I is for Innovation

Google’s decision to create a holding company called Alphabet comes as a major surprise, a rare event that is one of the most ambitious, drastic, and radical moves that we have seen in a long time. On few occasions have we seen one of the most important companies in the world implement change on this scale, involving not just a name, but a wholesale reorganization.

The most interesting thing about the announcement is the extent to which innovation management has become so strategically important.

To be clear: I have been discussing and teaching about innovation management for a long, long time now, and imagine that it’s relatively normal for us to understand change, and to try to explain it using aspects of our daily reality. I do not know if by now there are financial experts trying to explain this announcement in the context of company valuation or share price evolution, understood in marketing terms as the importance of brand management, or in fiscal terms as the possible consequences for taxation, but I fear these aspects are secondary, simple consequences of a move that is fundamentally about innovation management, an attempt to find a structure that allows resources destined for innovation to be separate from those used in corporate management.

Google’s main problem, like all other growing companies, has been managing innovation: as the company has moved from startup to become one of the most important companies in the market, and among those that have contribute the most in terms of defining the variables of the new environment, we have seen a steady transition toward its bureaucratization. This is a consequence of the growth that takes place in most companies, and that in this sector alone has brought us textbook cases like Yahoo!, which never recovered from it, creating a situation in which founders and key shareholders are far from comfortable with. Managing a radically diversified company meant keeping a lot of balls in the air, and plates spinning, too.

As soon as Larry Page took over running the company, he began scaling back, setting priorities so as to be able to refocus the company and avoid dispersion. This week’s move is the opposite, and shows acceptance that the nature of the project is constant diversification based on the opportunities out there that can help change the world, while creating a structure that allows for individual projects, optimizing their management.

This is not going to be easy: most companies tend to grow and become bloated in the process, which impacts negatively on their ability to innovate, leading them to focus on managing their main business: such is the perverse dynamic of the markets.

Being an Alphabet investor is not the same as being a Google investor, whatever the shareholder structure. A Google shareholder has a stake in a mature company with a constellation of challenges that have a lot to do with an entity so big that it moves like an elephant in a china shop, bumping into anti-monopoly legislation or the regulators every time it announces a new move. The expected growth that the market discounts in a company like Google is marginal, perhaps higher du to the dynamism of the industry, but diluted by dependence on a business model known by all.

Whereas Alphabet is something else completely: a collection of initiatives able to exploit the market, and that shouldn’t be diluted or eclipsed under the Google umbrella. The new structure will make it independent of that, giving these initiatives a character of their own, on a par with the search engine, giving them a management focused on their specifics. Leaving Sundar Pichai to manage Google is not just taking better advantage of a previously undervalued resource, but freeing up Larry Page, Sergey Brin, and Eric Schmidt to work on other things.

In short, this is a nice move. The market has welcomed it, sending share prices to record highs, and impatiently waiting for further news about the reorganization. Knowing the company and the image Larry Page likes to project, the announcement makes perfect sense. All that remains now is to go from announcement to reality.

(En español, aquí)