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Chapter Ten

Organizing for Innovation Organizing for Innovation at Google Google was founded in 1998 by two Stanford Ph.D. students, Sergey Brin and Larry Page, who had developed a formula for rank ordering random search results by relevancy. Their formula gave rise to an incredibly powerful Internet search engine that rapidly attracted a loyal following. The search engine enabled users to quickly find information through a simple and intuitive user interface. It also enabled Google to sell highly targeted advertising space.

The company grew rapidly. In 2001, Brin and Page hired Eric Schmidt, former CTO of Sun Microsystems and former CEO of Novell, to be Google’s CEO. In 2004, the company went public, raising $1.6 billion in one of the most highly anticipated IPOs ever. Under Schmidt, the company adhered to a broad yet dis- ciplined mission: “To organize the world’s information and make it universally accessible and useful.” This led the company to leverage its core search and advertising capabilities into blogging, online payments, social networks, and other information-driven businesses.

By 2014, Google had sales of over $66 billion, and employed more than 57,000 people. Despite this size, however, the company eschewed hierarchy and bureaucracy and sought to maintain a small-company feel. As noted by Schmidt during an interview, “Innovation always has been driven by a person or a small team that has the luxury of thinking of a new idea and pursuing it. There are no counter examples. It was true 100 years ago and it’ll be true for the next 100 years. Innovation is something that comes when you’re not under the gun. So it’s important that, even if you don’t have balance in your life, you have some time for reflection. So that you could say, ‘Well, maybe I’m not working on the right thing.’ Or, ‘maybe I should have this new idea.’ The creative parts of one’s mind are not on schedule.”a

In accordance with this belief, Google’s engineers were organized into small technology teams with considerable decision-making authority. Every aspect of the headquarters, from the shared offices with couches, to the recreation facilities and the large communal cafe known as “Charlie’s Place,” was designed to foster

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226 Part Three Implementing Technological Innovation Strategy

informal communication and collaboration.b Managers referred to Google as a flex- ible and flat “technocracy,” where resources and control were allocated based on the quality of people’s ideas rather than seniority or hierarchical status. Schmidt remarked, “One of the things that we’ve tried very hard to avoid at Google is the sort of divisional structure that prevents collaboration across units. It’s difficult. So I understand why people want to build business units, and have their presidents. But by doing that you cut down the informal ties that, in an open culture, drive so much collaboration. If people in the organization understand the values of the company, they should be able to self-organize to work on the most interesting problems.”c

A key ingredient in Google’s organization is an incentive system that requires all technical personnel to spend 20 percent of their time on innovative proj- ects of their own choosing. This budget for innovation is not merely a device for creating slack in the organization for creative employees—it is an aggres- sive mandate that employees develop new product ideas. As noted by one Google engineer, “This isn’t a matter of doing something in your spare time, but more of actively making time for it. Heck, I don’t have a good 20% project yet and I need one. If I don’t come up with something I’m sure it could negatively impact my review.”d Managers face similar incentives. Each manager is required to spend 70  percent of his or her time on the core business, 20 percent on related-but- different projects, and 10 percent on entirely new products. Accord- ing to Marissa Mayer, Google’s head of search products and user experience, a significant portion of Google’s new products and features (including Gmail and AdSense) resulted from the 20 percent time investments of Google engineers.

In 2015, the company was reorganized into Alphabet Inc., a holding com- pany, wherein Google and other divisions such as Access, Calico, CapitalG, Nest, and others were wholly owned subsidiaries. The divisions retained their flat and flexible reporting structures.e

In a podcast interview at Stanford University, Andy Grove (former CEO of Intel) remarked that the company’s organization appeared chaotic, even noting “From the outside it looks like Google’s organizational structure is best described by . . . Brownian motion in an expanding model” and questioned whether Schmidt believed this model would continue to work forever. In his response, Schmidt responded, “There’s an important secret to tell, which is there are parts of the company that are not run chaotically. Our legal department, our finances. Our sales force has normal sales quotas. Our normal strategic planning activities, our normal investment activities, our M&A activities are run in a very traditional way. So the part of Google that gets all the attention is the creative side, the part where new products are being built and designed, and that is different. And it looks to us like that model will scale for quite some time . . . it looks like small teams can run ahead and that we can replicate that model for that part of the company.”f

Discussion Questions

1. What are the advantages and disadvantages of the creative side of Google being run as a flexible and flat “technocracy”?

2. How does Google’s culture influence the kind of employees it can attract and retain?

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Chapter 10 Organizing for Innovation 227

OVERVIEW

The structure of an organization and the degree to which it uses formalized and stan- dardized procedures and controls can significantly influence its likelihood of inno- vating, the effectiveness of its innovation projects, and the speed of its new product development processes.1 For example, it is often argued that small, flexible organiza- tions with a minimum of rules and procedures will encourage creativity and experi- mentation, leading to more innovative ideas. At the same time, it is also frequently pointed out that well-developed procedures and standards can ensure that the organi- zation makes better development investment decisions and is able to implement proj- ects quickly and efficiently. How then do managers decide what structure and controls would make the most sense for their firm?

A vast majority of firms use some type of product team structure to organize their new product development process, and we will look closely at how teams are com- posed and structured in Chapter Twelve, Managing New Product Development Teams. This chapter focuses on the organization-wide structural dimensions that shape the firm’s propensity and ability to innovate effectively and efficiently. We will review the research on how firm size and structural dimensions such as formalization, stan- dardization, and centralization affect a firm’s innovativeness. By focusing on these underlying structural dimensions, we will elucidate why some structures may be better for encouraging the creativity that leads to idea generation, while other structures may be better suited for efficient production of new products. We will also explore struc- tural forms that attempt to achieve the best of both worlds—the free-flowing organic and entrepreneurial structures and controls that foster innovation, plus the formalized and standardized forms that maximize efficiency while ensuring coherence across all of the corporation’s development activities. The chapter then turns to the challenge of managing innovation across borders. Multinational firms face particularly difficult

3. What do you believe the challenges are in having very different structure and controls for Google’s creative side versus the other parts of the company?

4. Some analysts have argued that Google’s free-form structure and the 20 percent time to work on personal projects is possible only because Google’s prior success has created financial slack in the company. Do you agree with this? Would Google be able to continue this management style if it had closer competitors?

a J. Manyika, “Google’s View on the Future of Business: An Interview with CEO Eric Schmidt,” McKinsey Quarterly, November 2008.

b From “The Google Culture,” www.google.com. c Manyika, “Google’s View on the Future of Business.” d B. Iyer and T. H. Davenport, “Reverse Engineering Google’s Innovation Machine,” Harvard Business

Review, April 2008. e R. Price and M. Nudelman, “Google’s Parent Company, Alphabet, Explained in One Chart,” Business

Insider, 2016. Available at: http://www.businessinsider.com/chart-of-alphabet-google-parent-company- infographic-x-gv-2016-1.

f Podcast retrieved on April 13, 2009, at http://iinnovate.blogspot.com/2007/03/eric-schmidt-ceoof-google.html.

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228 Part Three Implementing Technological Innovation Strategy

questions about where to locate—and how to manage—their development activities. We will review some of the work emerging on how multinational firms can balance the trade-offs inherent in these choices.

SIZE AND STRUCTURAL DIMENSIONS OF THE FIRM

Size: Is Bigger Better? In the 1940s, Joseph Schumpeter challenged supporters of antitrust law by propos- ing that large firms would be more effective innovators.2 Schumpeter pointed out that (1) capital markets are imperfect, and large firms are better able to obtain financing for R&D projects, and (2) firms with larger sales volume over which to spread the fixed costs of R&D would experience higher returns than firms with lower sales volume. Large firms are also likely to have better-developed complementary activities such as marketing or financial planning that enable them to be more effective innovators, and they are also likely to have greater global reach to obtain information or other resources.

Another advantage of size may arise in scale and learning effects. If large firms spend more on R&D in an absolute sense, they might also reap economies of scale and learn- ing curve advantages in R&D—that is, they may get better and more efficient at it over time.3 Through investing in R&D, the firm develops competencies in the new product development process and thus may improve its development process. It may accumulate better research equipment and personnel. Furthermore, as a large firm gains experience in choosing and developing innovation projects, it may learn to make better selections of projects that fit the firm’s capabilities and have a higher likelihood of success.

Large firms are also in a better position to take on large or risky innovation projects than smaller firms.4 For example, only a large company such as Boeing could develop and manufacture a 747, and only large pharmaceutical companies can plow millions of dollars into drug development in hopes that one or two drugs are successful.5 This suggests that in industries that have large development scale (i.e., the average develop- ment project is very big and costly), large firms will tend to outperform small firms at innovation. In theory a coalition of small firms ought to achieve the same scale advantages, but in practice, coordinating a coalition of firms tends to be very difficult. While a single large firm can exert hierarchical authority over all of the development activities to ensure cooperation and coordination, coalitions often do not have such a well-defined system of authority and control.

On the other hand, as a firm grows, its R&D efficiency might decrease because of a loss of managerial control.6 That is, the bigger a firm gets the more difficult it can become to effectively monitor and motivate employees. Furthermore, as a firm grows, it becomes increasingly difficult for individual scientists or entrepreneurs to appropri- ate the returns of their efforts; therefore their incentives diminish.7 Thus, as the firm grows, the effectiveness of its governance systems may decrease.

Large firms may also be less innovative because their size can make them less nim- ble and responsive to change. Large firms typically have more bureaucratic inertia due to many layers of authority and well-developed policies and procedures.8 For example, in the early 1980s, Xerox discovered that the administrative layers it had added to prevent errors in new product development had the unintended effect of blocking a

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