12 Aug 15 Industry Insights
Google may still be known for search, but it’s done a whole lot more since its founding in 1998. From building an entirely new type of advertising to creating a driverless car, Google has been quite relentless in the breadth of its technological innovation.
The breadth of the Google Empire, however, has evidently raised some concerns for its founders Larry Page and Sergey Brin. Empires tend to crumble when they are stretched too thin, so allowing these various subsidiaries – Google, Google Ventures, Google X, Nest, Calico, Fiber, Google Capital – to run as independent businesses should protect the long-term prospects of the organisation.
Google Alphabet Org Chart. Source: CNNMoney
But how does restructuring achieve this exactly?
To answer this question I’m going to turn to one of the most – if not the most – influential books on the tech industry, which analyses how innovation takes place. It provides a robust theory on why we often see market leaders collapse because they fail to capture the next wave of emerging technology and how small entrants with less resources and compete with and defeat former market leaders. Of course, I’m referring to The Innovator’s Dillema , by Clayton M. Christensen (1997).
Let’s take a look at the section of The Innovator’s Dilemma which explains why “new technologies cause great firms to fail”:
What Christensen’s theory — and the substantial evidence that backs it— suggests that while incumbent firms are usually the ones that identify and develop new technologies (and successfully reorganise themselves to achieve this), they often fail to value new innovations properly. This is mainly because they try to apply new innovations to their existing customers, product architectures or value networks. New technologies are typically too new and weak for the more mature value networks of established firms, so the ROI needed to advance the innovation appears too low to be viable. Management rejects the continued investment in these emerging technologies under the belief that they are acting in the company’s best financial interests. Moving into a new market is also rejected because they appear too small to be viable and their cost structure prevents them from entering with practical margins.
Therefore, new entrants (often founded by ex-employees of established market leaders) don’t have much to lose when they enter these small emerging markets. These startups don’t pose a threat to larger, established companies at first as they apply new technologies mainly through trial and error and at relatively low margins. Their agility and lower cost structures allow them to operate sustainably where established firms could not.
However, when these startups find the right application use and market, they advance rapidly and reach the steep part of that good ol’ “S” curve , eventually disrupting the higher margin and more mature markets occupied by the established companies.
Was Google Influenced By The Innovator's Dilemma?
Looking at Google through the framework that Christensen provides, we can now see that the main concern that Google – and any market leader – is battling is not so much the quality of their management but the risk of overlooking new technologies and highly lucrative gaps in the market.
Google’s new structure – as a cluster of established tech businesses and startups – provides an interesting solution to the “innovator’s dilemma” as it could allow each subsidiary to invest their resources and attention with a futuristic frame of reference that prioritises the search for new technologies and the markets they can disrupt as much as the improvement of existing products and services, which - according to Christensen's logic - should safeguard Google's position as a market leader.
As Google was founded only 1 year after The Innovator’s Dilemma was published, it’s possible that Page and Sergey were influenced by Christensen’s ideas from the very beginning. Google operates under the belief that the key to achieving and sustaining market leadership is to explore alternative business models, strategies and structures that prioritise innovation and entrance into new untapped markets.
In their original founders letter they stated, “Google is not a conventional company. We do not intend to become one.” In a TED talk last year, Page commented, “Companies are doing the same incremental thing that they did 50 years ago, 20 years ago. That’s not really what we need.” And in Monday’s blog post Page wrote, “Sergey and I are seriously in the business of starting new things.”
Will this brave strategy sustain Google’s position as a market leader in the tech world? Only time will tell, but this is possibly the first time we've seen a major market leader that has incorporated Christensen's theories in The Innovator's Dilemma to establish a new organisational structure and modus operandi, and that's surely something to get pretty excited about.
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