Google’s announcement of its reorganization into Alphabet, Inc. was a surprise. Reaction has ranged from the complimentary to doomsday predictions. I think it is a brilliant strategic move that will help the company jump to the next S-Curve. More specifically, it is a great demonstration of “Three Horizons” thinking.
The Three Horizons model was described in a very insightful book called “The Alchemy of Growth: Practical Insights for Building the Enduring Enterprise”, by Mehrdad Baghai, Steven Coley. and David White, all of McKinsey. Horizon 1 is your current business, generating material business results. Horizon 2 is the business or businesses that will become your next Horizon 1 business. Horizon 3 is where a portfolio of options is explored to find the next Horizon 2 business. To me, this is one of the most useful analytical and formulation frameworks available to strategists. One fundamental premise under this whole model is that value migrates, and every Horizon 1 business will ultimately begin to fade.
As an analytic tool, one can assess the health of each horizon in a company. As Geoffrey Moore points out in his discussion of the model in “Dealing with Darwin”, many tech companies have great Horizon 1 businesses and invest heavily in R&D activities that might fall into Horizon 3 activities (although few companies treat them as business options rather than technology explorations). Horizon 2 is often a wasteland.
Alphabet seems to have embraced this model. Google (search and YouTube) defines a Horizon 1 business, generating about 90% of the company’s revenue and profit. Nest, Google X (including self-driving cars and Loon), Fiber, Calico, and Life Sciences are all Horizon 2 businesses. Google Ventures and Capital manage investments in Horizon 3 options. Each entity gets its own CEO and management team.
These various efforts deserve to be independent. They don’t share common market segments, can’t use a common route to market, and have little in common when it comes to technology or research. As part of a larger bureaucracy, they would be competing for resources, consuming management attention, and stifling growth.
Moreover, staying monolithic might very well smother future innovation. As seen in the cartoon, even the most promising new ideas get passed over in the name of funding the Horizon 1 business (often called the “core business”). Anything but incremental improvements in Horizon 1 is seen as a distraction. Autonomy is often counseled as the way to prevent this from happening.
With Alphabet, Google is spelling out how they will succeed over the next horizon.