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2015-08-18 10:32:29
Sarah Cliffe
August 13, 2015
The announcement that Google would be reorganized into a holding company named Alphabet has already been interpreted in multiple, often conflicting, ways. Joseph Bower, a strategy professor at Harvard Business School, offers up the simplest interpretation possible: The company s leaders are doing exactly what executives have done, under similar circumstances, since the 1920s. In other words, it s Management 101. What follows is an edited version of our conversation.
HBR: As a student of corporate strategy, how do you interpret the move to create Alphabet out of Google and its assorted businesses?
Bower: It s a simple, classic move. At a certain point, companies recognize that they re in multiple businesses, and that they will be better managed if they organize into business divisions, essentially. Alfred Chandler wrote about this back in the 1960s and the 1970s; DuPont was one of the earliest examples he studied.
It s a very sensible thing to do.
So will Alphabet be a conglomerate?
We don t know yet whether it will be a conglomerate or a multi-divisional corporation. Brin and Page and the new CEO could adopt a holding-company strategy: something like Berkshire Hathaway or Loews, whose businesses are not really connected to each other. Warren Buffett doesn t move talent from one company to another.
Or they could behave more like GE and choose to become a classic corporation, where top management allocates resources cash and talent among the different companies and supports a strong corporate culture.
Which direction makes more sense, from your point of view?
Either could work, and I don t think they know yet which is a better bet, so it s just as well that they ve left it open. If it turns out that the people who are good at search are also good at making driver-less cars, then maybe it should be a traditional corporation. That would allow them to treat Google as a cash cow pull cash out of that and into the more future-oriented businesses.
But you could make just as good an argument on the other side. If one business is capital intensive and others are not if one business model is throwing off a lot of cash today and another will take years to pay off they need to be managed very differently.
How will this change affect Google s very talented and independent workforce, in the near term?
That s a great question and my answer relates to what I just said about different business models needing different management systems. If what it takes to operate the businesses and make them successful are fundamentally similar, then it will be helpful to have a unifying corporate culture so that knowledge and learning get shared. But if they are really different, then any attempts at corporate synergy will simply frustrate people. My guess is that in businesses that depend on truly great creative talent, there are fewer economies of scale or scope than one might think.
Take Harvard University. We have great centers of bio-genetic science in several different schools. Would the institution be better would they be better? if they were made to work together? I suspect not.
Is it unusual that the founders are still deeply involved at this inflection point?
No, I don t think so. More and more, we re seeing that founders of successful businesses like to stick around. Gordon Moore and Andy Grove were at Intel for decades. And for all the talk about hyper-fast change, a lot of successful companies tend to have very slow turnover at the top. Jeffrey Immelt is only the thirteenth CEO of GE, I believe.
Do you think this move was in part a response to pressure from Wall Street?
I don t think it has anything to do with Wall Street. Google has two classes of stock, so the founders can afford to ignore pressure from activist investors. Basically, they can do whatever they want to.
These are smart people. They re doing what the business needs them to do.
Sarah Cliffe is an executive editor at the Harvard Business Review.