Spin-offs—new firms created by individuals breaking off from existing ones to create competing companies of their own—are common in many high-technology industries and others as well. This articles examines the structural conditions conducive to spin-offs and the environments from which they are most likely to arise.
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References
1.
See, for example, GoodmanRichard A.AbernathyWilliam J., “The Contribution of the ‘New Boy’ Phenomena to Increasing Innovation and Improvement in New Technology,”R & D Management, vol. 9 (October 1978), pp. 32–41.
2.
There is some haziness to this definition. Markets have seldom been carefully defined, leading analysts to lump together the following phenomena: New companies that compete directly (in same market segment) with the firms their founders have left, new companies that compete indirectly (in same general industry, but different market segments) with the firms their founders have left, and new companies that supply products to the firms their founders have left. A narrow definition of spin-offs would only include firms from the first of these three categories.
3.
Entry by spin-off should not be confused with product development by spin-off, which refers to commercial products that embody technology originally intended for other purposes. See, for example, WellesJohn G.WatermanRobert H.Jr., “Space Technology: Pay-Off from Spin-Off,”Harvard Business Review (July/August 1964), pp. 106–118.
4.
For a sampling of these studies, see CooperArnold C.KomivesJohn L. (eds.), Technical Entrepreneurship: A Symposium (Milwaukee: The Center for Venture Management, 1972).
5.
LanzillottiRobert F., “The Automobile Industry,” in AdamsWalter (ed.), The Structure of American Industry, 3rd edition (New York: Macmillan, 1961), pp. 314–318; WhiteLawrence J., “The Automobile Industry,” in AdamsWalter (ed.), The Structure of American Industry, 5th edition (New York: Macmillan, 1977), p. 173; and EpsteinRalph, The Automobile Industry (New York: Shaw, 1928), passim.
6.
HillebrandtPatricia M., Small Firms in the Construction Industry, Committee of Inquiry on Small Firms, Research Report No. 10 (London: Her Majesty's Stationery Office, 1971), p. 40; and LangeJulian E.MillsDaniel Quinn (eds.), The Construction Industry (Lexington, Massachusetts: D. C. Heath and Company, 1979), pp. 4–7.
7.
“The New Shape of Management Consulting,”Business Week (21 May 1979) p. 100.
8.
GlatzerRobert, The New Advertising (New York: The Citadel Press, 1970), pp. 15–16.
9.
FramePete, Rock Family Trees (New York: Quick Fox, 1980).
10.
For another approach to entry behavior, focusing on entry posture (the timing of entry) and marketing mix (the relative emphasis placed on price and quality, breadth of product line, and similar variables), see BiggadikeE. Ralph, Corporate Diversification: Entry, Strategy, and Performance (Boston: Division of Research, Graduate School of Business Administration, Harvard University, 1979), pp. 24–34, 133–167.
11.
MaidiqueModesto A., “Entrepreneurs, Champions, and Technological Innovation,”Sloan Management Review (Winter 1980), p. 73.
12.
PorterMichael E., Competitive Strategy: Techniques for Analyzing Industries and Competitors (New York: The Free Press, 1980), pp. 218–219.
13.
CooperArnold C., The Founding of Technologically-Based Firms (Milwaukee: The Center for Venture Management, 1971), pp. 23–25.
14.
RubensteinAlbert H., “Problems of Financing and Managing New Research-Based Enterprises in New England,” research report to the Federal Reserve Bank of Boston (April 1958), p. 50, and SusbauerJeffrey C., “The Technical Entrepreneurship Process in Austin, Texas,” in CooperArnold C.KomivesJohn L. (eds.), op. cit., p. 43.
15.
Cooper, op. cit., p. 25.
16.
For a summary of the evidence on the personal characteristics of technical entrepreneurs, see CooperArnold C., “Technical Entrepreneurship: What Do We Know?”R & D Management, vol. 3 (February 1973), p. 60. In general, the founders of high-technology companies tend to be in their thirties, have a higher than average aesthetic orientation, leadership orientation, and need for achievement, possess at least a B.S. and typically a Master's or higher degree, and come disproportionately from homes where the father was in business for himself.
17.
Porter, op. cit., p. 218; and TiltonJohn E., International Diffusion of Technology: The Case of Semiconductors (Washington, D.C.: The Brookings Institution, 1971), p. 80.
18.
Cooper, “Technical Entrepreneurship,” p. 63.
19.
The seminal work in this area is BainJoe S., Barriers to New Competition (Cambridge, Massachusetts: Harvard University Press, 1956).
20.
Tilton, op. cit., pp. 73–81; and WebbinkDouglas, The Semiconductor Industry: A Survey of Structure, Conduct, and Performance (Washington, D.C.: U.S. Government Printing Office, 1977), p. 102.
21.
Cooper, The Founding of Technologically-Based Firms, p. 38; CooperArnold C., “Entrepreneurial Environment,”Industrial Research (September 1970), p. 75; and MaharJames F.CoddingtonDean C., “The Scientific Complex—Proceed with Caution,”Harvard Business Review (January/February 1965), p. 146.
22.
The support of financiers and bankers, however, is of more than symbolic importance, for the availability of venture capital appears to play an important role in facilitating spin-offs. In fact, the limited availability of such capital in Western Europe is thought to be a chief reason for the small number of spin-offs observed there. See Cooper, “Entrepreneurial Environment,” pp. 75–76; idem, “Technical Entrepreneurship,” p. 62; DeutermannElizabeth P., “Seeding Science-Based Industry,”New England Business Review (December 1966), pp. 9–10; MaharJames F.CoddingtonDean C., “Academic Spin-Offs,”Industrial Research (April 1965), pp. 63–64; Rubenstein, op. cit., pp. 25–44; and WatkinsD. S., “Technical Entrepreneurship: A Cis-Atlantic View,”R & D Management, vol. 3 (February 1973), pp. 67–68.
23.
Cooper, “Technical Entrepreneurship,” p. 63.
24.
On the other hand, small firms do appear to be better incubators than large firms, producing a higher proportion of spin-offs, probably because their managers are required to master a broader range of business skills than their counterparts at large firms (who often become functional specialists) and so are more likely (and perhaps better able) to spin-off. For some evidence on this point, see Cooper, The Founding of Technologically-Based Firms, pp. 26–30; and JohnsonP. S.CathcartD. G., “The Founders of New Manufacturing Firms: A Note on the Size of ‘Incubator’ Plants,”Journal of Industrial Economics, vol. 28 (December 1979), pp. 219–224. A study of the spin-offs from seven research laboratories at M.I.T. produced similar results, while a study of new firm formation in the West Midlands region of Great Britain led to the opposite conclusion; see ForsethDaniel A., “The Role of Government-Sponsored Research Laboratories in the Generation of New Enterprises: A Comparative Analysis,” M. S. thesis, Sloan School of Management, M.I.T. (1965), p. 143; and BeesleyM. E., “The Birth and Death of Industrial Establishments: Experience in the West Midlands Conurbation,”Journal of Industrial Economics, vol. 4 (October 1955), pp. 45–61.
25.
ShaperoAlbert, “The Process of Technical Company Formation in a Local Area,” in CooperKomives, op. cit., p. 90. According to Shapero, “The output of highly technical companies tends to consist of ‘tailormade,’ short-run, high specification, ever changing products. Furthermore, it is a business in which future outputs and requirements cannot be predicted with any accuracy. Consequently, small technical firms cannot afford to establish and support many vital functions that are operated only intermittently. Thus, the ready availability of outside suppliers of required goods and services can be a critical ingredient in the technical company formation and survival process.” In more technical terms, the existence of multiple sources of supply enables firms to realize “economies of massed reserves,” reducing costs incurred because of unpredictable fluctuations in demand. See also SchererF. M., The Economics of Multi-Plant Operation (Cambridge, Massachusetts: Harvard University Press, 1975), pp. 274–284, for further discussion.
26.
MaharCoddington, “The Scientific Complex—Proceed with Caution,” pp. 146–147, and Deutermann, op. cit., pp. 10–12.
27.
ShaperoAlbert, The Role of the University in Defense R & D (Menlo Park, California: Stanford Research Institute, 1966), pp. 93–108. The authors observe that there are areas with strong universities and few spin-offs as well as regions without a university that have a high rate of new firm formation.
28.
The concept of the product life cycle first appeared in the literature on marketing. It was later embraced by students of international trade and business strategy and eventually by experts on manufacturing and technology, who introduced the closely related idea of a process life cycle. For representative examples of the early trade literature, see VernonRaymond, “International Investment and International Trade in the Product Life Cycle,”Quarterly Journal of Economics, vol. 80 (May 1966), pp. 190–207; and WellsLewis T.Jr. (ed.), The Product Life Cycle and International Trade (Boston: Division of Research, Graduate School of Business Administration, Harvard University, 1972). A summary of the marketing and business strategy literature may be found in The Product Life Cycle, Harvard Business School (Boston: Intercollegiate Case Clearinghouse 9-579-072, 1978). Process life cycles were first discussed in a series of papers by William J. Abernathy and various coauthors and received further development in the work of Robert H. Hayes and Steven C. Wheelwright. See AbernathyWilliam J.TownsendPhillip L., “Technology, Productivity, and Process Change,”Technological Forecasting and Social Change, vol. 7 (1975), pp. 379–396; AbernathyWilliam J.UtterbackJames M., “A Dynamic Model of Process and Product Innovation by Firms,”Omega, vol. 3 (1975), pp. 639–656; HayesRobert H.WheelwrightSteven C., “Link Manufacturing Process and Product Life Cycles,”Harvard Business Review (January/February 1979), pp. 133–140; and HayesRobert H.WheelwrightSteven C., “The Dynamics of Product-Process Life Cycles,”Harvard Business Review (March/April 1979), pp. 127–136. For a criticism of the life cycle approach, see DhallaNariman K.YuspehSonia, “Forget the Product Life Cycle Concept,”Harvard Business Review Ganuary/February 1976), pp. 102–112.
29.
See MuellerDennis E.TiltonJohn E., “Research and Development Costs as a Barrier to Entry,”Canadian Journal of Economics, vol. 2 (November 1969), pp. 670–679, for a discussion of variations in research and development costs over the product life cycle.
30.
The following discussion is based on Sierra Log Homes, Inc. (A), Harvard Business School (Boston: Intercollegiate Case Clearinghouse 1-378-195, 1978).
31.
The concept of the “dominant design,” which marks the acceptance of a basic product type and initiates a shift in emphasis from product innovation (performance) to process innovation (cost), is due to William Abernathy. See AbernathyWilliam J., The Productivity Dilemma (Baltimore: The Johns Hopkins University Press, 1978), p. 75.
32.
Tilton, op. cit., pp. 78, 80.
33.
CoughlanAnne J.FlahertyM. Therese, “Preliminary Study of the Semiconductor Industry” (Economics Department, Stanford University, mimeographed, April 1978), pp. 58, 60.
34.
Some evidence on the importance of transferability is provided by RobertsE. B.WainerH. A., “New Enterprises on Route 128,”Science Journal (December 1968), pp. 78–83. In studying the spin-offs from various research laboratories at M.I.T., Roberts and Wainer note that the most successful companies were those characterized by a “high transfer of technology from the source laboratory to the new enterprise.”
35.
Porter, op. cit., pp. 218–219. The importance of labor mobility requires further emphasis, for it suggests another possible explanation for the low incidence of spin-offs in Western Europe and Japan. Employees there are often bound by (implicit) long-term employment contracts. These contracts, and the firm loyalty that often accompanies them, may be one reason why so few scientists and managers in those countries have broken away to form companies of their own.
36.
SeltzerLawrence, A Financial History of the U.S. Auto Industry (New York: Houghton Mifflin, 1928), p. 19.
37.
One indication of the importance of know-how in the early years of the automobile industry is the fact that the industry's first technical manual was not issued until about 1910, several years after the industry's founding. See Epstein, op. cit., pp. 184–185.
38.
MayGeorge, R. E. Olds (Grand Rapids, Michigan: W. B. Eerdmans Publishing Company, 1977), pp. 157–159.
39.
For a further discussion of the “technology” of service firms, see LeavittTheodore, “The Industrialization of Service,”Harvard Business Review (September/October 1976), pp. 63–74.
40.
See AbernathyWilliam J., “Innovation and the Regulatory Paradox: Toward a Theory of Thin Markets,” in GinsbergDouglas H.AbernathyWilliam J. (eds.), Government, Technology, and the Future of the Automobile (New York: McGraw-Hill, 1980), pp. 38–61, for a detailed discussion of the characteristics of these markets.
41.
The risks of entrepreneurship in knowledge-intensive industries are often exaggerated. The founders of new firms are generally skilled and creative people, well respected by other firms in their industries. Should their new companies suffer financial problems, the presence of such valuable personnel often makes them attractive acquisition candidates. In the semiconductor industry, Tilton has observed that “a company employing a few competent people is often acquired by an established firm for that asset alone.” Tilton, op. cit., p. 80. Also see Rubenstein, op. cit., pp. 76–77.
42.
CoughlanFlaherty, op. cit., pp. 12–13; citations omitted.
43.
AbernathyWilliam has noted that in chemical products, as in other industries employing continuous flow processes, “advanced, elaborate, and large scale process equipment is used to make a new product virtually from the initial product introduction.” See AbernathyWilliam J., The Productivity Dilemma, p. 84.
44.
Information on these industries has been drawn from several sources. See BrockGerald, The U.S. Computer Industry, 1954–1973: A Study of Market Power (Cambridge, Massachusetts: Ballinger Publishing Company, 1975); HarmanAlvin J., The International Computer Industry (Cambridge, Massachusetts: Harvard University Press, 1971); Note on the Minicomputer Industry in 1970, Harvard Business School (Boston: Intercollegiate Case Clearinghouse, 1979), and Note on the Minicomputer Industry in 1978, Harvard Business School (Boston: Intercollegiate Case Clearinghouse, 1979).
45.
Porter, op. cit., p. 234 (emphasis in original). In more technical terms, the issue is one of externalities. In the early stages of an industry, reputation has certain “public good” characteristics. All firms benefit from the entry of competitors that enhance the industry's reputation, solidifying its position relative to longer established products by providing evidence of stability and quality.
46.
RobertsEdward has termed this strategy “venture spin-off.” See RobertsEdward B., “New Ventures for Corporate Growth,”Harvard Business Review (July/August 1980), pp. 134–142.
47.
“Citibank: A Rising Giant in Computer Services,”Business Week (4 August 1980), p. 56.
48.
3M has followed a similar strategy of promoting internal entrepreneurship, although voluntary divestiture has seldom been involved. See Roberts, op. cit., pp. 139–141.
