Deploying Corporate Spin-offs and Leverage Innovation

An Exploratory Case Study

Master's Thesis, 2018

73 Pages, Grade: 1,0


Table of Contents

Table of Contents

List of Tables and Figures

List of Abbreviations

1. Introduction
1.1. Problem Specification and Relevance of Topic
1.2. Problem Statement and Course of Investigation

2. Theoretical Foundation
2.1. The Innovation Dilemma and Organizational Ambidexterity
2.2. The Principle of Corporate Entrepreneurship
2.3. Open Innovation in the Context of Corporate Entrepreneurship
2.4. Corporate Spin-offs
2.1.1 Definition and Typology
2.1.2 Generic Shareholder Interests and Effects
2.1.3 Potential Risks and Challenges

3. Developing a Conceptual Framework
3.1. Overview
3.2. Organizational Context
3.2.1. Business Environment
3.2.2. Characteristics of the Parent Company
3.2.3. Characteristics of the Spin-off
3.3. Interrelationship
3.3.1. Pre-Separation Stage
3.3.2. Establishment Stage
3.3.3. Post- Separation Stage

4. Methodological Background
4.1. Research Design
4.1.1. Case Type and Selection
4.2. Data Collection
4.2.1. In-depth Interviews
4.2.2. Documents and Archival Records
4.3. Data Analysis
4.4. Quality of Research

5. The Case of Henkel and Afinitica
5.1. Overview
5.2. Dynamics within Science-Driven Industries
5.3. A Culture of Innovation
5.3.1. A Systematic Process to Innovation
5.3.2. Activities for Business Development
5.4. The unique Case Afinitica
5.4.1. Motivational Drivers
5.4.2. Business Model Strategy and Core Value
5.5. The Henkel-Afinitica Collaboration Ecosystem
5.5.1. Basic Construct
5.5.2. Capital Structure and Communication Process
5.5.3. Degree of Oversight and Control
5.6. Outcomes
5.6.1. Benefits for Afinitica
5.6.2. Benefits for Henkel
5.6.3. Challenges and Potential Barriers

6. Discussion

7. Conclusion
7.1. Theoretical and Managerial Implications
7.2. Future Research and Limitations

Reference List

Appendix A: Exemplary Interview Questionnaire

Appendix B: Case-Specific Implications…

List of Tables and Figures

Figure 1 - Classification of Corporate Entrepreneurship

Figure 2 – Conceptual Framework

Figure 3 – Organizational Context

Figure 4 – Interrelationship

Figure 5 – Exemplary Data Coding

Figure 6 – Innovation Culture at Henkel

Figure 7 – Process of Innovation at Henkel

Figure 8 –Managerial Implications

List of Abbreviations

Abbildung in dieser Leseprobe nicht enthalten

1. Introduction

1.1. Problem Specification and Relevance of Topic

Increasing global competition, fast technological improvement, and rising customer expectations put increasing pressure on companies to operate in an efficient and effective manner, while continuously developing new products and services to meet current market demand. This results in increasing pressure on research and development (R&D) activities, especially for science-driven industries such as the chemical, biotechnology, pharmaceutical, or semiconductor companies (e.g. Gambardella, 1995). Businesses operating in these industries have a two-sided relationship towards innovation: On the one hand, success is driven by their research outcome, resulting in large R&D investments. At the same time, however, the outputs of their research are highly uncertain and, therefore, bear significant risks towards the organization (Kodama, 1995). Moreover, as companies mature in their market position, the need for innovation increases, while at the same time their ability to generate innovation declines (Drucker, 1985; Block & MacMillan, 1993; King, 2002). For that reason, concepts around corporate entrepreneurship, the practice of start-up entrepreneurship turned inward an organization, and open innovation gained momentum (Pinchot, 1985; Thornberry, 2001).

One of the most effective means to foster corporate entrepreneurship and innovation is the creation of spin-offs, where a parent company separates parts of its business into a new entity (De Cleyn and Braet, 2006). It is an agile attempt to innovation, the parent organization can improve innovativeness, flexibility, and efficiency without losing capacity and keeping focus on their core business activities. Thus, an organization has the chance to leverage R&D outcome without significantly increasing operational risk (De Cleyn and Braet, 2006). On the other side, the Corporate Spin-off is provided with assets and investment support (Chemmanur and Yan, 2004; Bergh and Lim, 2008), which implicates a significant advantage compared to start-up companies that lack initial resources.

In the course of spin-offs´ growing importance in business practice, the European Commission highlighted the importance of supporting and investigating in spin-offs due to their positive impacts on both innovation and competitiveness and the economic environment as well as employment (Commission of the European Communities, 2002).

Apart from the rising interest from scientists, organizations in the consulting or financial sector acknowledge the growing importance of corporate Spin-offs. For example, a report published by the investment bank JP Morgan in 2015 argued that corporate spin-offs bear many benefits and will enjoy increasing popularity within the upcoming years (Zenner et. al, 2015).

This is in line with a recent article from the German business newspaper Handelsblatt, illustrating the dramatic increase of corporate Spin-offs. The authors reveal implications of the recent evolvement, showing that the separated entities tend to outperform the market and oftentimes even their former parent (Hoffmann, 2017). Prominent examples include eBay´s spin-off PayPal, Hewlett-Packard´s separation of its PC and printer business, and, more recently, Siemens´ Spin-off Healthineers AG.

However, companies that pursue corporate entrepreneurship face challenges related to the balance between new and old organizational traits (Garvin and Levesque, 2006). In first instance, corporations are concerned about the success of their established business as they account for the majority of their revenues. While these cash flow streams are considered as predictable, new businesses (i.e. spin-offs) in their early stage are not yet proven to be marketable. Moreover, premature corporate entrepreneurship activities generally require initial investment while, on the other hand, they lack efficiency and do not generate ample return (Charles et. al, 2016). As a consequence, they represent both a potential future USP and are unpredictable and, hence, are a risk.

1.2. Problem Statement and Course of Investigation

Even though the benefits of corporate Spin-offs seem to be clear, not all spin-offs create long- term success, as one study published by the consulting firm The Boston Consulting Group (BCG) (2016) reveals. Their analysis of 80 spin-off companies showed a significant spread in total shareholder return of more than 38 percentage points between Spin-offs in the top-quartile and bottom-quartile (Kotzen et al., 2016). While other studies yield similar results (e.g. McConnell and Ovtchinnikov, 2016), key factors deciding on failure or success are complex and vague, hence requiring further investigation (e.g. De Cleyn and Klofsten, 2013).

Previous research mainly focuses around corporate entrepreneurship and open innovation on competitive advantage (e.g. Covin, 1999). In the context of spin-offs, many studies were conducted around the behavior and characteristics of entrepreneurial scientists (e.g. Kassicieh et al., 2002; Szyperski and Klandt, 1980). Moreover, prior research heavily focused on institutional spin-offs, specifically on the sub-type university spin-offs (e.g. Powers and McDougall, 2005) and university entrepreneurship (e.g. Siegel et al., 2007). Studies regarding corporate spin-offs, which are the focus of this paper, predominantly investigated in the stages of the spin-off process, reasons for initialization, effects of corporate policies, and techniques to measure value creation in economic terms. Research on success factors mostly consider only single factors such as the incubator, characteristics of the founders and teams, or the relationship between parent and Spin-off. However, research on a holistic view on the outcome and success factors of corporate Spin-offs scarce, specifically considering science-based industries.

This Thesis is dedicated to fill current research gap by examining key factors of influence and the implication on R&D outcome, specifically by addressing the question:

How can companies in research-intensive industries leverage their research outcome though corporate spin-offs?

In the course of this investigation, practical insights are gathered through a case study based on Henkel Adhesive Technologies and their spin-off Afinitica. Apart from contribution to research, this exploration of Henkel, as the global market leader for adhesives solutions and one of the most innovative companies worldwide (Auris, 2018), provides interesting insights to innovation strategies and mechanisms from a global player. Additionally, the business model of the Spin-off Afinitica was analyzed and evaluated in terms of its fit to Henkel´s strategy. In particular, the practical part of this study centers around the questions:

What are the key elements of Henkel ´ s innovation strategy? How does the company ´ s culture, policy, and practices support corporate entrepreneurship and new business development?

What is the business model of the corporate spin-off Afinitica? How does it fit to Henkel ´ s innovation strategy and which benefits and challenges exist?

The investigation of this study builds up on present knowledge and answer the calls for further research posed by Van Gorp and Jagersma (2004) and Festel (2014), by conducting a qualitative case study on a micro-level based on one company and its spin-off in specific. Moreover, it fulfills a gap in current research by specifically consulting the leverage of research outcome that can be generated through this type of corporate venturing. Furthermore, this thesis theoretically and practically contributes to the knowledge of corporate entrepreneurship within research-intensive industries. Finally, theoretical and practical implications for Henkel and Afinitica is outlined to create, capture, and sustain value.

2. Theoretical Foundation

This chapter reviews key concepts related to this study, starting with an overview on three important concepts in innovation management in order to establish an understanding on the background of this study. The second part then concentrates on corporate spin-offs in specific, starting with a definition and typology followed by generic shareholder interests as well as associated risks and challenges.

2.1. The Innovation Dilemma and Organizational Ambidexterity

Today´s market dynamics imply pressures on companies across all industries. Thus, in order to stay competitive in the long-term, firms must be capable of exploiting their current business while simultaneously exploring new opportunities (Splender and Kessler, 1995). Especially large established firms face a dilemma when striving for operational efficiency and innovativeness at the same time. In general, literature refers to innovation as both the process of renewal and its outcome, wherein organizations employ their capabilities and resources to create new value (Schrumpeter, 1942). The success of companies operating in a highly uncertain, competitive, and changing environment is highly dependent on innovation, considering is as the motor for economic development. Innovation does not only lead to superior products and processes, but also strengthens market positions and increases customer satisfaction (Schrumpeter, 1942).

The two diverging forces of exploitation (i.e. refining established knowledge) and exploration (i.e. developing new knowledge) impede challenges for large established firms. Clayton Christensen (2013) refers to “ The Innovator ´ s Dilemma ” , resulting from conflicting skills, mindsets, structures, and processes needed for each operation. Exploitation calls for efficiency, convergent thinking, and is best executed in mechanic structures. On the contrary, exploration involves risk-taking, discovery, searching for alternatives, thinking different and is fostered through organic structures (Sine, Mitsuhashi and Kirsch, 2006). In addition, established business operations yield stable returns, whereas revenue generated by innovation is uncertain and risky. For that reason, organizations tend to become risk-averse and focus solely on their current operations, thereby neglecting opportunities to grow and eventually risking their market position on the long-term. However, due to the indisputable importance of innovation, companies need to balance between exploitation and exploration, taking into consideration the trade-offs of each.

O’Reilly and Tushman (2004) contend that companies can achieve an optimal balance and become “ ambidextrous ” organizations. Achieving this state, organizations have “the ability to simultaneously pursue both incremental and discontinuous innovation [...] from hosting multiple contradictory structures, processes, and cultures within the same firm”. Approaches to ambidextrous organizations have been discussed by a significant number of studies over the last decade. Christensen and Raynor (2013) were among the first to suggest the creation of separate units as a means to innovate. Their practical implications concentrated on structural dimensions such as the importance of a bridging position between the new unit and parent company. More recently, increasing attention was drawn on non-structural elements of ambidexterity such as culture and values, incentives, mindsets, and strategy (Röglinger et al., 2018). The following sections introduce two prevailing concepts emphasized in literature on corporate innovation.

2.2. The Principle of Corporate Entrepreneurship

Over the past decade, Corporate Entrepreneurship (CE) gained momentum among scientists and economists alike (Dess et al., 2003). Current literature reveals no universal definition of CE, instead providing a number of slightly different understandings and classifications. Leibenstein (1968), in accordance with McFadzean, Loughlin and Shaw (2005) describe CE as a strategy to promote innovation and growth from an inter-organizational perspective by aligning resources, exploiting an commercializing existing opportunities, while constantly searching and evaluating new opportunities. Chrisman and Sharma (1999) further define CE as “the process whereby an individual or a group of individuals, in association with an existing organization, create a new organization or instigate a renewal or innovation within that organization”. As Figure 1 illustrates, they distinguish corporate entrepreneurship from independent entrepreneurship, whereas the latter refers to organizational renewal outside the corporate entity.

Abbildung in dieser Leseprobe nicht enthalten

Figure 1 - Classification of Corporate Entrepreneurship, Source: Author, Derived from Chrisman and Sharma (1999)

CE activities are clustered into three categories, namely Corporate Venturing, Innovation, and Strategic Renewal. The latter refers to major strategic or structural changes induced by an existing organizational entity, where the activities reside within existing organizational domain. Innovation is described as the introduction of something new to marketplace, bearing a potential to transform competitive environment and organizational contexts. Finally, the third category, Corporate Venturing, is defined as the process or organizational creation induced by an existing organization, whereas the resulting entities are treated as independent businesses (Chrisman and Sharma, 1999). Similar the approach of Guth and Ginsberg (1990), corporate venturing activities are further split into internal and external activities. The first refer to the introduction of new businesses as semi-autonomous entities that originate from the corporation, such as corporate spin-offs. The organizational structure of the divestiture can either be taken over from the parent (e.g. separating a whole business unit) or constitute entirely new organizational patterns (Kuratko, 2007). The second category, external corporate venturing, refers to investments in young, early growth-stage businesses created by external parties, such as corporate venture capital, licensing, acquisitions, or joint ventures. Other authors propose further classifications such as venture management or intrapreneurship. The latter comprises motivational concepts and risk-taking approaches that strive to discover, develop, and organize new business fields within corporate boundaries (Schween, 1996). In that context, an Intrapreneur is a person who promotes innovation by establishing entrepreneurial behavior whilst being employed (Weber et al., 2014).

Kuratko et al. (2014) state that CE involves significant organizational changes, as firms nowadays operate in highly fluctuating markets. They define CE strategy through the initial development of a corporate vision that encourages innovation, acting as a basis for entrepreneurial culture. After establishing this basis, individual employee participation and team formation are emphasized. When pursuing CE strategy, a company´s strategic intent must be to foster creative and entrepreneurial opportunities for growth and competitive advantage. In line with Goodale et al. (2010), the researchers conclude that innovation is the outcome of successful CE.

2.3. Open Innovation in the Context of Corporate Entrepreneurship

Open Innovation (OI) is another widely discussed phenomenon where traditional parameters of the innovation process are disrupted. The term has been introduced by Professor Henry Chesbrough (2003) and refers to a participatory and decentralized approach to innovation, where corporate innovation processes are opened up towards external parties. The idea is to consolidate both internal and external ideas, thereby expanding outside usual business scope and trigger growth (Chesbrough, 2003). Implementing this concept, companies move away from their traditionally rather closed innovation processes in which internal capabilities are the only resources. According to this theory, organizations following conventional “closed” innovation strategies fail to make use of practices, ideas, products, and services that do not fall into their core activities. In contrast, OI approaches encompass the usage of inflows and outflows of knowledge to accelerate internal innovation and expand usage opportunities. The OI paradigm treats R&D as an open system and places external ideas and paths to market on the same level of importance as internal ones (Chesbrough, 2003). This allows companies to react to changing market dynamics such as technological improvement, increasing competition, rising customer expectations, and the growing challenge of attracting and keeping skilled professionals.

Activities within OI can be classified into inbound OI, where external knowledge flows inside the firm, and outbound OI, where knowledge flows outside the firm. The second dimension distinguishes between pecuniary and non-pecuniary mode, where the latter does not impede direct financial reward or compensation. For example, corporate business incubation or spin- offs are pecuniary outbound operations, where knowledge flows mainly outside a company and involves monetary values. On the contrary, non-pecuniary inbound activities include customer co-creation or crowdsourcing, where firms source external knowledge usually without significant monetary compensation (Chesbrough, 2013). Thereby the traditional relationship with stakeholders is transformed, including customers as the most significant group. As the innovation process happens in cooperation with customers, value chain shortens time-to-market and reduces market uncertainty in the process of acquiring cutting-edge innovation (Chesbrough et al., 2014).

Even though the relationship between OI and CE is not yet fully determined, innovation is the central dimension and final destination for both. At the core, both concepts argue that an organization can only exploit its full potential if it connects its internal knowledge and resources to external ones. Allmendinger and Kuckertz (2016) analyzed the two concepts along six categories and found significant overlaps in their activities and instruments. Chesbrough (2013) further provided indications on the linkage between OI and CE, stating that the execution of OI requires entrepreneurship moderates such as leadership principles and managerial tactics. Hence, OI is a subcategory of CE and can only be entered if CE is established in the first place. In other words, a firm that engages in OI inevitable also promotes CE, whereas the cause of conditions is not applicable for the reversed relation.

2.4. Corporate Spin-offs

The previous section discussed the dimensions of corporate innovation considering the three predominant concepts Organizational Ambidexterity, CE and OI. The two latter terms highlight corporate venturing as an instrument of innovation, whereas corporate spin-offs is part of the internal venturing arm. The following section investigate in corporate Spin-offs definition and typologies. The subsequent paragraph briefly illustrated principal reasons for the evolution of Spin-off activities and review microeconomic and macroeconomic impacts. Afterwards, potential benefits regarding Spin-offs´ innovative capability are illustrated, followed by an assessment of potential risks and challenges. However, the course of this paper shows that chances and risks depend on mutual variables, such as industry characteristics or core business activities. Therefore, this chapter reviews only generic principles and findings from literature.

2.1.1 Definition and Typology

Similar to the previously elucidated innovation management practices, there is no universal definition for spin-offs. According to most common definitions, the term refers to the creation of an independent entity that is separated from the original parent organization (Maselli, 1997).

Also known as spin-out or starburst, the operation new entity has own assets, organizational processes, employees, intellectual property rights, and products independent to the parent organization. Core elements within the separation process include a shift in control, risk, distribution of assets, as well as transfer of technology and ownership rights (Cusatis et al., 1994; Nadig, 1992). Corporate spin-offs differ from institutional or academic spin-offs, which originate from public or private institutions, for example universities. In contrast, corporate Spin-offs are divested from parent companies and are founded by previous employees. Tübke (2004) defines the term as “the division of an existing company into one parent company and one or more independent spin-off(s).” The parent maintains control over and interest in the detached business unit (Garvin, 1983), while formal and informal relationships remain (Tübke, 2004). Literature further differentiates corporate Spin-offs among type of parent company, origin of motivation, as well as practices and relationships between parent and Spin-off. Tübke (2003) specifically mentions research-based spin-offs resulting from entrepreneurial approach to commercially exploit research results. The review on spin-off types showed a uniform attempt to encourage innovation along with the aim to enter new markets and market niches (Autio, 1997).

2.1.2 Generic Shareholder Interests and Effects

The generic motivation to spin off can either come from (former) employees, the parent company itself, or a combination of both. Depending on the origin of the business idea, Tübke (2003) classifies spin-offs into entrepreneurial and restructuring-driven types. The first category refers to an approach “driven by one or more individuals, spin-off entrepreneurs, who want to exploit an unused potential based on their [experiences] acquired within the company. In this case, the spin-off entrepreneur does not necessarily receive help from the parent organization and might even have to face resistance against his or her intention” (Tübke, 2004). Other authors highlight the discovery of an unexploited market opportunity that is not encouraged by the parent, either due to a lack of resources or unwillingness (Helm, 2005).

Alternatively to the spin-off decision, entrepreneurial employees could consider to form a startup without any connections to the established company. However, new companies typically face problems in the development of a customer base, initial capital founding, and operational tasks such as management or marketing. In contrast, spin-offs have the advantage to often employ pilot projects from their parents, thereby building an image and quoting the company as reference. Therefore, initial lack of order can be bridged and customer acquisition can be eased. Apart from that, spin-offs might get the chance to use resources of the company such as production machinery or supply chains, which help overcome initial lack of resources or missing organizational entities. Many spin-off founders lack managerial experience, as they oftentimes have a technical background. Support from the parent company, such as consulting services, can result in a significant advantage over other technology-based startups. In addition, initial financing can be leveraged as minority shares from the parent provide sufficient equity capital in the beginning, and pilot orders and guarantees can be used to facilitate borrowing of outside capital.

In contrast, restructuring-driven Spin-offs are initiated by the parent company and often times result from changes in corporate structure or strategic turn-arounds (Mustar, 2001). Principle motivations are short-term (direct) benefits and long-term (indirect) benefits. Direct benefits include improved business focus and a change in capital structure, which may improve strategic fit and yield beneficial taxation (Tübke, 2004; Wachtell et. al, 2016). Moreover, financial advantages arise since leaner companies are perceived as more transparent and, therefore, more attractive to investors (Tübke, 2004). For that reason, a spin-off activities often have a positive effect on shareholder value and, thus, yield an increase economic value for investors and the parent company (Zenner et. al, 2015). Another potential benefit for the parent company is the reputational improvement. This implicates further advantages, for instance when recruiting new employees as unbureaucratic structures and open working culture is perceived attractive. Indirect benefits can be achieved if parent organization keeps a long-term relationship to the discharged entity. Depending on the capabilities of individual spin-offs, conglomerates benefit from new technological potential through shared knowledge and other resources. As illustrated in chapter 2.1 to 2.3, established companies can combine their strengths (e.g. established supply chains, customer networks, and resources) with the advantages of small companies (e.g. flexibility and faster processes).

Current research shows that this type of corporate venturing does not only positively impact single companies or entrepreneurs, but also has a positive impact on the economy overall. Corporate spin-offs impact regional economic structures, competitiveness, employment, and new market creation (Commission of the European Communities, 2002; Tübke, 2004). On the one hand, the orientation towards growth and innovation benefits the local industrial cluster by positively influencing competitiveness and employment (Moncada-Paternò-Castello et al., 1999). Besides, it facilitates new market creation, improves productivity by leveraging efficiencies, and creates new employment opportunities (Commission of the European Communities, 2002). Hence, on a microeconomic level, corporate Spin-offs initiate entrepreneurial drive, innovativeness, and growth, simultaneous to creating leaner, more productive, focused, and, thus, more competitive parent companies. On the macroeconomic level, the economy is boosted through growth through new developments, market entries, and job creation.

2.1.3 Potential Risks and Challenges

The digital consulting firm Capgemini Consulting conducted an interview on the top concerns within corporate venturing practices (2016). Two out of the top three concepts concerned the relationship between new entity and the parent company: Lack of commitment and resources on the one hand, and low level of alignment and intensity of collaboration with the parent on the other. This is in line with previous research findings by Moncada-Paternò-Castello (2010), who states that frequent problems result from a lack active support from their parent companies. Most arguments against spin-off support involve fears to lose the best employees, possible (temporary) turmoil and disorganization, nurturing a possible competitor, and difficulties to re- reintegrate the entity later on (Moncada-Paternò-Castello et al, 1999). Apart from that, a publication by Wachtell, Lipton, Rosen and Katz (2016) showed potential disadvantages when introducing a Spin-off. These include the potential loss of revenue and cost synergies, disruptions to the business, additional separation costs, cash flow and stock price volatility, and negative impacts on credit ranking (Wachtell et al., 2016).

3. Developing a Conceptual Framework

Review on current literature revealed a gap in providing an explanation why and how corporate spin-offs in particular may facilitate innovation. Even though there are some investigations based on a small sample sizes, no sophisticated model was established. Besides, given the complex nature of this topic, the uniqueness of business cases has to be taken into account (Porter, 1996). Thus, in awareness of the inability to capture real-life business in its full complexity, the following section provides a theoretical model based on a comprehensive analysis of current literature. Since literature review on spin-offs as facilitators of innovation did not yield sufficient results, findings from adjacent concepts were included (e.g. corporate venturing, organizational ambidexterity, academic spin-offs, and entrepreneurship). The weighting of each category and factor was approached in relation to the circumstances of the subsequent case study.

3.1. Overview

After conducting a comprehensive analysis of current literature, several overlaps were identified, summarized and analyzed in terms of relevance for the underlying business case. Against this background, a framework was developed focusing around six categories (see Figure 2). The model theoretical framework consists of two major categories, namely Organizational Context and Interrelationship. The first includes the three subcategories Business Environment, Parent Company Characteristics, and Spin-off Characteristics. Factors within the second category are further differentiated among the spin-off process, namely Pre Separation Stage, Establishment Stage, and Post-Separation Stage.

Abbildung in dieser Leseprobe nicht enthalten

Figure 2 - Conceptual Framework, Source: Author

3.2. Organizational Context

The first part of this framework concentrates on the background in which the spin-off activity is performed. The rationale is to provide a contextual overview without referring to the details of relationship between both entities. In other words, the attempt is to discuss the three categories by themselves, without focusing on their relationship to one another. However, due to the nature of this concept, continuous transitions between the characteristics of a spin-off and its parents occur, resulting in blurry boundaries. Figure 3 provides an overview on the four propositions discussed in the following.

Abbildung in dieser Leseprobe nicht enthalten

Figure 3 - Organizational Context, Source: Author

3.2.1. Business Environment

Studies concerning Spin-off success and the potential to facilitate innovation agree on the importance of industry characteristics in which an organization operates. Tübke (2004) highlighted the importance of market maturity, stating that immature markets in an early lifecycle stage, the absence of a dominant product design as well as the availability of market niches offer favorable conditions for Spin-offs. Kirchberg and Pohl (2016) consider a similar factor, stating that technological market conditions such as the development stage of technology is important to consider. Moreover, R&D intensity and the importance of skilled labor are positively related to prevalence of corporate divestment (Moncada-Paternò-Castello et al., 1999; Keune and Nathusius, 1977). As these industries are characterized by a high degree of innovation and competition, spin-offs can be used to retain, improve, and establish competitive positioning both in existing and new markets.

The relevance of the institutional, political, and judicial environment, as well as the legal and regulatory framework become apparent when comparing the settings and spin-off frequency in the US to Germany (Maselli, 1997; Roberts, 1991; Teece, 1986). One of the reasons why spin- offs in America are common whereas they are gradually arise in Germany is because of the composure of the patent law, the Employee Interventions Act, and company law. Apart from deteriorative regulations for capital procurement in Germany, Property Rights do not include a protection within fundamental research, while application processes typically take long and involve high costs. In addition, market regulation (e.g. price-setting or maximum number of players in the market) and considerable tax incentives or subsidies (Teece, 1986) play an important role in some industries (e.g. environmental technologies). Coming back to the comparison of market conditions between Germany and the US, cultural differences, such as the general view on entrepreneurship and risk-taking behavior, should be considered. In the course of this paper, the business environment is considered as a moderating factor that sets the space in which companies can make use of spin-offs as a facilitator of innovation.

Proposition 1: The industry, in which a company operates, moderates the way in which Spin offs can be used as a facilitator of innovation.

Therefore, industry and market characteristics were analyzed, specifically by reviewing secondary data on technological market maturity, degree of R&D and need for skilled labor, as well as regulatory and cultural environment.

3.2.2. Characteristics of the Parent Company

The potential leverage effect of corporate spin-offs to the parent´s innovation capacity depend on two basic categories. First, the parent company has to have barriers in performing innovations themselves. Second, they need to establish mechanisms that allow for sourcing innovation from outside or, more specifically, corporate spin-offs.

Explaining the paradox that a company´s R&D spending increases proportional with firm size, while the number of innovations decreases with firm size (Siegel et. al, 2003; Knott, 2013) requires investigation to a company´s market position and size. As mentioned in the context of “ The Innovator ´ s Dilemma ”, established organizations face increasing barriers to innovate as they grow. The most important reasons for this phenomena lie in their hierarchical and bureaucratic boundaries. These organizational structures yield slow internal processes, for example considering requests for approval, and insufficient coordination between business units. Moreover, as organizations age, they tend to become dependent on established routines and skills that facilitate exploitation instead of exploration (Tushman, 2010). Besides, established companies are generally less dependent on the individual innovations compared to small companies, which mitigate their proactive search for innovations motivation (Dobberstein, 1992). Further, missing direct customer contact and too conservative management structures hinder innovativeness. On the level of individual employees, motivational barriers and risk aversion challenge corporate innovation.

The change in motivation upon separation can be illustrated though the principal-agent theory. If the company develops an innovation internally, information asymmetries between manager (principal) and employee (agent) exist. These asymmetries yields to “ Agency Costs ” , as the manager has to provide incentives for the employee such that he acts according to the manager´s instructions or, rather, the company´s best interest. As the employee becomes the spin-off founder, his goals become equivalent to the goals of the company and omits costs of incentives and control. Thus, it is in the spin-off employees’ best interest to work in an efficient manner, which stimulates an aggressive turnover- and market conduct. Another driver of motivation within spin-offs is the collective identity on which the spin-off team is based. In general, the spin-offs´ core team is small and characterized a mutual strive to perform innovations, where the collective norms and values lead to low transaction costs. Hence, large organizations face increasing difficulties in controlling managerial opportunism and monitoring individual managers´ performances (Milgrom and Roberts, 1992).

Another concept is the resource-based view, which affirms that companies benefit from a change in organizational structure if moving assets from lower to higher value or deploying redundant assets (Ito and Rose, 1994). Thus, large companies facing difficulties in managing innovations can benefit if they transfer the process outside their core business (Chesbrough, 2003). Parent companies can assign tasks to their spin-offs that require fast realization as the smaller firm can make use of “economies of speed” due to their incentive structure and motivational advantages. Moreover, the costs of control and uncertainty are lower when cooperating with spin-offs compared to outside companies through a previously established basis of trust.

Concerning the ability to successfully include innovations from outside, literature highlights the importance of establishing a corporate strategy that fosters innovation, such as CE and active innovation culture (Gassmann et al., 2003). Haid (2004) introduced a conceptual framework to show strategic control executed through strategy formulation and implementation to perform innovation through Internal Corporate Venturing. Strategy formulation includes defining the degree to which innovation is a key priority, formulating visions for orientation, establishing a shared understanding on the strategic direction, and providing corporate guidelines on the principles of innovativeness, proactivity, and risk tolerance. Strategy implementation includes basic mechanisms for identification and project selection, degree of resource autonomy, control and support. Besides, Tübke (2004) distinguishes between active and passive entrepreneurship culture. According to him, most companies do not actively support spin-off formations due to fears such as loosing qualified employees or temporary turmoil and disorganization. This attitude limits the openness towards new opportunities and thrills entrepreneurial talent. On the contrary, active culture and support enhances the parent- spin-off relationship, increases collaboration opportunities, and facilitates growth (Mocada et al.,1999). Companies that engage actively in CE activities often use innovation centers or place competent employees at technology transfer offices to set the scene (Ambos et al. 2008). The strategic dimension further influences a company´s decision whether to invest in a particular innovation project or not. For parent companies, most important criteria include strategic fit of products and markets, economic value, and feasibility. If the relevant criteria are not met according to the organization, project offers might be rejected by the parent company, leading to frustration (Tübke, 2004) and hindering innovative outcome. Therefore, it is important to define the exact dimensions of each requirement and expectation from the very beginning.

The way in which innovation is portrayed by top-management further provides an indication on practices performed by middle management. In general, the ability to turn spin-offs into a mutual performance increase for both parties, if a positive attitude among employees is predominant (Gassmann et al., 2003; Knecht ,1998; Smilor and Matthews, 2004; Steffensen et al., 2000). Attitdues of individual employees and business units are influenced by transparency and clarity about the strategic importance of individual corporate venturing activities (Smilor and Matthews, 2004; Kassicieh et al., 1997; Powers and McDougall, 2005). This is crucial as managers play a crucial role in corporate innovation initiatives. Burgelman (1983) differentiates between middle and top management. He states that the role of top management is in general to provide financial and political support. On the contrary, middle managers are considered as key for initial support of innovation activities. They explore new business opportunities more easily and are oftentimes the direct contact person for potential cooperation activities (Burgelman, 1983). Hence, companies must be able to establish substantiated decision criteria whether to accept or neglect new opportunities and which strategy to consider as adequate when combining resources or defining the collaboration context (Han, 2007).

Proposition 2: Active entrepreneurship culture is positively related to the development of innovation.


Excerpt out of 73 pages


Deploying Corporate Spin-offs and Leverage Innovation
An Exploratory Case Study
Catalog Number
ISBN (eBook)
ISBN (Book)
Open Innovation, Corporate Spin-Offs, Corporate Entrepreneurship, O, Innovation Dilemma, Organizational Ambidexterity, Strategy and General Management, Henkel Adhesive Technologies, Afinitica
Quote paper
Juliana Waltermann (Author), 2018, Deploying Corporate Spin-offs and Leverage Innovation, Munich, GRIN Verlag,


  • No comments yet.
Look inside the ebook
Title: Deploying Corporate Spin-offs and Leverage Innovation

Upload papers

Your term paper / thesis:

- Publication as eBook and book
- High royalties for the sales
- Completely free - with ISBN
- It only takes five minutes
- Every paper finds readers

Publish now - it's free