Part III: Alphabet/Google and Structure of Innovation

If you had $620 billion to spend over the next ten years in promoting innovation, what would you do? Alphabet’s annual gross margin is $62 billion and it can spend billions each year on thousands of projects. There is a method to Alphabet’s spending. To ensure that each project receives appropriate funding and support, Alphabet matches each project to one of seven structures. Here I will define each of the seven structures and examples of how Alphabet uses them to execute on its strategy. Fortune 500 and government leaders can learn from Alphabet’s approach in order to execute their strategy by matching the right types of innovation to the right level of funding and support.

Structure

“Structure follows strategy” is a phrase coined in 1962 by Alfred DuPont Chandler, Jr., a professor at Harvard Business School. It is meant to convey that corporate structure is created to implement a given corporate strategy.1Successful innovation depends on the structure where the innovation is started, grown, and maintained. Google’s parent company, Alphabet, uses a combination of structures in order to achieve its strategic imperative of continuous innovation. This imperative is noted in Alphabet’s 2004 Founders’ IPO Letter “An Owner’s Manual for Google’s Shareholders”:

We will not shy away from high-risk, high-reward projects because of short term earnings pressure. Some of our past bets have gone extraordinarily well, and others have not. Because we recognize the pursuit of such projects as the key to our long term success, we will continue to seek them out. For example, we would fund projects that have a 10% chance of earning a billion dollars over the long term. Do not be surprised if we place smaller bets in areas that seem very speculative or even strange when compared to our current businesses. Although we cannot quantify the specific level of risk we will undertake, as the ratio of reward to risk increases, we will accept projects further outside our current businesses, especially when the initial investment is small relative to the level of investment in our current businesses.2

The varied structures that Alphabet chooses are each designed to accomplish a specific objective based on what type and grade of innovation Alphabet seeks to accomplish. Alphabet engages in the following structures:

  • Sustaining innovation in its core operations, such as datacenters.
  • New product development aligned with its core business, which have resulted in Gmail and Adsense.
  • Joint ventures to acquire a specialty that it doesn’t have in house, such as working with automobile manufacturers to develop self-driving cars.
  • Research in several technological domains. Pushing the boundaries of the entire tech ecosystem by publishing proprietary research, research grants, and open challenges.
  • An innovation lab, now called X, in order to explore “moonshot” innovations.
  • A venture fund, GV, that invests in companies outside of its conglomerate.
  • Acquisition of companies and projects, such as its purchase of YouTube.

Sustaining Innovation

The top 4 websites worldwide, based on traffic, are Google, Facebook, YouTube, and Gmail. Google, YouTube, and Gmail are all Alphabet products. Managing all the traffic and data from those sites requires a tremendous amount of networking, data management, distributed systems and parallel computing, server hardware and architecture, security, privacy, and energy consumption.

Google standardizes its data centers to reduce waste and costs. It has implemented common procedures to reduce costs and complexities, and increase security.3 Google employs security teams, privacy teams, and internal audits and compliance specialists. Internal processes and quality are so high that recently a datacenter passed an incredible milestone; 3 million man hours or 1,442 work years with zero lost time incidents, which means an injury to an employee with at least one full day of lost time. 4

While operations seek organizational stability, developers seek change and testers seek risk reduction.5 To manage these opposing forces, Google engages in dev-ops, an approach where building, testing, and releasing software can happen rapidly, frequently, and more reliably.6 The speed and scale at Google is difficult to imagine. More than 5,000 developers in 40 offices are working on more than 2,000 active projects and running more than 100 million test cases a day. Making a significant investment in central tools team resulted in a measurable boost in engineer productivity. A central tools team provided standard automation and testing tools to support developers, which saved 600 work years from 2008–2009.7

New Product Development

Alphabet innovates by improving its core and ancillary products and services through structured and unstructured projects. The founders, in their 2004 Founders’ IPO Letter, claim that this is a strategic decision and that the organization naturally supports these kinds of initiatives.

…we expect to devote the vast majority of our resources to improvements to our main businesses (currently search and advertising). Most employees naturally gravitate toward incremental improvements in core areas so this tends to happen naturally.8

Structured Projects

Gmail was a new product launched April 1, 2004. Larry Page, Google co-founder claimed that Gmail originated from user frustration with other email services at the time, such as Hotmail and Yahoo Mail.9

It was a structured project, or in other words an executive decision to build a new email service. Paul Buchheit, Gmail’s creator, explained that “it was an official charge, I was supposed to build an email thing.”10

Development of Gmail took over two years and there was some internal disagreement on whether email should be a focus. Buchheit said: “A lot of people thought it was a very bad idea, from both a product and a strategic standpoint. The concern was this didn’t have anything to do with web search. Some were also concerned that this would cause other companies such as Microsoft to kill us. Larry [Page] and Sergey [Brin] were always supportive.”

The email service was, in the end, closely related to its core business of search and advertising. Google’s search technology allowed Gmail to search the content of users’ emails and display advertisements based on that content, creating a successful/robust/reliable revenue model.

In order to leverage the power of search and provide more and better ads, Gmail needed to motivate users to save a greater number of emails. Google elected to allow a 1GB storage limit, 500 times greater than the industry standard storage limits. As of February 1, 2016 Gmail has over one billion users.

Unstructured Projects

Some of Alphabet’s products come from employees taking their own initiative to work on a project in their spare time. In fact, Alphabet encourages employees, in addition to their regular projects, to spend 20% of their time working on projects they think will benefit the company. This time encourages employees to be more creative and innovative. The 2004 Founders’ IPO Letter describes the 20% time concept:

Many of our significant advances have happened in this manner. For example, AdSense for content and Google News were both prototyped in “20% time.” Most risky projects fizzle, often teaching us something. Others succeed and become attractive businesses.11

Adsense was a product that came from the 20% time. It allows websites and blogs to monetize their sites by delivering Google ads alongside their own content. Adsense uses the same web-search technology Google Search uses to discover content on the web to scan the site content (and other relevant factors) to determine which ads to deliver.

Adsense generated $15 billion, or 20% of total revenue for the fiscal year ending December 31, 2015.12

Research

Google benefits from fast moving technology and a constantly changing industry because it is positioned to move quickly and incorporate these changes through its products/services and operations. Google Research is intended to drive innovation throughout the entire tech ecosystem and maintain Google at the forefront of the change.

Google conducts research in several of the most challenging technological domains. The research team (selectively) publishes findings in order to engage others outside of the company. Google Research has produced:

  • 21 research domains (computer science and related fields)
  • 3,552 publicly published articles often tested through real product implementation at scale.
  • 19 Public Research Datasets
  • 20 million lines of code on 900 open source code projects

Google Research does outreach to support academic research by providing funding, open tools, data and code. Below is a list of three representative grant programs:

  • Faculty Research Awards. One year grants to roughly support the cost of one graduate student in one of 18 domain areas.13
  • Focused Research Awards. Multi-year projects granted on an invite-only basis to support research in one of the 21 domains.14
  • Google Earth Engine Research Awards. One year gifts of up to $150,000 to support research in the area of geospatial data analysis15

Google Research also promotes open challenges to solve important problems. For example, in February 2016 Google and IEEE awarded a $1 million prize for creating a smaller energy inverter.16 Inverters are the boxes that take direct current from a device like solar panels and turn it into alternating current to be used by other electrical devices. The challenge rewarded the team that could fit an inverter into the smallest rectangular enclosure while maintaining minimum specifications.17 Teams retained their intellectual property, but published technical approach documents. Electrical engineering experienced a breakthrough and Google may use “these improvements [to] make our data centers run more safely and efficiently.”

Joint Venture

Joint Ventures are another way for Alphabet to engage innovation by focusing on its organizational specialization but still cross technical disciplines by accessing the speciality of another organization. A joint venture is an arrangement in which two or more parties agree to pool their resources for a new project. Joint ventures often include a licensing agreement by the parties which defines the compensation and regulates the use of the proprietary information shared during the joint venture.18

Through the innovation lab, X, Alphabet developed smart contact lenses due to its expertise in miniaturized electronics, low power chip design and microfabrication. But it needed to acquire expertise in the physiology and visual performance of the eye, clinical development and evaluation- including FDA approval in the United States, as well as commercialization of contact and implant lenses. To that end Alphabet entered into a license agreement with Novartis, a multinational pharmaceutical company with $50 billion in annual revenue.

Novartis’ interest in this technology is currently focused in two areas:

  • Continuously measure tear fluid to monitor glucose levels for diabetic patients. The lens sends the readings wirelessly to a mobile device.
  • Provide autofocus correction on near objects for people living with presbyopia (farsightedness), who can no longer read without glasses.

“We are looking forward to working with Google to bring together their advanced technology and our extensive knowledge of biology to meet unmet medical needs,” said Novartis CEO Joseph Jimenez when announcing the agreement.19

Innovation Labs

Some types of projects benefit by being separate from ongoing operations. There are several possible reasons for this. For example, it may be beneficial to limit the number individuals with access to a secret or sensitive project. Separation may also accelerate development by allowing a project to avoid time-consuming procedures applicable to normal operations, such as quality assurance or procurement restrictions. Separation may also allow a company to explore new products or services outside of the core business. This structure was made famous by Lockheed Martin’s Skunk Works.

The launch of the Skunk Works division occurred during World War II. In 1943 the United States needed to respond to Germany’s development and deployment of jet fighters. Lockheed’s chief engineer, Clarence “Kelly” Johnson received a secretive project with a very tight deadline. Johnson promised the Pentagon a jet fighter prototype in 150 days. He selected a group of engineers and separated them from the rest of the factory. His engineers developed a jet prototype in 143 days, creating the P–80 Shooting Star.20

Since 1943 Skunk Works has pursued the mission to “build the world’s most experimental aircraft and breakthrough technologies in abject secrecy at a pace impossible to rival”. The division has won six Collier trophies, the most prestigious award in the aeronautics industry. The Skunk Works approach is described in the notes Kelly Johnson made in his logbook while working to prepare the U–2 for its first test flight on July 15, 1955. “Airplane essentially completed. Terrifically long hours. Everybody almost dead.”21

Alphabet has its own innovation lab, now called X, in order to pursue “moonshot” innovations. Since 2010 X has been led by Astro Teller, an entrepreneur and scientist. Teller holds a Bachelor of Science in computer science and Masters of Science in symbolic computation from Stanford University and a PhD in artificial intelligence from Carnegie Mellon University. X’s projects has included the self-driving car, Google Glass & Google Lense, Project Loon (delivering internet via balloons), Makani (kites that generated energy), and a drone delivery service dubbed Project Wing.

In an annual report filed with the Securities and Exchange Commission, Alphabet claims:

Many companies get comfortable doing what they have always done, making only incremental changes. This incrementalism leads to irrelevance over time, especially in technology, where change tends to be revolutionary, not evolutionary. 22

X aims for revolutionary change, what the team calls Moonshots. In February 2016 Astro Teller defined what X looks for and his definition of moonshots, in an open blog post:

We look for a huge problem in the world that affects many millions of people. Then we try to propose a radical solution for solving that huge problem. And third, there needs to be some reason to believe that the technology for such a radical solution could actually be built. Some glimmer of hope to get us going and some clear first few steps we could take along that journey…
We spend most of our time breaking things and working to discover that we’re wrong. That’s it. That’s the secret. Run at all the hardest parts of a problem first. Ask cheerfully, “How are we going to try to kill our project today!”23

Huge problems that have not heretofore been solved are either very difficult or impossible to solve. Astro and his X team want to figure out as quickly as possible which of those two is correct with respect to a given problem. Once a breakthrough has been made, the project graduates out of X.

Venture Fund

Alphabet allocates $400 million a year to fund companies outside of its conglomerate through the GV venture fund (formerly called Google Ventures). GV is a venture capital firm, with a total of $2.4 billion under management that invests money in startups and also provides speciality support in life science, design, engineering, recruiting, and marketing.24

Larry Page, Alphabet’s CEO has told Bill Maris CEO of GV, “Do as much as you can, as fast as you can in as big and disruptive a way as possible” and even inquired “What do you think you could do with a billion a year?”25 -26

The tactical purpose, like any other venture fund, is to earn a financial return. So the VCs make investments with high-growth potential and relative to the innovation lab X, a high likelihood of success. There are three reasons that the VC model is needed. First, it recognizes Alphabet does not hold a monopoly on good ideas. Second, being a startup outside of the conglomerate can provide greater flexibility and responsiveness to the market. Finally, the search for financial return and independence allows startups to compete directly against any other Alphabet company and/or be sold to an Alphabet competitor.27

Acquisition & Integration

Alphabet acquires companies or projects if they compliment Alphabet’s business and there is some aspect of the acquisition that it could not build themselves, such as its acquisition of YouTube.28

Google didn’t purchase Youtube as a reaction for failing to see the coming trend in online videos. It didn’t purchase Youtube because the technology was too difficult or because it required a specialty that wasn’t readily available. Google had its own video product, but was losing to a startup that was not generating revenue and had significant copyright concerns.

Susan Wojcicki is the current CEO of Youtube and employee number 16 of Google. She played a critical role for the $1.65 billion purchase of the video-sharing website. In 2006 Wojcicki was running a department called Google Video.

“I knew it was going to be really hard for us to catch up, and that this was a real phenomenon,” Wojcicki said. “I understood it, because we had our own product.” In just one day Wojcicki developed a financial model and presented to Google’s board of directors who approved the acquisition.29Youtube only spent a little more than a year as a standalone company before being acquired, and was Google’s largest acquisition at the time.

In the 2015 annual financial report, Alphabet stated: “People thought we were crazy when we acquired YouTube… But [Youtube has] matured into major platforms for digital video.”30

Conclusion

There is no one correct answer to how to create, cultivate, and sustain innovation. Alphabet’s structure serves as a great reminder that each type of innovation needs appropriate funding and support. “Structure follows strategy” and there is no one correct answer to strategy.

  1. Chandler, A.D. Jr. (1962). Strategy and Structure: Chapters in the History of the American Industrial Enterprise. Cambridge, MA: MIT Press ↩︎
  2. “2004 Founders’ IPO Letter.” Alphabet Investor Relations. Alphabet, Inc, 18 Aug. 2004. Web. 13 Mar. 2016. https://abc.xyz/investor/founders-letters/2004/ipo-letter.html. ↩︎
  3. “How Google Protects Your Data.” Google for Work Security and Compliance Whitepaper (n.d.): n. pag. Google for Work. Google. Web. 12 Mar. 2016.https://static.googleusercontent.com/media/apps.google.com/en/US/files/google-apps-security-and-compliance-whitepaper.pdf. ↩︎
  4. “Inside a Google Data Center.” YouTube. Google for Work, 16 Dec. 2014. Web. 13 Mar. 2016. https://youtu.be/XZmGGAbHqa0. ↩︎
  5. Loukides, Mike (11 June 2012). What is Devops?. Oreilly Media. ↩︎
  6. Floris, Erich; Chintan, Amrit; Maya, Daneva (2014–12–10). “A Mapping Study on Cooperation between Information System Development and Operations”. ↩︎
  7. Kumar, Ashish. “Development at the Speed and Scale of Google.” (n.d.): n. pag. Engineering Tools. Google. Web. 14 Mar. 2016.https://qconsf.com/sf2010/dl/qcon-sanfran-2010/slides/AshishKumar_DevelopingProductsattheSpeedandScaleofGoogle.pdf. ↩︎
  8. 2004 Founders’ IPO Letter. “An Owner’s Manual” for Google’s Shareholders. Larry Page & Sergey Brinhttps://abc.xyz/investor/founders-letters/2004/ipo-letter.html ↩︎
  9. “Google Gets the Message, Launches Gmail.” News from Google. Google, 1 Apr. 2004. Web. 15 Mar. 2016.http://googlepress.blogspot.com/2004/04/google-gets-message-launches-gmail.html. ↩︎
  10. McCracken, Harry. “How Gmail Happened: The Inside Story of Its Launch 10 Years Ago.” TIME. TIME, Inc., 1 Apr. 2014. Web. 14 Mar. 2016.http://time.com/43263/gmail-10th-anniversary. ↩︎
  11. “2004 Founders’ IPO Letter.” Alphabet Investor Relations. Alphabet, Inc, 18 Aug. 2004. Web. 13 Mar. 2016. https://abc.xyz/investor/founders-letters/2004/ipo-letter.html. ↩︎
  12. “FORM 10-K.” UNITED STATES SECURITIES AND EXCHANGE COMMISSION. Alphabet, Inc, 1 Feb. 2016. Web. 12 Mar. 2016.https://abc.xyz/investor/pdf/20151231_alphabet_10K.pdf.. ↩︎
  13. “What Are the Global Faculty Research Awards?” Research at Google. Google, n.d. Web. 15 Mar. 2016. https://research.google.com/research-outreach.html#/research-outreach/faq/faculty-research-awards. ↩︎
  14. “What Are Focused Research Awards?” Research at Google. Google, n.d. Web. 15 Mar. 2016. https://research.google.com/research-outreach.html#/research-outreach/faq/focused-research-awards. ↩︎
  15. “What Are Google Earth Engine Research Awards?” Research at Google. Google, n.d. Web. 15 Mar. 2016. https://research.google.com/research-outreach.html#/research-outreach/faculty-engagement/earth-engine-research-awards. ↩︎
  16. Koningstein, Ross. “And the Winner of the $1 Million Little Box Challenge Is…CE+T Power.” Research Blog. Google, 29 Feb. 2016. Web. 14 Mar. 2016. http://googleresearch.blogspot.com/2016/02/and-winner-of-1-million-little-box.html. ↩︎
  17. “Detailed Inverter Specifications, Testing Procedure, and Technical Approach and Testing Application Requirements for the Little Box Challenge.” Little Box Challenge. Google, 22 July 2014. Web. 14 Mar. 2016. https://www.littleboxchallenge.com/pdf/LBC-InverterRequirements-20150717.pdf. ↩︎
  18. “World Intellectual Property Organization.” Technology Licensing. World Intellectual Property Organization, n.d. Web. 15 Mar. 2016.http://www.wipo.int/sme/en/ip_business/licensing/technology_license.htm. ↩︎
  19. “Novartis to License Google “Smart Lens” Technology.” Novartis Media Relations. Novartis, 15 July 2014. Web. 15 Mar. 2016.https://www.novartis.com/news/media-releases/novartis-license-google-smart-lens-technology. ↩︎
  20. “Missions Impossible: The Skunk Works® Story.” Historical Programs. Lockheed Martin, n.d. Web. 12 Mar. 2016.http://www.lockheedmartin.com/us/100years/stories/skunk-works.html.↩︎
  21. “Missions Impossible: The Skunk Works® Story.” Historical Programs. Lockheed Martin, n.d. Web. 12 Mar. 2016.http://www.lockheedmartin.com/us/100years/stories/skunk-works.html.↩︎
  22. “FORM 10-K.” UNITED STATES SECURITIES AND EXCHANGE COMMISSION. Alphabet, Inc, 1 Feb. 2016. Web. 12 Mar. 2016.https://abc.xyz/investor/pdf/20151231_alphabet_10K.pdf.. ↩︎
  23. Teller, Astro. “The Secret to Moonshots? Killing Our Projects.” Backchannel. Medium, 15 Feb. 2016. Web. 13 Mar. 2016.https://backchannel.com/the-secret-to-moonshots-killing-our-projects-49b18dc7f2d6#.6juxhk8gy. ↩︎
  24. Kowitz, Braden. “GV 2015 Year in Review.” GV Library. Medium, 06 Dec. 2015. Web. 13 Mar. 2016. https://library.gv.com/gv-2015-year-in-review-5a6b61e37b5b#.304zrhrzb. ↩︎
  25. Miller, Claire Cain. “Google Looks for the Next Google.” The New York Times. The New York Times, 19 July 2011. Web. 13 Mar. 2016.http://www.nytimes.com/2011/07/20/technology/google-spending-millions-to-find-the-next-google.html ↩︎
  26. McBride, Sarah. “Exclusive: Google Ventures Beefs up Fund Size to $300 Million a Year.” Reuters. Thomson Reuters, 08 Nov. 2012. Web. 13 Mar. 2016. http://www.reuters.com/article/us-venture-google-cash-idUSBRE8A70MD20121108. ↩︎
  27. McDuling, John. “What It’s like to Run Google’s $2 Billion Venture Capital Fund.” Quartz. N.p., 7 May 2015. Web. 15 Mar. 2016.http://qz.com/399232/what-its-like-to-run-googles-2-billion-venture-capital-fund. ↩︎
  28. “Google To Acquire YouTube for $1.65 Billion in Stock.” News from Google. Google, 9 Oct. 2006. Web. 13 Mar. 2016.http://googlepress.blogspot.com/2006/10/google-to-acquire-youtube-for-165_09.html. ↩︎
  29. Swift, Mike. “Susan Wojcicki: The Most Important Googler You’ve Never Heard of.” San Jose Mercury News. San Jose Mercury News, 2 July 2011. Web. 13 Mar. 2016. http://www.mercurynews.com/ci_17286427. ↩︎
  30. “FORM 10-K.” UNITED STATES SECURITIES AND EXCHANGE COMMISSION. Alphabet, Inc, 1 Feb. 2016. Web. 12 Mar. 2016.https://abc.xyz/investor/pdf/20151231_alphabet_10K.pdf.. ↩︎
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