosshairs of its rival Microsoft.”8
The announcement 10 months later that Google would add an operating system to its Chrome browser reinforced the impression that Google was increasingly locking horns with Microsoft.
Google in Hardware
As internet access transitioned toward mobile devices, Google sought to reinforce its proprietary technology in that sphere. Since 2010, Google has marketed and distributed smartphones under the Nexus and Pixel brands. HTC, LG, and Samsung have manufac- tured these phones. Its acquisition of the struggling handset maker Motorola Mobility in 2012 for $12.5 billion was primarily to acquire its rich portfolio of patents relating to wireless communication. After selling Motorola to Lenovo in 2014, Google continued to develop and market its Pixel brand of smartphones (built by HTC) and a range of notebook and tablet computers based upon its Chrome operating system.
TABLE 2 Shipments of smartphones: Market share by operating system
2020 2018 2015 2013 2011
Android (Google) 84.8% 86.1% 78.0% 75.5% 36.1%
iOS (Apple) 15.2% 13.7% 18.3% 15.9% 18.3%
Blackberry OS (RIM) 0.0% n.a. 0.3% 2.9% 13.6%
Windows (Microsoft) 0.0% n.a. 2.7% 3.2% 2.6%
Other 0.0% 0.2%b 0.7% 1.5% 29.4%c
Total 100.0% 100.0% 100.0% 100.0% 100.0%
Notes: a The data are for the first quarter of each year. b Includes Blackberry and Windows. c In 2011, “Other” comprised Symbian with 26.0%, Linux with 3.1%, and other systems 0.3%. Source: Modified from IDC, Smartphone Market Share, Apr 2021.
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CASE 12 GOOGLE IS NOW ALPHABET— BUT WHAT’S THE CORPORATE STRATEGY? 467
Subsequent diversifications also increased Google’s involvement in hardware:
●● Google Glass is an internet- enabled, optical display built into a set of spectacles, was introduced in 2013 and marketed on an experimental basis.
●● With the acquisition of Nest in January 2014, Google became a supplier of home security and control devices— including thermostats and smoke detectors. Google Home’s smart speaker business was merged into Nest, and Nest broad- ened its range of security and entertainment cameras in order to build Google’s position in the “smart home.” Google Assistant, an AI-powered virtual assistant supporting two- way conversations, formed an integral part of Google’s smart home initiative.
By 2021, individual products, notably its smart speakers, had achieved notable success. However, in connected devices for home security and climate control, Nest had achieved limited market penetration. Google halted the development of its operating system for connecting devices, Android Things, early in 2021.
●● Google’s Chromecast is a plug- in connected device to a TV. Chromecast com- plements Google TV’s video on-demand service that allows viewers to select movies and TV shows from Disney, Amazon, and others.9
●● The acquisition of Fitbit (concluded in January 2021) provided Google with a well- established position in the digital wearables market and access to a massive stream of biometric data.10
Social Networking
Google’s forays into social networking were defensive moves aimed to counter Face- book’s growing online presence and its growing share of online advertising:
If you were an advertiser, who would you rather place your ads with? On the one hand, you have a company that will attempt to gear ads to things like the search his- tory of users. On the other hand, you have a company that knows where its users went to college, where they work, who they are friends with, what they’re reading and sharing, and their favorite bands, books, foods, and colors. Advertisers want to target their ads to the people most likely to be receptive to them, and information is the key to targeting. The more information available, the better the targeting.11
However, all four of the social networks launched by Google (Orkut, 2004; Google Friend Connect, 2008; Google Buzz, 2010; and Google+, 2011) failed to dent Facebook’s dominance.12 In 2019, Google took a different tack: Shoelace, launched only in New York City, was an experimental “hyperlocal” social network— it was closed the following year.13
Cloud Services
The launch of Google Cloud Platform in 2008 involved Google extending to third-party customers the infrastructure hardware and services that it used in its own data centers to run its end-user products. Since its launch, Google Cloud Platform has extended its product range to include storage and database services, computing services, big data services, an application programming interface, identity and security support, and other cloud-based services. In 2016, Google’s G Suite productivity applications—Gmail, Docs, Drive, Calendar, and Meet—were added to Google’s cloud platform to create Google Cloud.
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468 CASES TO CONTEMPORARY STRATEGY ANALYSIS
Google has sought to differentiate its cloud offerings through emphasizing its soft- ware strengths, particularly in big data and artificial intelligence. However, despite strong revenue growth, it lags far behind Amazon Web Services and Microsoft Azure in both market share and profitability.14
Other Bets
The restructuring of Google Inc. into Alphabet Inc. provided a powerful signal of the breadth of the company’s ambitions and its willingness to take on risk (“alpha-bets”). These “other bets”—as Alphabet referred to its non-Google businesses—include the following (among others):
●● Waymo began as a self-driving car project in 2009. By 2015, Google was testing fully autonomous cars on public roads in five states. In 2016, Waymo LLC was established as a subsidiary of Alphabet; in 2020 it raised $3 billion in external investment.
●● Life sciences ventures included Alphabet subsidiaries Verily and Calico. Verily engages in bioelectronics research developing wearable and portable devices and surgical robotics. It has also launched a health insurance venture backed by Swiss Re. Calico’s mission is “to harness advanced technologies to increase our understanding of the biology that controls lifespan.” Through R&D alliances with AbbVie, C-4 Therapeutics, and other organizations, it has developed drugs for treating cancer and other conditions.
●● Broadband. Alphabet’s Access subsidiary combines several broadband projects directed at expanding access to the internet. Its principal business is Google Fiber, which offers broadband and TV service in 19 US cities. It also includes Webpass, a gigabit internet provider acquired in 2016.
●● DeepMind Technologies is a UK-based organization engaged in cutting-edge research into artificial intelligence and its applications to computer science, neu- roscience, engineering, and public policy.
●● X is Google’s “moonshot factory,” an incubator for developing experimental technologies: “X is perhaps the only enterprise on the planet where regular investigation into the absurd is not just permitted but encouraged, and even required.”15 In its 2020 annual report, Alphabet reaffirmed its commitment to working at the frontiers of technology:
Many companies get comfortable doing what they have always done, making only incremental changes. This incrementalism leads to irrelevance over time, especially in technology, where change tends to be revolutionary, not evolutionary.16
Projects at X that have “graduated” into commercial undertakings include:
○○ Project Loon—high-altitude balloons providing internet connectivity in areas lacking broadband infrastructure;
○○ Project Wing—package delivery via airborne drones;
○○ Malta—storing renewable energy in molten salt;
○○ Dandelion—geothermal energy for home heating;
○○ Chronicle—a cybersecurity intelligence and analytics platform that helps companies to detect and counter hackers and cybercriminals.
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CASE 12 GOOGLE IS NOW ALPHABET— BUT WHAT’S THE CORPORATE STRATEGY? 469
Current projects include:
○○ Mineral—unlocking the genetic diversity of the world’s 30,000 edible plant species to identify plant species and varieties that can thrive under the pressure of climate change;
○○ Tidal—developing a system of cameras, sensors, and machine percep- tion tools to improve the management of fish farms through improvements to feeding systems, identification of pests, monitoring of fish health, and providing a better understanding of events beneath the waves;
○○ Everyday Robots—developing a robotic system that can operate autono- mously in unstructured human environments;
○○ Taara—using beams of light to deliver high-speed connectivity over long distances to areas lacking broadband access.17
●● Venture Capital. Google Capital was established in 2013 to make late-stage venture capital investments in technology companies. In 2016 it was renamed GoogleG. The companies it invests in have access to technological and strategic advice from Alphabet’s executives and engineers. Its investments include Survey Monkey, Lending Club, Airbnb, Snap, Stripe, Robinhood, Databricks, and Lyft. Google Ventures—renamed GV in 2015—is Alphabet’s other venture capital subsidiary. It provides early-stage investment to companies in life sciences, artificial intelligence, robotics, and cybersecurity.
Alphabet’s Management and Capabilities
In Alphabet’s holding company structure, each subsidiary is a separate legal entity with its own CEO and a high level of decision-making autonomy (see Figure 1). The parent company, Alphabet Inc., has limited functions and lacks the corporate staff typical of diversified, multidivisional companies such as Procter & Gamble or General Electric. Alphabet’s parent company functions are limited to overall financial control, legal mat- ters, and shareholder relations. Operational and strategic decision- making lies almost entirely within the operating companies. This structure allows considerable flexibility: new businesses (either acquisitions or “graduates” from X) can be added, businesses can be spun off, and external equity capital can be tapped.
A l p h a b e t I n c . (parent company)
G o o g l e
Google Search
Google Ads
Google Maps
Android Google Cloud
You Tube
Nest
Waymo LLC
DeepMind Technologies
Ltd.
Verily LLC
Calico LLC
Access LLC
Webpass LLC
X
Sidewalk Labs LLC
Wing LLC
Fiber LLC
Hardware
Capital G
GV
O T H E R B E T S
FIGURE 1 Alphabet Inc.: Organization structure
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470 CASES TO CONTEMPORARY STRATEGY ANALYSIS
While the holding companies are a highly traditional structure for diversified companies— even if they are uncommon in the technology sector— Google’s management system is unique, even by the unorthodox standards of Silicon Valley. Some of its key features include:
●● Hiring policy: From its earliest days, Google committed itself to hiring only the “brightest of the bright.” Google’s targets were not simply the highly intelligent. They were “smart creatives”— people who were “not confined to specific tasks . . . not adverse to taking risks . . . not hemmed in by role definitions . . . don’t keep quiet when they disagree . . . get bored easily and shift jobs a lot . . . combine technical depth with business savvy and creative flair.”18 As founders Page and Brin explained: “Our employees, who have named themselves Googlers, are everything. Google is organized around the ability to attract and leverage the talent of exceptional technologists and business people . . . Because of our employee talent, Google is doing exciting work in nearly every area of computer science . . . Talented people are attracted to Google because we empower them to change the world.”19
●● A “dramatically flat, radically decentralized” organization: Google structure and systems were designed around the simple notion of “What do smart cre- atives need in order to be productive?” The answer was primarily about the aspects of traditionally managed organizations that should be avoided: authority, rules, formality, defined job roles, and hierarchical privileges. Google was a flat organization because its smart creatives needed easy access to key decisions in order to get things done. To minimize hierarchy, Google used a “rule of seven”: each manager must have at least seven direct reports.
●● Small, self- managing teams: Most of Google’s employees, including all those involved in product development, worked in small teams. Most engineers were in teams of three or four. Team size was limited by the “two- pizza rule”— teams should be small enough to be fed by two pizzas. Teams appointed their own leaders, and engineers could switch teams without the need for permission from the HR department.
●● An environment that fosters creativity: For employees to be productive, they required a working environment that stimulated and fostered their interaction. Google’s workplaces were designed to minimize separation among colleagues. Google’s opulent eating and sports facilities were similarly designed to increase human interaction. Creativity and innovation were institutionalized through Google’s “70–20–10” rule, which stipulated that Google would devote 70% of its engineering resources to developing the core business, 20% to extend that core into related areas, and 10% allocated to fringe ideas. As a result, Google employees were able to spend time working on pet projects of their own choosing.
●● Rapid, low- cost experimentation: According to Gary Hamel: “Evolutionary adaptation isn’t the product of a grand plan, but of relentless experimenta- tion . . . Google’s ‘just- try- it’ philosophy is applied to even the company’s most daunting projects, like digitizing the world’s libraries . . . That kind of step- wise, learn- as- you- go approach has repeatedly helped Google to test critical assump- tions and avoid making bet- the- farm mistakes.”20
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CASE 12 GOOGLE IS NOW ALPHABET— BUT WHAT’S THE CORPORATE STRATEGY? 471
TABLE 3 Alphabet Inc.: Selected financial data, 2012–2020 ($ bn.)
2020 2019 2018 2017 2016 2015 2014 2013 2012
Income statement items
Revenues 182.5 161.9 136.8 110.9 90.3 75.0 59.1 50.5 43.7
Cost of revenues 84.7 71.9 59.5 45.6 35.1 28.2 25.7 22 17.2
R&D 27.6 26.0 21.4 16.6 13.9 12.3 9.8 7.1 6.1
Sales and marketing expense 17.9 18.5 16.3 12.9 10.5 9.0 8.1 6.6 5.5
General and admin. expense 11.1 9.6 6.9 6.9 7.0 6.1 5.9 4.4 3.5
Income from operations 41.2 34.2 27.5 26.1 23.7 19.4 16.5 15.4 13.8
Other income 6.9 5.4 7.4 1.0 0.4 0.3 0.8 0.5 0.6
Income before income taxes 48.1 34.3 30.7 27.2 24.2 19.7 17.3 15.9 14.5
Net income 40.2 34.3 30.7 12.7 19.5 16.3 14.4 12.9 10.7
Balance sheet items
Cash and marketable securities 136.7 119.7 109.1 101.9 86.3 73.1 64.4 58.7 48.1
Total assets 319.6 275.9 232.8 197.3 167.5 147.5 129.2 109.1 93.8
Long- term liabilities 40.2 28.2 20.5 20.6 11.7 7.8 9.8 7.7 7.7
Total stockholders’ equity 222.5 201.4 177.6 152.5 139.0 120.3 104.5 87.3 71.7
Source: Modified from Alphabet Inc. 10- K reports, 2017.
Underlying Alphabet’s capacity for innovation and effective implementation of new initiatives was a set of resources that few other technology- based companies could match. With an operating cash flow of $65 billion in 2020 and a cash pile of $137 billion, Alphabet was a financial powerhouse that could buy its way into almost any market or area of technology. (Table 3 shows financial data for Alphabet.) How- ever, most of the time it was content to make small acquisitions. Owning one of the world’s most valuable brands (Google) and the world’s two most visited websites (google.com and youtube.com), Alphabet commanded attention in any market it chose to enter.
Despite the flexibility benefits of Alphabet’s holding company structure, would lack of integration undermine the organizational capabilities that had made the company so successful? Commenting on the transition from Google to Alphabet, the Financial Times observed: “Further down the organization, life gets more compartmentalized. It is not obvious that working in a silo at Company XYZ, ‘an Alphabet subsidiary’, is as attractive as working on complex issues across today’s Google.”21 Two years later, Fortune confirmed these fears, noting that the creation of Alphabet has “changed what it means to work for Google. Some grumble that their role now is to subsidize innovation at their sister companies, rather than to innovate themselves. . . . That’s a striking shift, especially for high- performing employees accustomed to moving about the company almost at will.”22
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472 CASES TO CONTEMPORARY STRATEGY ANALYSIS
The Future of Alphabet
Google’s reincarnation as Alphabet established that Google was no longer a search company, but failed to articulate what Google had become: Alphabet’s “strategy remains as opaque as ever,” and lack of strategic clarity may translate into loss of “coherence, insight, and resilience.”23
Undermining Alphabet’s pronouncements concerning its technological ambitions, the fact remained that none of its “Other Bets” had achieved significant commercial success.
The dire financial performance of Alphabet’s Other Bets (see Table 4) reinforced the tensions between Alphabet’s technological ambitions and its responsibilities to inves- tors. These tensions have contributed to the high turnover of senior managers in the Other Bet companies:
They signed up with the promise of being CEOs running their own startups, but were instead constrained from the top by Alphabet’s CFO Ruth Porat, who con- trolled funding, as well as by the whims of Google cofounders Larry Page and Sergey Brin . . . The vision of Alphabet was to create nimble startups. Still, many of the entre- preneurs tasked with leading these startups concluded that they had better prospects of accomplishing their goals outside Alphabet than within.24
During 2019 and 2020, employee dissatisfaction became more widespread within Alphabet. Employee complaints included bullying, sexual harassment, lack of commit- ment to diversity, and unethical practices. The rising tide of discontent culminated in the formation of the Alphabet Workers Union in January 2021 by a group of Google employees.25
In addition to the problems arising from increasing size and— by 2021, Alphabet had more than 135,000 employees— the company was also facing increasing external pressures.
TABLE 4 Alphabet Inc.: Financial results of business segments, 2018–2020
2020 2019 2018
Revenues
Google Services 168,635 151,825 130,524
Google Cloud 13,059 8918 5838
Other Bets 657 659 595
Total revenues 182,527 161,857 136,819
Operating income (loss)
Google Services 54,606 48,999 43,137
Google Cloud (5607) (4645) (4348)
Other Bets (4476) (4824) (3358)
Corporate costs (3299) (5299) (7907)
Total operating income 41,224 34,231 27,524
Source: Modified from Alphabet Inc. 10- K reports, 2017.
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CASE 12 GOOGLE IS NOW ALPHABET— BUT WHAT’S THE CORPORATE STRATEGY? 473
Concerns over Google’s market power had resulted in antitrust actions in the European Union, United States, and several other countries. In 2017, the European Commission imposed a fine of €2.42 billion for anticompetitive practices regarding Google’s display and ranking of shopping search and, in 2018, a €4.3 billion fine for anticompetitive practices related to Android. In 2020, the US Department of Justice charged Alphabet with antitrust contraventions in relation to search and advertising.26
Privacy issues were another area where Alphabet faced regulatory and legal threats. Privacy advocates and political activists have long expressed concern that Google’s ability to track individuals’ search and browsing behavior, the content of their Gmail messages, and, through Android, their cell phone usage and locations, represented a threat to individual privacy. Initiatives to restrict Alphabet’s use of individuals’ data included the European Court’s “right to be forgotten” judgment in 2014, which allowed individuals to require that Google removed search results about them. Under the 2018 European General Data Protection Regulation, which extended protection of personal data, Google was fined in 2019 and 2020.
One indication of growing regulatory and political pressures that Alphabet faced was its growing presence in Washington, DC. In 2019, Alphabet spent more on lobby- ing than any other company.
Competition provided another dimension of Alphabet’s increasingly complex external environment. As the company diversified from search into an ever- increasing range of activities, so it came into competition with a widening range of rivals. In advertising, Facebook was its closest competitor; in mobile platforms and online payment systems, it was Apple; in browsers, computer operating systems, and office software, Microsoft; in home automation, Amazon and Honeywell; in autonomous driving, Tesla, Uber, Ford, and General Motors; in cloud computing, Amazon and Microsoft. Competing with multiple companies on multiple fronts meant that Alphabet could not operate as a set of quasi- autonomous companies.
When Sundar Pichai took over as Alphabet’s CEO in December 2019, it was hoped that he would bring a more commercial orientation and greater emphasis on opera- tional effectiveness compared to Page and Brin’s hands- off style and preoccupation with breakthrough technologies in the service of humanity. However, the range and the complexity of the internal and external problems that Alphabet faced in 2021 had raised doubts over Pichai’s capacity for the kind of leadership the situation demanded. In particular, Pichai struggled to develop a vision for Alphabet that reconciled the firm’s technological and humanitarian aspirations with Google’s continued dominance of online advertising.
The new structure would also facilitate adding new businesses— either by acqui- sition or internal development— thereby setting the scene for further diversification. This raised concerns among investors as to whether the new company would provide greater opportunity for Page and Brin to pursue their ambitions of using technology to change the world. In an interview with the Financial Times in October 2014, Larry Page declared, “The societal goal is our primary goal,” and outlined the main challenge as: “How do we use all these resources . . . and have a much more positive impact on the world?”27 The answer seemed to be to use the money generated by Google’s search advertising business to make bets on technologies that offered long- term solutions to some of the world’s most pressing problems. Many of these initiatives grew out of the curiosity and personal interests of the two founders. For example, the inspiration for Calico came from the interests of Larry Page’s wife, Lucy, in bioinformatics and the dis- eases of old age.
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474 CASES TO CONTEMPORARY STRATEGY ANALYSIS
Notes
1. https://www.google.com/about/philosophy.html, accessed March 22, 2018.
2. “FT Interview with Google Co- founder and CEO Larry Page,” Financial Times (October 31, 2014).
3. https://www.fool.com/investing/2019/02/03/better- buy- google- vs- apple.aspx, accessed February 14, 2021.
4. “Google’s Growing Identity Crisis,” ( July 19, 2009), http:// www.mercurynews.com/ci_12853656?IADID, accessed July 20, 2015.
5. “The New GE: Google, Everywhere,” Economist ( January 18, 2014).
6. Google Offer Prospectus (November 23, 2004): 69. 7. Google Inc. 10- K Report for 2008: 4. 8. “Inside Chrome: The Secret Project to Crush IE and
Remake the Web,” Wired (October 16, 2008). 9. https://www.wired.com/review/chromecast- with-
google- tv/, accessed February 15, 2021. 10. “Google to Buy Fitbit for $2.1 Billion,” New York Times
(November 1, 2019). 11. “Why Facebook Is a Threat to Google’s Earnings,” (April
12, 2012), http://www.cnbc.com/id/47030496, accessed February 18, 2021.
12. https://finance.yahoo.com/news/googles- social- network- spectacular- failure- 183906984.html, accessed February 15, 2021.
13. https://www.pcmag.com/news/google- is- shutting- down- shoelace, accessed February 16, 2021.
14. https://www.theverge.com/2021/2/2/22263048/google- cloud- loss- alphabet- q4- 2020- earnings, accessed February 16, 2021.
15. “Google X and the Science of Radical Creativity,” The Atlantic (November 2017).
16. Alphabet, Inc. 10- K Report for 2020: 5. 17. For descriptions of current projects see: https://x.company/
projects/, accessed February 17, 2021. 18. Letter from the Founders, “An Owner’s Manual,” for
Google’s Shareholders, http://investor.google.com/ ipo_letter.html, accessed July 20, 2015. Reproduced with permission from Google Inc.
19. Ibid. 20. G. Hamel, The Future of Management (Boston: Harvard
Business School Press, 2007). 21. “Google: Hacking the Structure,” Financial Times
(August 11, 2015). 22. http://fortune.com/2017/06/27/google- alphabet- corporate-
structure/, accessed February 18, 2021. 23. https://www.forbes.com/sites/kenfavaro/2015/09/07/
still- searching- for- the- strategy- in- alphabet- nee- google/#16a0a49b6601, accessed February 18, 2021.
24. http://www.businessinsider.com/is- alphabet- other- bets- strategy- doomed- to- fail- 2018- 2, accessed March 23, 2018.
25. “Hundreds of Google Employees Unionize, Culminating Years of Activism,” New York Times ( January 4, 2021).
26. Alphabet Inc. 10- K Report for 2020: 82–83. 27. “FT Interview with Google Co-founder and CEO Larry
Page,” Financial Times (October 31, 2014).
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