Most companies now recognize just how important innovation is to continued profitable growth. The challenge is how to innovate successfully, not just once but again and again. Because real innovation demands constant and continuous renewal, which is hard to realize within an established enterprise.
Many companies see the spin-off as the holy grail of successful innovation. In a recent study on spin-offs in the biotech industry, Accenture and Utrecht University looked at hundreds of examples of how major corporations have launched ‘innovative’ spin-offs only to see them flounder and fail. And discovered some very important lessons about how companies can avoid the pitfalls that doom so many spin-offs to failure.
It’s an all too familiar scenario. After years of success, a major company sees its margins decline and its growth slow. It desperately needs a new engine for growth and because the company is so big it has to be a very big engine. So the management decides to launch a spin-off company to focus on unchartered markets, because these are the only markets with the potential for real, sustained growth. So far so good. The spin-off can operate away from the constraints of its parent company and its often cumbersome organizational structure.
Keep ‘em hungry
However, the first mistake many companies make, we found, is to throw resources at the new spin-off in the form of cash and intellectual property. There’s a lot of pressure for quick results, so apparently the new company needs lots of cash. For one, to hire a high-profile CEO with a proven ability to attract even more investment. But all too often the expected success fails to materialize and the spin-off is a massive – and costly – failure.
So why is it so difficult to launch a successful spin-off and why do so many companies fail? What emerged out of our joint study was that having a generous parent company can be as much a hindrance as a help. The study revealed some of the success factors behind profitable spin-offs. For instance – and this shouldn’t be a surprise – successful spin-offs listen to their markets and have short times to market. Successful spin-offs are patient in terms of growth, but tend to be very impatient for profit.
Of course, this still leaves the question of how can companies create the right conditions for a successful spin-off? The first recommendation sounds counter-intuitive, but may come as a pleasant surprise to many companies. Keep your spin-offs hungry in terms of capital funding! But do make sure they have the right people equipped with the right skills to deal with new technology, new products and new markets. And be patient. You cannot tap truly new markets overnight; spin-offs should be given the time to explore their markets and discover their customers’ real needs.
We’ll be exploring these success factors and the recommendations to companies looking to launch a spin-off in more detail in my next two blog posts.
For his Masters thesis, Tim Agterberg studied the development of various types of start-up companies in the Dutch biotechnology sector. Tim conducted the study during an internship with Accenture, under the guidance of Accenture’s Jeroen Hendrix and Dr. Jan Faber, associate Professor of Innovation Studies at the Copernicus Institute of Sustainable Development, Utrecht University. The study analyzed 540 cases spread across four years, in the period 2002-2005.