Alphabet Eyes New Frontiers

SM – Assignment – 4
Group Details:

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 Table of Contents

REPORT COVER ..................................................................................................................... 01

CONTENT............................................................................................................................... .02

PROJECT QUESTIONS & ANSWERS ................................................................................. 03

PROJECT QUESTIONS & ANSWERS (Contd.) .................................................................. .04

Alphabet Eyes New Frontiers Assignment Questions:

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Q1. Why did Google diversify to acquire YouTube and Android without having any
valuable previous expertise in videos or operating systems?

Answer:

For Google, online advertising accounted for the vast majority of ITS total revenues (95%in
2012), which was a large dependability on single search engine platform and their concern was
how they can successfully diversify their approaches in order to extract revenue from service-
based offerings and create sustainable competitive advantage.
They followed related diversification strategy, i.e. entered into a related industry where there
is some link with the organizations value chain. By acquiring Youtube and Android, they
created synergy in the business.

Youtube and Android, supported well its growing ad business by creating new markets and
also helped in retaining existing customers or users.

Q2. What is the logic of investing into Moonshots ranging from thermostats, to biotech,
robotics etc.? Is the logic of entering these businesses the same as acquiring YouTube
and Android?

Answer:

Google is a highly innovative company and constantly focuses on exploring new technological
innovations as they had long term view on changing business and technological landscape.
They placed there major bets on promising new opportunities. They had high margins and
required resources which they wanted to exploit in futuristic businesses. By doing this they
wanted to widen its scope of activities by moving away from its current products and market
to a new product and new market. In other way they wanted to reduce the risk on too much
dependency in one business.

While diversifying, they followed related and unrelated diversification strategy.

Thermostats, Biotech, Robotics are the example of unrelated diversification strategy. Where
they went to new market with new products by exploring there resources, and technological
capabilities. These investments are futuristic in nature where invention was the key for making
Google relevant in future ahead.

Whereas acquiring YouTube & Android, is a business strategy which helped them to innovate
there most lucrative ad business space with more customer base and retaining their existing
customer base.

Q3. What purpose does the reorganization and creation of Alphabet serve? What are the
pros and cons of the decision to create Alphabet to
a) Moonshots

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b) Core Google
c) Investors?

Answer:

Alphabet's structure is designed to give each separate business more independence and
freedom to grow. Reorganization would allow the company more on managing scale
and define clear strategy and clarity in Google’s core business and Bets business.

Since smart home company Nest, and experimental Google X, and age-fighting Calico
don't have much to do with Google's core research business, spinning them off makes a
good deal of sense. Google hired a big-time CFO Ruth Porat, for Alphabet, and she
wanted to add more transparency to Google's business. Alphabet's new structure gave
investors a good understanding of how well Google's" side projects" are performing, as
well as more clarity about Google's core business.
The Alphabet move was done in part to appease investors. Shareholders have been
growing increasingly anxious about Google's "moonshot" investments that may never
pay off. Since 90% of Google's sales came from advertising, Now, Google, the core
business, will be a separate run company without its CEO worrying about those "side
projects".

a) Moonshots:

Google’s whole motivation for creating the Alphabet holding structure in the first
place was to force more financial discipline at its various “moonshots” and other
Businesses, like Nest, that didn’t fit neatly into Google’s core focus

Earlier Google was abruptly investing on Bets businesses and they were among the top
spenders in the industry, 12% of their revenue was invested in R&D in 2004. But they did not
have any clear evaluation metrics to evaluate performance of these riskier endeavors.

And it was also difficult for a CEO to manage such a diversified conglomerates with equal
focus and financial discipline. Reorganization in other way gave the Moonshots a separate unit
head who can have focused approach and nurture innovations and grow spending resources
prudently in Moonshot businesses. It also helped minimizes the bureaucracy in way of moving
fast, more efficient and little more independent.

Google always kept there innovations ahead of shareholders value. They always encouraged
employees to innovate following the Rule of 20%. But now organization asked each division
to be more accountable for their costs, which may lead to more caution on spending in other
way limit their relentless focus on Innovation.

b) Core Google:

CFO Porat went on to outline Alphabet’s “70:20:10 system” in which 70% of the company’s
resources were spent on the core, 20% on adjacent projects, and 10% on research. The new
restructuring helped Google to Protecting the Brand, Innovation and talent. It allows Google to
have many uncertain, but high potential, ventures without damaging the parent brand. It also
allows them the opportunity to keep the P&L separate for different areas of the company.”

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Further, he sees the move as allowing Alphabet to build brands that are further separated from
the Google brand.

c) Investors:

The Alphabet move was done in part to appease investors. Reorganizing gave a clear
picture on Business performance, which earlier shareholders have been growing
increasingly anxious about Google's "moonshot" investments that may never pay off.
Post restructuring they earned investors’ confidence and shares climbed and in the 4rt
quarter Alphabet had a higher percentage of institutional fund ownership (31%) than
any other stock. Alphabet earned best-possible 99 IBD Composite Rating and total
revenue grown up to $21.3 which is 18% growth over last year. And by Feb 2015, Share
prices almost gone up 50% higher.

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