Alphabet Eyes New Frontiers

Problem Summary

Alphabet holdings is now the parent of Google which is the search engine known to the

world. It is a globally used search engine and product brand that diversifies itself in many

different markets to grow as a firm. Many see Google as a go to in life in which they can utilize

as a valuable tool in everyday life. It is hard to see any flaws in Alphabet as they continue to

expand and grow with a strong mission and a strategy for its firm to break barriers and push

limits and gamer new firms. It is the act of becoming too large that may put them in harm of

maintaining brand loyalty. As they enter new territory and try to encompass startup companies,

they must be willing to partner with executives that are willing to abide by and work with

"Alphabet's corporate umbrella" in order to expand (Alcacer, et al.,2018).

Another area in which Alphabet could see some risk is the way in which they use their

time. They developed a 200/o of the time rule that states that all employees must use 20% of their

work time to brainstorm and work on new ideas for Google. This type of work environment can

cause great risk to a firm. Not only can innovations fail they also absorb funds that can be sunk

costs. It also causes a high turnover of employees who think they can start a business on their

own or choose to change jobs due to the innovation of their own products. Although this type of

work can bring great risk it also has potential for great reward.

The work environment at Google is unique. It can be filled with bureaucracy as one

employee stated. The need to compete with other large firms such as Facebook also causes high

tension between the two companies when competing within the market in the form of

advertisements which is the highest revenue maker for Alphabet. This is yet another reason for

employee turnover. Instead of Google investing carelessly or getting involved in workforce

bureaucracy if they worked on retaining employees and focused on their internal environment it

is possible that there would be less risk of losing valuable employees.

Eeonomies of Scope
___"Economies of scope exist when using a resource across multiple activities uses less of

that resource than when the activities are carried out independently," (Grant p 348). Google is a

clear example of how a company can benefit from economies of scope, but before their

restructuring, these resources and capabilities were not so fairly divided among different

subsidiaries and their investors were skeptical of their different activities and ventures. Google

had many inconsistencies with the management of their different departments and wanted their

management structure to be bottom-up, however, that allowed spending to become

"irresponsible" in some areas, which could have chipped away at the unlimited amount of

resources that Google has access to. When looking at economies of scope, there is a supply side,

which would be Google's tangible and intangible resources along with their organizational

capabilities. Then there is the demand side of economies of scope.

Alphabet/Google's tangible resources include their main campus called GooglePlex in

Mountain View, California. This is a huge fixed cost that can be dispersed among many different

departments or companies within the Google umbrella. During the restructuring, some sectors

or small businesses of Alphabet were able to use the same administrative services, which allowed

the companies to focus on their core goals. "Google would provide Nest financial, legal, and

administrative resources that would help them grow," (Alcacer, Et al., 2018). The intangible

resources include brand extension, reputation and of course, technology. Google's brand is well-

known and is spread through the many different companies that are under its umbrella. The

brand being connected to other subsidiaries, gives the new company an advantage when entering
the market. It is covered by a trusted brand. However, to shareholder's, they did not always

have a good reputation. Shareholders viewed the owners as vague and almost not trustworthy

with the money that the shareholders invested. When they brought on Ruth Porat, who came on

and gave a detailed update on the spending of the company, this affirmed shareholders that

Google was shifting into a more responsible approach to cost-reduction. Their reputation then

improved among their investors, which increased their willingness to invest in more of their

companies.

Alphabet's organizational capabilities include their general management capabilities.

Their core values stretch among the different companies underneath the over encompassing

umbrella. Ruth Porat and her cost control techniques spread throughout the company and the

bottom-up culture of the organization as a whole is something that is seen throughout the

different sectors of the organization. 90% of Google's revenue comes from advertising, so they

are quite capable when it comes to marketing and advertising as an organization in which you

can see this capability filtered over into YouTube.

The last segment of economies of scope is the demand side. Google is able to offer

different services from different companies in one package. An example of this is a Google

search on an Android phone for a YouTube video.

Economies from internalizing transactions

___The restructuring of Google in 2015 that created Alphabet as it becomes the parent

company of Google, Nest, Fiber, X, Calico, and many other subsidiaries has shown its

advantages and disadvantages. Before creating Alphabet, Google operated a lot of its investing in

R&D and other products internally but because of this philosophy that they created, they lacked a
bit of transparency with investors. In this style of management, each company operates within

their own rules so they can keep "bottom-up" google management. Each of the companies under

Google was able to invest more in their projects they were working on without worrying about

failing; therefore, having a financial consequence on the company. This meant most of the

projects were internalized within their own companies but primarily owned by Google. Once the

company was restructured in 2015, many of those companies that operated individually were

now being overseen by Alphabet. This plan was to give investors a sense of security that

somebody was looking into all the money that was being used for projects and to make

overspending was at a minimum. The consequence of this was everything was still internalized,

and the software and hardware developments were not outsourced but these projects were

supervised by Alphabet. It created another layer of bureaucracy that many employees and key

employees complained about like the former CEO of Nest. Employees say they were not as free

to work on innovative projects before the restructure because Alphabet wanted to make sure a lot

of the money didn't go to these risky projects. These lead lo long time employees leaving the

firm because the company cared more about making sure costs were down. This led to a minor

deuteration of the original "bottom-up" management that Google had for years.

Most of the activities that were outsourced are all the manufacturing for products such as

Nest thermostats, Google phones, and other products. The reason why it is cheaper to build these

products is due to the cheaper labor and parts. The things for the company to stay internalized is

software development and other new projects because it is easier to communicate. After all,

employees are close together and would have fewer communication barriers to deal with.
Parenting Advantage

Alphabet is considered a parenting company as it diversifies itself in other firms in order

to add value to that business greater than any other potential parent firm (Grant, p. 351). Google

and Nest began to expand, and they thought by restructuring into a holding company it would

benefit financially and have the opportunity for future growth. This type of diversification

allows for large firms to dwell in the same environment to create the most value. The parenting

advantage allows Alphabet to use its own operating system, Google, to diversify into unrelated

firms, it can cause vertical and horizontal growth and can induce predatory pricing throughout

industries and markets. This type of profit/value generation is a way to excel competitively.

Alphabet utilizes its strengths in corporate management in order to grow other firms to

make them successful and more valuable. Unlike Porter's Five forces, instead of sharing

resources for the benefit of the firm they are sharing management strategy and creating a

relationship with a new firm in order to expand as a unit. This type of diversification can be risky

as it must entice others to work with the parenting firm and fall under their holding company.

Many competitors may see this as an opportunity to gain profits at a quick pace, however,

parenting advantage is only worth the value that is deemed by other firms.

Internal Market

Whenever Google made the decision to essentially go backwards in regards to the

architecture of their brand, Alphabet was met with head scratches and a lack of understanding by

the public. Alphabet however, is only relevant to the internal world of the holding firm. Alphabet

is the roof over the heads of Google, Google Capital, Google Ventures, Nest, Fiber, Google X,

and Calico. They operate individually but also have the ability to share information, techniques,
and strategies with one another quite easily. Alphabet exists because Google has grown so

rapidly and they believed by creating a holding finn it would allow more companies to fall under

its umbrella. Not only have they done so in the most basic definition of the tenn, but also

acquired other companies such as Youtube and merged with several other companies as well.

With the Alphabet structure, it will be easier for them to do so. Alphabet has avoided some of the

disadvantages of being so diversified such as turf battles and ego building. They have done so by

creating a culture that is conducive to innovation. They let each of their brands employees do

things their own way, which also helps protect against corporate risk. This type of work

environment does bring some drawbacks and risk as money invested in failed projects is

inevitable. The vast majority of Alphabet's business is still generated through search and ad

revenue from Google. They have created a collection of inter-connected services and

applications. This is important because the more products that a consumer uses, the more profit

Google earns from advertising. Alphabet and its brands benefit overall from Google's success in

this case.

Alphabet has also changed their internal labor market strategy in recent years as a result

of the change in architecture. Founders Larry Page and Sergey Brin no longer are managing

Alphabet or Google. Instead, they have given the CEO status to Sundar Pichai who was already

the CEO of Google. This is important because Pichai has been at Google for over 15 years and

the infonnation he already has about the company and its strategies is invaluable. The labor

structure has also changed in the way that now Alphabet has more contractors that it works with

than it does direct employees. This structure saves the company money, but the workers are

affected by the costs as well as having less job security. The contract workers lack the benefits
that regular employees do and make less money as well. This structure does help Alphabet with

costs, but it in tum hurts the contracted workers that it hires.

Alternatives

The first alternative that would be beneficial to Alphabet is further diversification.

Diversification is a growth strategy that involves entering into a new market with new products.

Diversification can help the company increase sales and revenue. It would help them gain market

share because diversification would expand their customer base. Diversification will help the

brand grow faster as well. "This constitutes the core of Alphabet business strategy (Google

business strategy). Starting from the search engine business in 1998, the product portfolio of the

company has been consistently expanded. Today Alphabet Inc. offers the widest ranges of

products and services including self-driving cars, indoor and outdoor cameras, learning

thermostats, and smoke alarms and even products to stop mosquitoes in their tracks" (Alphabet

(Google) Business Strategy and Alphabet (Google) Competitive Advantage - Research-

Methodology, 2017).

The second alternative that would be beneficial to Alphabet is expanding product

development. In order to be successful in product development is to invest in Research and

Development. "In 2014, Google spent 12% of its revenues on research and development, the

highest percentage since the company's 2004 IPO. In all, the company spent $9.8 billion on

R&D, up 38% from 2013. Meanwhile, online advertising continued to dominate, generating

nearly 90% of total revenues in 2015. Some of those profits had been funding the company's

moonshots, but consolidated reporting made it difficult for investors to evaluate the performance
of these riskier endeavors" (Aleacer, Et al., 2018). This investment will help find what the

problem is, and how to fix it. It will also help find out the market availability of different

products. Whenever a product is launched, marketing is one of the most important things. They

need to create an interest in the product for consumers so that they feel the need to buy the

product.

The third alternative that would be beneficial to Alphabet is growth through acquisitions. Growth

through acquisitions would help gain competitive advantage for Alphabet. Alphabet CFO said,

"The main thing that we've said is that the primary use for that (pile of cash) is organic growth

and acquisition growth. We look at acquisitions all the time. We've done some really important

ones for us - YouTube and DoubleClick and others came to us through acquisition. But we have

a high bar. The acquisitions that we've talked about really in particular fill in holes in the cloud

and that's been really valuable." (Townsend, T., 2017). Through acquisitions,Alphabet gains new

skills, improves current products, and better technology. Acquisitions also add onto the

company's resources and capabilities, which improves the company's competitive advantage. It

also creates economies of scale, because you can use the same marketing and sales strategies you

use on the current company, on the new company, which lowers the cost.

Strategic Rec:ommendatious
The best alternative would be the third alternative because growth through acquisitions

promotes the company in various ways. They already are the parent company ofGoogle. As

stated before Google is the most popular search engine. The acquisition ofYouTube was a major

strategic move. YouTube is the most popular online video streaming company. The best thing

about these acquisitions is that they are horizontal integrations. They should continue this trend
because it truly expands the company. As opposed to the other alternatives, growth through

acquisitions is more beneficial to the company. Alphabet grows the company externally and

internally. Externally they are able to provide more to their customers. More services and

products help create that loyalty between consumer and company. Consumers are going to be

able to rely on Alphabet the more service they offer. It creates the "all-in-one" effect. Internally

they are able to create more jobs. If they are able acquire more land they can have employees in

those new cites. By creating new jobs for current employees, they create new opportunities for

them. Allowing employees to move up the ladder into management positions. This is a domino

effect, when employees know they have the opportunity to grow in the company, they show

higher productivity. Acquisitions create opportunities for new technology advancements. With

new technology comes opportunities for employees to gain new skills. Overall, Alphabet gains

more through strategic acquisitions deals both in accounting profits and economically. They

benefit the company on both ends of the spectrum, from the consumer's side and the employee

side making it the most applicable strategic recommendation.

 References

Grant, R. M. (2016). Contemporary strategy analysis. Chichester, West Sussex, UK: Wiley.

Townsend, T. (2017, May 31 ). Alphabet's acquisition strategy has focused on cloud, says CFO

Ruth Porat. Retrieved December 02, 2020, from

https://www.vox.com/20 I7/5/3 I/ 15 720458/alphabet-google-acguisition-appetite-focus-

cloyd-ruth-pora(

Alcacer, Juan, Raffaella Sadun, Olivia Hull, and Kerry Herman. "Alphabet Eyes New Frontiers"

Harvard Business School Case 717-418, July 2016. (Revised February 2018.)

Alphabet (Google) Business Strategy and Alphabet (Google) Competitive Advantage - Research-

Methodology.(2017, June 17). Retrieved December 02, 2020, from https://research-

methodology.net/alphabet-google-business-strategy-and-alphabet-google-competitive-

advantage/