Google has been a Silicon Valley pioneer since its inception in 1998, spearheading initiatives in fields ranging from longevity research to high-speed fiber communications to the exciting new era of the “smart home.”
But its boldest move yet might be this month’s announcement that it would restructure Google (ticker: GOOG, GOOGL) into a parent company called Alphabet, under which its major divisions will operate as distinct companies.
While the name change may seem jarring and unnecessary to some, co-founders Larry Page and Sergey Brin aren’t dummies. Let’s take a look at three reasons Google decided to shake things up, and why other companies might want to take a cue from the search engine behemoth in Mountain View, California.
Independence and innovation. Precious few companies have the sprawling operational scope Google has today. Businesses often evolve in unpredictable ways, and as they grow and change, it sometimes makes sense for the corporate structure to change with it.
Warren Buffett, for example, morphed Berkshire Hathaway (BRK.A, BRK.B) from a textile manufacturer into a dominant international holding company worth nearly $350 billion. Today, Berkshire Hathaway has a hand in businesses entirely unrelated to one another; its portfolio ranges from insurance and railroads to ketchup, airplane parts and chocolates.
By allowing these companies to operate independently of one another, Buffett has reaped massive returns for both himself and his shareholders. No wonder they call him the “Oracle of Omaha.”
Google’s new Alphabet structure divides the company into a handful of distinct entities: Google X (the company’s so-called “moonshot” projects are the most out-of-the-box ideas, such as driverless cars and Google Glass), Fiber (high-speed internet), Google Ventures (venture capital), Google Capital (long-term tech investment), Calico (studying ways to increase human lifespan), Nest (smart home products including smoke alarms, thermostats and cameras), and of course Google itself, with its core search business as well as bellwethers like Android, YouTube, and Maps.
Kris Duggan, CEO of BetterWorks, a Silicon Valley-based software company aimed at helping organizations, says that Google simply “outgrew their old management structure.” That can happen in any large company, but it was especially true for Google.
“For Google, innovation has been all about experimentation and they’ve managed to turn experiments into real businesses that impact the world. Thanks to this constant innovation, we’ll see segments of Google compete against Uber, Tesla (TSLA) and other top companies for years to come,” Duggan says.
“Altering the company structure to accommodate independent units equipped with independent leaders, will allow for even more diverse and innovative ideas and projects in the future,” he says.
In other words, when ambitious companies become overly diversified, why keep the business lines tied together?
Brand confusion/distinction. Independence and innovation aren’t the only benefits Google will reap from its restructuring.
Take it from Peter LaMotte, senior vice president and chief of digital engagement at Levick, a communications firm with offices in New York, Chicago and Washington, D.C.:
“The reorganization also serves to reduce risk by creating barriers between the brands,” LaMotte says. “Should one business suffer a crisis or reputational disaster, it is far less likely to be associated with the business engine that will remain under the Google name. This separation allows for more risks to be taken in emerging business lines now that direct association with Google is reduced.”
Reorganization — depending on the type — can also have legal and regulatory benefits while allowing investors greater options.
In 2003, says LaMotte, Philip Morris changed its name to Altria Group, which became the parent company of both Philip Morris entities. “In 2008, Altria spun off Phillip Morris International from Phillip Morris USA, which was designed to give international distributors of Marlboro more freedom from domestic legal and regulatory restraints,” LaMotte says. “This also allowed stakeholders to invest in the international tobacco business at a time when the domestic tobacco market was in decline.”
Whether it’s avoiding reputational risks or giving investors more flexibility, parent companies do, after all, serve a practical purpose.
Focus on the big picture. Lastly, and perhaps most importantly, a restructuring may become necessary to keep management focused on big-picture ideas without getting bogged down in the nitty-gritty.
Anil K. Gupta, a business professor at the University of Maryland, thinks this is especially relevant to Google. Despite Page’s brilliance, he says, “It’s unreasonable to expect him to be making the final call on products across a portfolio as wide-ranging as Google’s had become. You can’t have two dozen or more business units reporting to one person. It’s not manageable.”
Even Google competitor Microsoft Corp. (MSFT) is familiar with this problem, Gupta says.
“In 2005, Microsoft consolidated seven divisions into three: product platforms and services, the business division and an entertainment and devices division,” Gupta says. “Three years later, it reorganized the platforms division further, separating Windows from online services. Microsoft constantly faces the question: ‘How can you regroup to operate most efficiently?'”
Whether efficiency, innovation or the brand is at the heart of a reorganization, it’s not just the name that’s changing — it’s the company itself.
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Google Alphabet: 3 Reasons Why Good Companies Reorganize originally appeared on usnews.com
