A company’s decentralized culture is backfiring
Written by Graham
summary
- Alphabet reported double-digit sales growth, but slowing advertising sales growth led to a decline in its stock price.
- Alphabet’s culture, characterized by laid-back creativity, was once a competitive advantage.
- Alphabet’s culture problems include complacency, lack of flexibility in product development, and cultural fragmentation.
Google’s parent company Alphabet Inc. (GOOG, Financial) (GOOGL, Financial) reported its financial results on January 30th. Sales rose by double digits, but the stock fell after the report because advertising sales growth was slower than analysts expected. While Google Search and YouTube ad revenue saw healthy double-digit growth, Google Networks segment revenue fell 2% year-over-year. In total, Google’s ad revenue increased 11% year over year.
Compared to Amazon (AMZN, Financials), Microsoft (MSFT, Financials), and Meta Platform (META, Financials), Alphabet’s performance was clearly disappointing.
I have been following large technology companies in the US and China for more than a decade. I remember back in 2014, Alibaba (BABA, finance) and Alphabet both seemed invincible. But both companies are currently facing difficulties. In my opinion, Alibaba and Alphabet’s biggest challenge is culture, which ironically used to be their strength. Previously, I wrote about Alibaba’s cultural crisis. This discussion will focus on Alphabet’s culture and discuss both its strengths and weaknesses.
Alphabet Culture Overview
At the 2018 Berkshire Hathaway (BRK.A, Financials) (BRK.B, Financials) shareholder meeting, the late Charlie Munger commented on Alphabet’s corporate culture. He said, “I’ve been to Google headquarters. It looked like a kindergarten to me.” Warren Buffett (Trading, Portfolio) added, “It’s a very rich kindergarten.”
Having been to Google’s headquarters several times, I agree with Munger and Buffett’s views on Google. Personally, I wouldn’t describe it as a kindergarten, but there is no doubt that the facility has plenty of facilities and a very laid-back atmosphere. This atmosphere was designed from day one to foster creativity, as stated in Google’s first founder’s letter:
“Google is not a traditional company. We are not meant to be one. Throughout Google’s evolution as a private company, we have managed Google differently. We also and a climate of challenge that helps us provide fair, accurate and free access to information to people around the world who trust us.”
Having the best talent is key to Alphabet’s business model. To attract the best talent, the company created an unconventional decentralized atmosphere and offered the industry’s best compensation packages. As a result, the winning percentage when recruiting talent is always very high. When a talented engineer joins us, you’ll enjoy maximum flexibility and great benefits, including a free gym, snacks, and a variety of on-site restaurants. In other words, everything is handled by Alphabet. This is probably why Munger and Buffett call it kindergarten.
This culture worked very well in the early days. He remembers visiting the Google campus for the first time in 2014 and being really impressed by the open and vibrant culture. For a long time, this was the key to the alphabet moat.
Key Culture Issues at Alphabet
Like all major technology companies, Alphabet has rapidly expanded its employee base over the past decade as its business expands. In 2014, the company had just 53,600 employees. By the end of 2022, the number of employees will have ballooned to 190,234. Inevitably, more employees means more bureaucracy. This is true for all major technology companies. Realizing it had too many employees, the company cut its workforce for the first time in its history, reducing the number of employees to 182,381 as of the most recent quarter.
But bureaucracy is not Alphabet’s main cultural problem. I think the biggest problem with this country’s culture is complacency and laziness, which ironically is a cumulative result of the decentralized and creative culture this country boasts. It’s like spoiling a child. The best way to spoil a gifted child is to spoil him with easily available luxuries. Over the years, Alphabet engineers have become accustomed to this hands-off, laid-back approach to management. This approach works as long as business is strong. But once competition intensifies, Alphabet’s culture can become toxic. It’s like going to war with an army of soldiers whose essential military skills have deteriorated.
Another problem with the company’s culture was the lack of flexibility in product design and development, resulting in products that were not user-friendly. The best example is cloud business. Alphabet developed cloud technology years before Amazon. But Alphabet’s products aren’t exactly user-friendly because their engineers aren’t used to listening to customer feedback. Therefore, Alphabet’s cloud business is growing much slower than Amazon or Microsoft. I’m concerned that the company will repeat this problem again with Bard, a version of its conversational artificial intelligence tool.
Last but not least, I think Alphabet faces a cultural divide. This was inevitable as the company expanded its employee base. To be fair, most big tech companies will run into this problem. But for Alphabet, the problem is especially acute because it’s more open than other tech companies. Therefore, there are fewer rules governing employee behavior, making it difficult for management to reconcile differences.
conclusion
Alphabet’s earnings results are disappointing, but not too bad. For long-term investors, the more concerning issue is its culture. Cultural problems will remain unless management takes dramatic action. Fortunately, Sundar Pichai recognizes the cultural problem and is taking steps to address it. It remains to be seen whether he will be able to deal with them well in the future.
disclosure
I/We have no positions in the stocks mentioned and do not plan to purchase any new positions in the stocks mentioned within the next 72 hours.
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