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Corporate Strategy and Diversification

Your well-written paper should meet the following requirements:

Be 7 pages in length, which does not include the title page or required reference page, which are never a part of the content minimum requirements.

Use APA style guidelines.

Support your submission with course material concepts, principles, and theories from the textbook and at least (FOUR ) scholarly, peer-reviewed journal articles unless the assignment calls for more.

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Corporate diversification strategies raise a wide range of strategic management issues. For this week’s critical thinking assignment, read the case study (Attached) (Case 19): Google Is Now Alphabet—But What’s the Corporate Strategy?

Remember, a case study is a puzzle to be solved, so before reading and answering the specific case and study questions, develop your proposed solution by following these five steps:

Read the case study to identify the key issues and underlying issues. These issues are the principles and concepts of the course area which apply to the situation described in the case study.
Record the facts from the case study which are relevant to the principles and concepts of the course area issues. The case may have extraneous information not relevant to the current course area. Your ability to differentiate between relevant and irrelevant information is an important aspect of case analysis, as it will inform the focus of your answers.
Describe in some detail the actions that would address or correct the situation.
Consider how you would support your solution with examples from experience or current real-life examples or cases from textbooks.
Complete this initial analysis and then read the discussion questions. Typically, you will already have the answers to the questions but with a broader consideration. At this point, you can add the details and/or analytical tools required to solve the case.

Case Study Questions:

What is Google’s corporate strategy? Does Google have a clear vision of what it wants to become?
Use Porter’s Essentials Test (Chapter 12 ” Attached to have idea “) to determine if this strategy creates competitive advantage. If so, how? If not, why not?
Look beyond the conventional sources of synergy and consider complementarities, bargaining power, and rivals. What threats does Google face?
Does Google need to refocus? How should Google delineate its corporate boundaries and which businesses, or products would you recommend abandoning or divesting, if any?

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CONTEMPORARY STRATEGY ANALYSIS
tenth edition
Robert M. Grant
John Wiley & Sons Ltd., 2019

Chapter 12
Diversification
Strategy

Introduction: The Basic Issues
Motives for Diversification
Competitive Advantage from Diversification
Diversification and Performance
The Meaning of Relatedness in Diversification
Diversification Strategy
Copyright © 2019 John Wiley & Sons, Inc.
OUTLINE

INDUSTRY
ATTRACTIVENESS
COMPETITIVE
ADVANTAGE

Superior profit derives from two sources:
Diversification decisions involve these same two issues:
How attractive is the industry to be entered?
Can the firm achieve a competitive advantage?
Core Issues in Diversification Decisions
Copyright © 2019 John Wiley & Sons, Inc.
RETURN ON CAPITAL
> COST OF CAPITAL
INTRODUCTION: THE BASIC ISSUES

United States
United Kingdom
%
Diversification Strategies of US and UK Corporations during the 20th Century
Copyright © 2019 John Wiley & Sons, Inc.
INTRODUCTION: THE BASIC ISSUES

IMPLICATIONS
FOR
DIVERSIFICATION
STRATEGY
MANAGEMENT
GOALS
STRATEGY
TOOLS AND
CONCEPTS
Growth
Making diversification profitable
Creating shareholder value
1960 1970 1980 1990 2000 2018
Diversification by established firms
Emergence of conglomerates
Boom in M&A
Core business focus
Divestments, and spin-offs
Leveraged buyouts
Financial
analysis
M-form
structures
Corporate
planning
Economies of
scope
Portfolio
planning models
Modern
financial theory
Shareholder
value
Transaction cost
analysis
Core competence
Dominant logic
Corporate advantage
Product bundling and customer solutions
Alliances
Growth options
Parenting advantage
Real options
Demand-side economies of scope
Tech platforms
Emphasis on
related
diversification
Quest for
synergy

The Evolution of Diversification Strategies, 1960-2018
INTRODUCTION: THE BASIC ISSUES
Copyright © 2019 John Wiley & Sons, Inc.

*
1

The desire to escape stagnant or declining industries a powerful motives for diversification (e.g. tobacco, oil, newspapers).
But, growth in the interests of managers not shareholders
Growth-seeking diversification (esp. by acquisition) tends to destroy shareholder value
Diversification reduces the variance of profit flows
But, doesn’t create value for shareholders—they can
hold diversified portfolios of securities. [Capital Asset
Pricing Model shows that diversification only lowers
unsystematic risk not systematic risk]
For diversification to create shareholder value, then
bringing putting different businesses under common
ownership must increase their total profitability
Motives for Diversification
Copyright © 2019 John Wiley & Sons, Inc.
GROWTH

RISK SPREADING
VALUE CREATION
MOTIVES FOR DIVERSIFICATION

For diversification to create shareholder value, it must meet three tests:
1. The Attractiveness Test: diversification must be directed towards attractive industries (or those with e the potential to become attractive).
2. The Cost of Entry Test : the cost of entry must not capitalize all future profits.
3. The Better-Off Test: either the new unit must gain competitive advantage from its link with the company, or vice-versa. (i.e. some form of “synergy” must be present)
Diversification and Shareholder Value: Porter’s Three Essential Tests
Copyright © 2019 John Wiley & Sons, Inc.
MOTIVES FOR DIVERSIFICATION

Sources of Competitive
Advantage from Diversification
Copyright © 2019 John Wiley & Sons, Inc.
`COMPETITIVE ADVANTAGE FROM DIVERSIFICATION
ECONOMIES
OF
SCOPE
Sharing tangible resources (e.g. research labs,
distribution systems) across multiple businesses
Sharing intangible resources (e.g. brands,
technology) across multiple businesses
Transferring functional capabilities (e.g. marketing,
product development) across businesses
Applying common general management capabilities
to different businesses

ECONOMIES
FROM
INTERNALIZING
TRANSACTIONS
Economies of scope not a sufficient basis for
diversification—must be supported by transaction
costs in markets for resources
Diversified firm can avoid external transactions by
operating internal capital and labor markets
Diversified firm has better information on resource
characteristics than external markets

The Findings of Empirical Research
Copyright © 2019 John Wiley & Sons, Inc.
DIVERSIFICATION AND PERFORMANCE
Do diversified firms outperform specialized firms?
No consistent relationship
Evidence of a ∩-shaped relationship: dn. first increases profitability, then further dn. reduces profitability (increased complexity?)
McKinsey & Co. identify benefits from moderate dn.—especially for firms that have run out of growth opportunities
Question of direction of causation: does dn. drive profitability, or vice-versa?
What type of diversification is most profitable? —Related dn. vs. unrelated dn. Most studies show related dn. outperforms unrelated dn.
Related dn. offers greater synergies—but also imposes higher management costs
But what is “related dn.”? Businesses can be related in many different ways (e.g. LMVH, GE, Virgin group)

Economies of scope in diversification derive from two types of relatedness:
Operational Relatedness—synergies from sharing resources across businesses (common distribution facilities, brands, joint R&D)
Strategic Relatedness—synergies at the corporate level deriving from the ability to apply common management capabilities to different businesses.

Types of Relatedness between Businesses
Copyright © 2019 John Wiley & Sons, Inc.
Problem of operational relatedness:
The benefits from economies of scope may be dwarfed by the administrative costs involved in their exploitation.
RELATEDNESS IN DIVERSIFICATION

The Sources of Strategic Relatedness
Between Businesses
Copyright © 2019 John Wiley & Sons, Inc.
RELATEDNESS IN DIVERSIFICATION
Corporate Manage-ment Tasks Determinants of Strategic Similarity
Resource allocation Similar sizes of capital investment projects
Similar time spans of investment projects
Similar sources of risk
Similar general management skills required for business unit managers
Strategy formulation Similar key success factors
Similar stages of the industry life cycle
Similar competitive positions occupied by each business within its industry
Performance management and control Targets defined in terms of similar performance variables
Similar time horizons for performance targets

0
10
20
30
40
50
60
70
1949
1964
1974
1950
1970
1993
Single business
Dominant business
Related business
Unrelated business

Case 19 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 organizational structure of
Alphabet is shown in Figure 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 was a reaffirmation of the
company’s commitment to developing and commercialization of revolutionary tech-
nologies. 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

Google—now 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
is identifying 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 technological initiatives also fueled suspi-
cions about the motivations of the founders, Brin and Page. Despite their proclama-
tions 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.

588 CASES TO ACCOMPANY CONTEMPORARY STRATEGY ANALYSIS

Alphabet Inc.

Google Waymo Calico VerilyAccess CapitalG GV XNest*

* Nest was transferred to become part of Google in February 2018

“OTHER BETS”

FIGURE 1 Alphabet Inc.: Organization structure, March 2018

Yet, in terms of its revenue model, Google is an advertising company. In 2017, adver-
tising accounted for 86% of Alphabet’s revenues. Common to almost all Alphabet’s
businesses is that they are either vehicles for carrying advertising or they are sources of
information that could be utilized to better target advertising.

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: https://abc.xyz/investor/news/releases/2015/
0810.html, accessed March 21, 2018.

CASE 19 GOOGLE IS NOW ALPhABET—BuT WhAT’S ThE CORPORATE STRATEGY? 589

The confusion over Alphabet’s corporate strategy was no recent phenomenon. In
2009, the Mercury News reported:

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 iden-
tity 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?3

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 drew parallels with Berkshire Hathaway—ultimately, it seemed that Alphabet
truly was “a different kind of company.”4 Hence, the creation of Alphabet had done
little to answer the question that had tormented Google-watchers for years: What was
the corporate strategy of the company formerly known as Google?

The History of Google, 1996–2018

The Google Search Engine

Larry Page and Sergey Brin met as PhD students at Stanford University. Their investi-
gation of the linkage structure of the World Wide Web led them to develop a page-
ranking algorithm that used backlink data (references by a Web page to other Web
pages) to measure the importance of any Web page. They called their search engine
“Google” and in September 1998 incorporated Google Inc. in Menlo Park, California.
Google’s “PageRank” algorithm received a patent on September 4, 2001.

Search engines met the need of the growing number of people who were turning to
the World Wide Web for information and commercial transactions. As the number of web-
sites grew, locating relevant content became essential. Early Web search engines included
WebCrawler, Lycos, Excite, Infoseek, Inktomi, Northern Light, and AltaVista. Several of
them became portal sites—websites that offered users their first port of entry to the web.
Other portals, such as Yahoo! and AOL, soon recognized the need to offer a search facility.

The Google search engine attracted a rapidly growing following because of its
superior page ranking and simple design. In 2000, Google began selling advertise-
ments—paid Web links associated with search keywords. Its Adwords placed “spon-
sored 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; by 2009 its share had reached 65.6%.

Google became a public company on August 19, 2004: an IPO of about 7% of
Google’s shares raised $1.67 bn., valuing Google at $23 bn.

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

590 CASES TO ACCOMPANY CONTEMPORARY STRATEGY ANALYSIS

TABLE 1 Alphabet’s revenue sources, 2008–2017 ($billion)

2008 2009 2010 2011 2012 2013 2014

2015 2016 2017

Google advertising revenues (total) 21.1 22.9 28.2 36.5 46.0 51.1 59.6 67.4 79.4 95.4

—Google properties 14.4 15.7 19.4 26.1 31.2 37.4 45.1 52.4 63.8 77.8

—Google network members’ properties 6.7 7.2 8.8 10.4 12.5 13.1 14.0 15.0 15.6 17.6

Google other revenues 0.7 0.8 1.1 1.4 2.4 5.0 6.9 7.2 10.1 14.3

Google total revenues 21.8 23.7 29.3 37.9 46.0 55.5 66.0 74.5 89.5 109.7

Other Bets revenuesa – – – – – – – 0.4 0.8 1.2

Total revenues 21.8 23.7 29.3 37.9 46.0 55.5 66.0 75.0 90.3 110.9

Notes:
a Revenues from Other Bets businesses were included in “Google total revenues” prior to 2015.
Source: Google Inc. and Alphabet Inc 10-K reports.

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.

The result was a series of new products that allowed access to information from
diverse sources. These sources of information included images (Google Image Search),
maps (Google Maps), academic articles (Google Scholar), books (Google Book Search),
satellite imagery (Google Earth), panoramic street photographs of most of the world’s
cities (Google StreetView), news (Google News), patents (Google Patent Search), video
(YouTube), finance (Google Finance), Web logs (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 targeting of ads. Google’s
primary source of advertising revenue was AdWords, launched in 2000. Advertisers
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 advertiser’s 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.

CASE 19 GOOGLE IS NOW ALPhABET—BuT WhAT’S ThE CORPORATE STRATEGY? 591

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 consumers a less expen-
sive, richer and more powerful mobile experience.”5 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—by 2018, there 1.76 million Android apps.

Chrome

Google’s Chrome Web browser announced on September 2, 2008 generated huge
publicity, but little surprise. Google’s then head of product development (later CEO of
Google within Alphabet), Sundar Pichai, 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

TABLE 2 Shipments of smartphones: Market share by operating system

2018a (%) 2015a (%) 2013a (%) 2011a (%)

Android (Google) 86.1 78.0 75.5 36.1

iOS (Apple) 13.7 18.3 15.9 18.3

Blackberry OS (RIM) – 0.3 2.9 13.6

Windows (Microsoft) – 2.7 3.2 2.6

Other 0.2b 0.7 1.5 29.4c

TOTAL 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: IDC.

592 CASES TO ACCOMPANY CONTEMPORARY STRATEGY ANALYSIS

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.6

The announcement ten months later that Google would add an operating system
to its Chrome browser was seen as confirmation of Google’s aggressive intent toward
Microsoft.

Google in Hardware

As Internet access transitioned toward mobile devices, Google sought to reinforce its
proprietary technology in that sphere. Its acquisition of the struggling handset maker
Motorola Mobility in 2012 for $12.5 bn., was primarily to acquire its rich portfolio of
patents relating to wireless communication.

Owning Motorola would also permit Google closer integration of hardware and
software development in smartphones and tablet computers, thereby enhancing the
user experience.

However, becoming a handset maker put Google into competition with some of its
major customers, notably Samsung, which was already developing its own operating
system. In 2012, Google sold Motorola to Lenovo, but continued to develop and market
mobile devices, including the Nexus brand of smartphones (build by HTC) and a range
of notebook and tablet computers based upon its Chrome operating system. In January
2018, Google deepened its relationship with HTC when it paid HTC $1.1 bn. for patent
licenses and an engineering unit.

Subsequent diversifications also increased Google’s involvement in hardware:

● Google Glass, an Internet-enabled, optical head-mounted display controlled by
natural language voice commands, was marketed on an experimental basis bet-
ween April 2013 and January 2015.

● With the acquisition of Nest in January 2014, Google became a supplier of
home security and control devices—including thermostats and smoke detec-
tors. The goal was to build Google’s position as a central player in the “smart
home.” In May 2015, Google announced Project Brillo, an operating system to
link home devices, such as door locks, light bulbs, and security cameras, while
Project Weave would allow these devices to communicate with other products
and web services.7

● Google Home, launched in October 2016, and the Home Mini, launched
12 months later, were Google’s entrants to the fast-growing market for voice-
activated, smart speakers. Despite selling about 2 million smart speakers per
month in the closing months of 2017, Google remained a distant second to
Amazon in this market.

● Google’s involvement in smart TV has included its Google TV and Android TV
software programs and its Chromecast plug-in devices, first launched in 2013,
which allow video streaming on TV receivers.

Google+

Google’s foray into social networking began with Orkut in January 2004 and continued
with Google Friend Connect and Google Buzz. However, all were eclipsed by Face-
book. When, in March 2010, Facebook overtook Google as the most visited website

CASE 19 GOOGLE IS NOW ALPhABET—BuT WhAT’S ThE CORPORATE STRATEGY? 593

within the United States, Google became fully aware of the threat posed by Facebook
to its online advertising revenue:

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.8

Launched in June 2011, Google+, the company’s fourth venture into online social
networking, had 540 million users by October 2013. However, by the end of 2017, it
was clear that, yet again, Google had failed to build a viable competitor to Facebook—
although YouTube was widely viewed as a social media platform.

Waymo

Google began developing autonomous driving systems in 2009 with applications both
to existing production cars and its own prototype cars, which lacked all driver con-
trols. By 2017, Waymo had a fleet of self-driving vehicles in Phoenix, AZ, being driven
without a person behind the wheel. However, it was competing with at least 12 other
companies in developing self-driving systems and any commercial revenues within the
next five years seemed unlikely. In February 2018, Alphabet received $244 million in
Uber equity, settling a legal suit over Uber’s alleged theft of Waymo’s technology.

Life Sciences

Alphabet’s research activities in life sciences were organized into two businesses.
Calico’s mission is “to harness advanced technologies to increase our understanding of
the biology that controls lifespan.” In 2014, Calico formed an R&D alliance with AbbVie
to develop new therapies for age-related diseases, including neurodegeneration and
cancer. Verily’s mission to make the world’s health data useful so that people enjoy
healthier lives. It makes a smart contact lens that measures blood sugar. In January
2017, Temasek, a Singapore-based investment company, paid $800 million for a non-
controlling equity stake in Verily.

Broadband

Alphabet’s Access subsidiary combines several broadband projects whose goal is to
expand access to the Internet. The major component of Access is Google Fiber, which
offers broadband and TV service in several locations with in the United States. It also
includes Webpass, a gigabit Internet provider acquired in 2016.

Venture Capital

Google Capital was established in 2013 to make late-stage venture capital investments
in technology companies. In 2016, it was renamed CapitalG. In addition to finance,
CapitalG provides companies within its portfolio access to technological and strategic

594 CASES TO ACCOMPANY CONTEMPORARY STRATEGY ANALYSIS

advice from Google’s executives. Its investments include Survey Monkey, Lending Club,
Airbnb, Snap Inc., Stripe, Looker, and Lyft.

GV, formerly Google Ventures, is Alphabet’s other venture capital subsidiary. It
invests in life sciences, artificial intelligence, robotics, and cybersecurity companies,
mainly in the early stages of their development.

X, formerly Google X, is a corporate lab for developing experimental technologies
known as “moonshots.” According to The Atlantic magazine: “X is perhaps the only
enterprise on the planet where regular investigation into the absurd is not just permitted
but encouraged, and even required.”10 Because of the secrecy surrounding X, only a
few of the projects being undertaken are known. During early 2018, these included:

● Project Loon—high altitude balloons providing internet connectivity in areas
lacking broadband infrastructure;

● Project Wing—package delivery via airborne drones;

● Makani Power—generating electrical power through wind turbines mounted on
tethered kites;

● development of a revolutionary, miniature battery for powering mobile devices;

● various robotics projects.

Alphabet’s Management and Capabilities

Google—now Alphabet—had created a management system that was unique, even
by the unorthodox standards of Silicon Valley. Some of the key features of this
system included:

● 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 intelli-
gent. 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 … com-
bine technical depth with business savvy and creative flair.”9 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 com-
puter science … Talented people are attracted to Google because we empower
them to change the world.”11

● 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: The majority of Google’s employees, including all
those involved in product development, worked in small teams. Most engineers

CASE 19 GOOGLE IS NOW ALPhABET—BuT WhAT’S ThE CORPORATE STRATEGY? 595

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
required a working environment that stimulated and fostered their interac-
tion. Google’s workplaces were designed to minimize separation among col-
leagues. 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.”12

Underlying Alphabet’s capacity for innovation and the effective implementation of
new initiatives was a set of resources that few other technology-based companies could
match. With an operating cash flow of $37 bn. in 2017 and a cash pile of $103 bn.,
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.) However, most of

TABLE 3 Alphabet Inc.: Selected financial data, 2008–2017 ($ bn.)

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Revenues 21.8 23.7 29.3 37.9 43.7 50.5 59.1 75.0 90.3 110.9

Cost of revenues 8.6 8.8 10.4 13.2 17.2 22 25.7 28.2 35.1 45.6

R & D 2.8 2.8 3.8 5.2 6.1 7.1 9.8 12.3 13.9 16.6

Sales and marketing expense 1.9 2.0 2.8 4.6 5.5 6.6 8.1 9.0 10.5 12.9

General and admin. expense 1.8 1.7 2.0 2.7 3.5 4.4 5.9 6.1 7.0 6.9

Income from operations 6.6 8.3 10.4 11.7 13.8 15.4 16.5 19.4 23.7 26.1a

Other income 0.3 0.1 0.4 0.6 0.6 0.5 0.8 0.3 0.4 1.0

Income before income taxes 5.9 7.1 10.8 12.3 14.5 15.9 17.3 19.7 24.2 27.2

Net income 4.2 6.5 8.5 9.7 10.7 12.9 14.4 16.3 19.5 12.7

Cash and marketable securities 28.4 24.5 35.0 44.6 48.1 58.7 64.4 73.1 86.3 101.9

Long-term liabilities 1.2 1.7 1.6 5.5 7.7 7.7 9.8 7.8 11.7 20.6

Total stockholders’ equity 28.2 36.0 46.2 58.1 71.7 87.3 104.5 120.3 139.0 152.5

Notes:
a Operating income was reduced in 2017 by a European Union fine of $2.7 bn.
Source: Alphabet Inc. and Google Inc. 10K reports.

596 CASES TO ACCOMPANY CONTEMPORARY STRATEGY ANALYSIS

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.

The holding company structure of Alphabet would allow greater autonomy and flex-
ibility for the individual subsidiaries, but would the loss 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 attrac-
tive as working on complex issues across today’s Google.”13 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.”14

The Future of Alphabet

Soon after Google’s reincarnation as Alphabet, Forbes contributor, Ken Favaro, argued
that Alphabet had failed to address the fundamental question of corporate strategy:
“How does the company itself add value to its particular businesses and ventures?” As
a result, Alphabet’s “strategy remains as opaque as ever.” In terms of the managerial
effectiveness, lack of strategic clarity may translate into loss of “coherence, insight, and
resilience” such that corporate development will “inevitably amount to a random walk
that can only be rationalized ex post.”15

These issues were especially pertinent in relation to Alphabet’s “Other Bets.” Business
Insider’s Steve Kovach noted:

The hope was that one of these Other Bets would become the next multibillion-dollar
tech company and help diversify parent company Alphabet’s revenue sources beyond
Google’s digital ads business. But this grand vision was always laden with some unan-
swered and uncomfortable questions: What does a successful Other Bet look like?
When will one of those companies graduate from a mere “bet” to a winner that can
stand on its own? Are they supposed to reach a point where they’re big enough to
spin out into a separate company outside Alphabet?16

Revealing the dire financial performance of Alphabet’s Other Bets (see Table 4) had
increased the tensions between Alphabet’s technological ambitions and responsibilities
to investors. These tensions appear to have been a factor in the high turnover of senior
managers in the Other Bet companies:

[T]he heads of some of Alphabet’s Other Bets, or of divisions that were on track to
become Other Bets, were frustrated by the Alphabet structure… 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 controlled funding, as well as by the
whims of Google cofounders Larry Page and Sergey Brin…The vision of Alphabet was
to create nimble startups, but many of the entrepreneurs tasked with leading these
startups concluded that they had better prospects of accomplishing their goals outside
Alphabet than within.17

CASE 19 GOOGLE IS NOW ALPhABET—BuT WhAT’S ThE CORPORATE STRATEGY? 597

In principle, the holding company structure had conferred greater autonomy to
the businesses, giving them greater freedom to develop and grow. This would resolve
many of the problems arising from Google’s increasing size and complexity. By 2018,
Google had 88,110 employees, up from 16,805 ten years earlier—inevitably this strained
Google’s famously informal management processes. Yet, the impact of the decentraliza-
tion in taking pressure off top management would be offset by the increasing external
pressures that Alphabet faced in 2018.

Concerns over Google’s market power had resulted in antitrust investigations in
the European Union, India, South Korea, Brazil, and Argentina. In 2017, the European
Commission imposed a fine of €2.42 bn. for anticompetitive practices regarding Google’s
display and ranking of shopping search results. It was also investigating Android distri-
bution practices and Google’s syndication of AdSense.

Privacy issues were another area where Alphabet faced regulatory and legal threats. Pri-
vacy 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” judgement in 2014, which allowed individuals to require that
Google removed search results about them, the European General Data Protection Reg-
ulation to protect personal data, and a similar measure under consideration in California.
Alphabet’s vulnerability to concerns over privacy was highlighted by the crisis that engulfed
Facebook in March 2018 over its release of personal data to Cambridge Analytica.18

One indication of growing regulatory and political pressures that Alphabet faced
was its growing presence in Washington, DC. In 2017, 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, all the major IT companies. Competing
with multiple companies on multiple fronts meant that Alphabet could not operate as
a set of quasi-autonomous companies.

TABLE 4 Alphabet Inc.: Financial results of business segments, 2015–2017

2015 2016 2017

Google Revenues 74,544 89,463 109,652

Operating income 23,319 27,892 32,908

Capital expenditures 8868 9417 12,605

Other Bets Revenues 445 809 1203

Operating income (3456) (3578) (3355)

Capital expenditures 850 1385 507

Source: Alphabet Inc. 10K report for 2017.

598 CASES TO ACCOMPANY 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. “Google’s Growing Identity Crisis,” ( July 19, 2009), http://
www.mercurynews.com/ci_12853656?IADID, accessed
July 20, 2015.

4. “The New GE: Google, Everywhere,” Economist ( January
18, 2014).

5. Google Inc. 10K Report for 2008: 4.

6. “Inside Chrome: The Secret Project to Crush IE and
Remake the Web,” Wired (October 16, 2008).

7. “Google Reveals Project Brillo and Weave to Power Inter-
net of Things,” Fast Company (May 28, 2015).

8. “Why Facebook Is a Threat to Google’s Earnings,” (April
12, 2012), http://www.cnbc.com/id/47030496, accessed
July 20, 2015.

9. E. Schmidt and J. Rosenberg, How Google Works (London:
J. Murray, 2014): 17.

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?” 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.

Beyond the notion of creating a “21st century, technology-based conglomerate,”
there was little indication of the boundaries that would be established around Alpha-
bet’s ambitions or its activities. Forbes contributor Dan Diamond pointed to healthcare
as a major area of future growth for Alphabet.

The implications of the new company for Google’s core search and advertising
business were far from clear. While investors hoped the holding company structure
would allow greater transparency and bottom-line focus for management, there was
limited evidence to support this optimism. The new Google subsidiary would include
YouTube and Android; there was no indication that financial data would be available
for the individual lines of businesses within Google.

Nor was it clear what the new structure would mean for the company’s ability
to address the challenges it faced from competitors and regulators. One regulatory
challenge was antitrust: Google’s dominant share of Internet search and Android’s
share of mobile operating systems meant it was a monopoly in terms of the compe-
tition laws of many countries of the world. The other was privacy: concerns included
the scanning of emails sent through Gmail, the use of cookies to track an individual’s
search history, the aggregation of an individual’s data across Google’s various services,
the depiction of private residences on Google’s StreetView, and the release of user data
to national government agencies.

Given the breadth of the challenges Google faced, had the time come for Google’s
leading trio—CEO and founder Larry Page, founder and director Sergey Brin, and exec-
utive chairman Eric Schmidt—to scale back Google’s ambitions and draw boundaries
around Google’s corporate strategy?

CASE 19 GOOGLE IS NOW ALPhABET—BuT WhAT’S ThE CORPORATE STRATEGY? 599

10. “Google X and the Science of Radical Creativity,” The
Atlantic (November 2017).

11. 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 per-
mission from Google Inc.

12. G. Hamel, The Future of Management (Boston: Harvard
Business School Press, 2007).

13. “Google: hacking the structure,” Financial Times (August
11, 2015).

14. http://fortune.com/2017/06/27/google-alphabet-corporate-
structure/, accessed March 23, 2018.

15. https://www.forbes.com/sites/kenfavaro/2015/09/07/
still-searching-for-the-strategy-in-alphabet-nee-
google/#16a0a49b6601, accessed March 23, 2018.

16. http://www.businessinsider.com/is-alphabet-other-bets-
strategy-doomed-to-fail-2018-2, accessed March 23, 2018.

17. Ibid.
18. “Facebook and Democracy: The Anti-social Network,”

Economist (March 24, 2018).