Google’s search need look no further than GE

Google has announced plans to reorganize its businesses under a General Electric-like conglomerate called Alphabet. If the new company wants to maximize overall performance, it should take a close look at Jack Welch’s work as GE’s CEO.

Under the new structure, Alphabet will be the corporate parent of a portfolio of diversified businesses. Google Inc. will be part of the new entity and include YouTube, Android mobile software and other web-based products. Alphabet will also include expanding and emerging businesses such as Nest, the smart-thermostat maker, cloud storage, Calico, Google Ventures, Google Capital, etc., with self-driving cars thrown in at no extra charge.

Each business will operate autonomously with a chief executive officer (CEO) and report to Google co¬≠ founders Larry Page and Sergey Brin, who will serve as Alphabet’s CEO and Alphabet president, respectively.

The average consumer of Google products will see no meaningful change. The co-founders hope restructuring will enable them to have a strong CEO run each business, freeing them to focus on capital allocation and maximizing all the businesses’ long-term performance. Managing a portfolio of diverse units to maximize the overall value to various stakeholders is the key corporate strategy challenge.

For many talented people at Google, the change will provide an opportunity to be their own CEOs, thereby stoking entrepreneurialism and helping to retain great talent. For investors, the conglomerate structure should provide greater transparency into how Google invests in various businesses and how the businesses, including the core, are performing.

Alphabet should study how General Electric (GE) operated as a conglomerate during Jack Welch’s 20- year tenure as CEO, when it managed businesses as disparate as jet engines, dishwashers, and a TV network.

Among the reasons GE succeeded as a holding company was that the majority of businesses within its portfolio shared a set of resources that linked them and could be readily leveraged into new businesses. By transferring and sharing specialized expertise, technological know-how, and other valuable resources across its units, the firm was able to perform better and create value greater than the sum of its individual parts.

For example, value was created by training managers, notably at GE’s famed Crotonville Center, regularly moving its world-class managers among the various businesses and driving strategic initiatives such as best manufacturing practices across all units. It was no accident that Welch spent two months a year on personnel evaluation of his top 400 managers. The focus at GE was not just on managing capital allocation, but on developing human capital as a scarce strategic resource.

GE’s umbrella brand was applied to businesses as diverse as financial services (GE Capital), medical imaging (GE medical diagnostics) and lightning (GE light bulbs). Using an umbrella brand in a diversified firm not only has the potential to reduce costs by spreading the fixed cost of developing a brand across many businesses, but also to link its products to a name consumers trust. This, among other resources, could be exploited, transferred and leveraged across a range of businesses.

Simply put, GE was an astute enabling corporate parent that nurtured its individual businesses to become a whole that was far greater than the sum of its parts. The diversified businesses performed better under the auspices of a single corporate parent that they would have had they been stand-alone businesses. The best parent companies create more value for stakeholders than any of their rivals would if they owned the businesses

Jack Welch identified GE’s critical resources, especially human capital. He created a learning organization and transferred resources over a broad range of businesses and geographies. The challenge for Google under the new structure will be to turn all its businesses into an integrated whole that is truly more than the sum of its parts.

To paraphrase Stephen Sondheim’s song, “Having just a vision’s no solution. Everything depends on execution. Putting it together, that’s what counts!”

Originally Published: September 19, 2015