The move comes as Google’s co-founder Larry Page wants to prevent the internet juggernaut from becoming "comfortable" – something he said often happens to large organisations.
Page, who will become CEO of Alphabet, explained in the Official Google blog: "[We] are not intending for this to be a big consumer brand with related products – the whole point is that Alphabet companies should have independence and develop their own brands."
Sundar Pichai, who was overseeing Android, will become CEO of Google itself.
Google's life sciences division, which works on glucose-sensing contact lenses, and the Calico initiative, which is focused on making breakthroughs in genetics and aging, will be split from Google. Alphabet will also include The X lab, under which Google has been testing drones, and the investment arm Ventures and Capital.
"Fundamentally, we believe this allows us more management scale, as we can run things independently that aren’t very related," Page added.
The creation of Alphabet will also act as a strategic PR move to help the company in "improving the transparency and oversight of what we’re doing", according to Page's blog.
Alphabet Inc will replace Google Inc as the publicly traded entity and all shares will automatically be converted.
Wall Street appeared to welcome the announcement, with Google's share price jumping six per cent.
The strategic change comes after Google was named as the leading brand in the world by the Futurebrand Index 2015, which polled 3,000 people about 100 leading companies. However, respondents also suggested that the company has started to lose its sense of purpose – something this restructure will look to address directly.