Google’s transformation into Alphabet, announced in early August by CEO Larry Page, is on one hand inconsequential "Page Six" news and on the other the most momentous business event of the past decade. For companies in the technology and other sectors that Google has begun to explore, it’s a wake-up call as it signals Mr. Page's intention to continue to expand his conglomerate, increasing risk for companies across numerous industries. Fortunately, knowing that objective and deciphering the implications of this announcement, allows competitors time and opportunity to adjust their competitive strategy.
The recognition that Mr. Page and Google co-founder Sergey Brin have started and nurtured numerous side businesses including cloud computing, self-driving cars, life longevity, and even satellites brings a yawn from even the most casual observer. After all Elon Musk has gained fame as CEO of Tesla Motors (cars), CEO of SpaceX (rockets), and Chairman of SolarCity (power systems). And as far back as 1878 no less a man than Thomas Edison set the standard when he created General Electric – lightbulbs, steam turbines, locomotives, radio, toasters, even ovens. The conglomerate structure of Alphabet has a long, well-established tradition.
Yet, it’s in considering the long-term impact that we can see the announcement for its true importance. In announcing the change, Mr. Page invoked the phenomenal success of Berkshire Hathaway under the 50-year reign of Warren Buffett. Berkshire Hathaway owns businesses as diverse as candies, furniture, insurance, jewelry, and power, and each subsidiary is cradled under the Berkshire Hathaway net. And he’s searching for more. In his recent letter to shareholders Mr. Buffett declares, “Berkshire is now a sprawling conglomerate, constantly trying to sprawl further.”
Capital allocation structure enables strategic options
The secret factor that Mr. Page is after lies in the allocation of capital. In a holding company framework, it’s much easier to shift funds from a failing subsidiary to a promising one, avoiding taxation, investment costs, and managerial battles that reduce the benefit. Mr. Buffett calls such a configuration critical to avoiding the ABCs of business decay - arrogance, bureaucracy, and complacency. Alphabet is now configured appropriately to fund promising ventures while simultaneously protecting its core business, Google, and letting weaker activities wither or find their own way. Further, in this structure, as the new, non-core businesses develop and mature, the Alphabet structure enables strategic options for monetizing them, increasing return for shareholders.
The technology sector is much more inventive and at times explosive than candies or lightbulbs, and under Alphabet Mr. Page and Mr. Brin are positioned to avoid Mr. Buffett's ABCs and move their vast amounts of funds to innovations that promise to be transformative, just as Google was and is. It is in this respect that their announcement carries weight and should raise the eyebrows of competitors across numerous markets.
No one knows what product or technology is going to be the next game changer. Through Alphabet Mr. Page is acknowledging that gap and hoping to prevent the company from missing out on the next major tech trends. With billions of ready cash on its balance sheet, Google, and the new Alphabet, is positioned to influence innovation in a number of sectors. Auto and satellite manufacturers, biological science and healthcare organizations, power generation and delivery firms, search and digital companies, and who knows what else, beware.
New corporate structure will help to hire and retain talent
Mr. Page and Mr. Brin have also established a framework in which Alphabet can properly use its substantial base of managerial and content-specific talent, unleashing innovation while at the same time nurturing experts across a wide spectrum of companies and disciplines. Such a culture of innovation was central to Thomas Edison and fundamental to General Electric’s success.
So, the competitive advantage is gained through capital allocation and also through talent. Hiring the best engineers creates a network effect. The smartest people want to work with the smartest people on the best projects, and a cumulative dynamic occurs with more top talent arriving. Google has for the last six years ranked number one on Fortune's list of the best companies to work for, attracting talent who would otherwise go to a competitor, an advantage that can’t be captured on a balance sheet. And as for talent retention, under Alphabet, those who might want to start their own venture can now remain, reinforcing the culture of innovation.
Early warning is critical to competition
The good news is that through the Alphabet structure executives in competitive firms have increased transparency into the financials and top talent. From an intelligence gathering and analysis perspective, the new structure is a boon to the analyst and competitor alike. The old structure offered limited visibility and with each news leak of a new Google venture in say, solar power or broadband infrastructure, incumbent players scrambled in alarm. What talent has Google dedicated to the venture? How was it organized? What funding would be allocated? What is the timing of a launch? With the new holding company structure, Alphabet’s management will be obliged to offer regular, transparent communication about its efforts in these new “side” businesses, whether it be healthcare, automobiles, digital, or satellites.
With this increased transparency, competitors will benefit by establishing a solid monitoring program to track the investments made by Mr. Page and Mr. Brin as well as to follow the rising stars and their activity. It is only through such early warning that competitors can obtain insight into what may be next. By taking these insights, and considering one's own strategy, executives can devise scenarios and play them out beforehand in competitive war games to ensure a robust competitive strategy to counter Alphabet's massive market position. This transformation presents an opportunity for Alphabet's competitors – it’s only by being better prepared that one can maneuver around, let alone beat, a giant.