Guest author Christopher Lochhead is a cofounding partner of Play Bigger Advisors. He wrote this post with his partners Al Ramadan and Dave Peterson.
“Gravity is working against me. And gravity wants to bring me down.” —John Mayer
Asking why Google created Alphabet is the wrong question.
The right questions to ask are: Why did Google miss social networking? How is it that limo company Carey didn’t see the opportunity in smartphone-powered transportation and Uber’s founders did? Why did it take SAP until 2011 to get into cloud apps, twelve years after the founding of Salesforce.com? And how come most of the innovation in technology security is coming from startups and not Symantec, McAfee, or Bluecoat?
Existing Markets Have Gravitational Pull
We believe the answer to these questions lie in what might be the most powerful force in business—the gravitational pull of existing markets. Gravity drags executives of existing businesses toward perfectly rationale decisions like listening to customers, meeting salespeople’s requests, responding to competitors’ moves, and thinking about new features for current products.
Managers tasked with competing for market share in known categories don’t question these priorities. But it turns out they are death when it comes to inventing new products, business models and market categories.
Eddie Yoon, a principal with The Cambridge Group, a consulting firm, in a landmark article for the Harvard Business Review, writes:
… category creation is the exception for large companies, not the rule. According to data in Nielsen’s Breakthrough Innovation Report, only 13% of the world’s leading consumer product companies introduced a breakthrough innovation from 2008 to 2010. Although large companies have the resources, capabilities, and growth aspirations to drive category creation, many market leaders merely sit on the sidelines watching new entrants create breakthrough products and business models.
Managing Versus Creating
The Google search business is one of the greatest technology Category Kings of all time. The search business unit is responsible for almost all of Google’s $66 billion in revenue. ComScore says Google has 67 percent market share and the space is growing at an annual rate of 26 percent At most large companies like Google, executives focus on managing and growing existing businesses. In a lot of ways they get paid to not screw up. Clearly, for Google, the smart thing to do is milk this cash cow forever.
The only problem—a legendarily awesome, high-class problem—is what about all of the new innovation Google wants to do? The gravitational pull of the search business inside Google is surely massive.
In the blog post announcing the change to Alphabet, CEO Larry Page wrote that his cofounder “Sergey [Brin] and I are seriously in the business of starting new things.”
If you take Larry at his word, he and Brin are decoupling managing the “as-is” business from creating “to-be” businesses. It is likely that entrepreneurially minded executives inside Google had become trapped by the inertial force of the search business. Gravity-bound executives work 80 hours a week doing business reviews, responding to customer demands, flying around hell’s half-acre on sales calls, meeting with investors, and so on. That’s required to run a successful operation.
The downside is that people “tinkering” on new stuff can seem irritating to executives focused on the core business. A good example of this is the troubled state of Google Now, which is falling behind competing offerings from Apple and Microsoft. Those charged with building the next great business simply don’t get much time, attention, or funding. This gravity dynamic can make it meaningfully harder for the people designing new products, business models, and categories to succeed, especially if they are competing with startups who are solely focused on new category potential.
If any of this was the case inside Google, devising a strategy to cultivate innovation, while preserving the core business would be smart.
Rocking Out To The Next Wave Of Change
Like the ’80s rock bands who used to play stadiums and now headline county fairs—any Loverboy fans still around?—the technology industry is littered with elderly Category Kings who cease to create breakthrough products and categories and lose relevancy over time. Page and Brin are clearly trying to avoid this fate.
In this context, Alphabet can be seen as a way to break the newer parts free from the gravity of the colossal search business, increasing their odds of independent success. Nest, led by the entrepreneurial CEO Tony Fadell, is a clear example.
If it works, Google could become a Category Kingmaker, while growing the core Google business at the same time. If that happens, we’ll be talking about Google for decades to come. If it doesn’t—well, there are always those county fairs.
Photo by Philip Cohen
