creating growth with externalization of r&d results—the spin-along approach

Creating Growth with Externalizationof R&D Results—The Spin-AlongApproach

REN E ROHRBECK ,MARIO D OHLER ,

AND HEINRICH ARNOLD

After a long period of restructuring and outsourcing,companies are increasingly looking for new growthopportunities. Growth with existing products orby expansion in new markets is limited. Therefore,companies are searching for ways to expand theiractivities in new businesses. A frequently used toolof multinational enterprises is corporate venturing.Within corporate venturing, a further differentiationcan be made between internal venturing and exter-nal venturing. Internal venturing promotes businessideas generated within the organization, whereas ex-ternal venturing integrates business ideas developedoutside the company.

This article presents a special case of corporateventuring: the spin-along approach of DeutscheTelekom Laboratories. It can be seen as a combi-nation of internal and external venturing. In thespin-along approach, employees of the corporate re-search and development (R&D) department are en-couraged to take their technology or business ideaexternal by founding a separate company. Success-ful companies might later be bought and integratedback into Deutsche Telekom. © 2009 Wiley Period-icals, Inc.

Today’s marketplace is characterized by a conver-gence of industries, the globalization of research anddevelopment, and the rise of smaller companies thatchallenge the incumbents with alternative businessmodels or through innovation speed. Respondingto increasing pressure from new market entrants,shorter product life cycles, and technological dis-ruptions, companies need to develop new business

models and new product concepts to maintain theircompetitiveness.

This holds especially true in the telecommunica-tion industry where the emergence of all InternetProtocol (all-IP) networks has reduced the market-entry barriers dramatically. In the past, offeringvoice services required the building and operatingof vast fixed-line or mobile networks. Today, anysmall company can use the Internet to offer allkinds of services, including voice, data, or televi-sion. For incumbent telecommunication operators,this development translates into the need to find newways to defend their market share against smaller,more agile competitors and at the same time intoa need to explore new markets and new businessopportunities.

This article presents and discusses the spin-alongapproach of Deutsche Telekom (DT) that uses cor-porate venturing mechanisms to promote the com-mercialization of research and development (R&D)results through independent spin-out companies.These spin-out companies are closely monitored andmight be integrated back into DT if they are suc-cessful and have sufficient synergy with DT’s corebusiness.

Limitations of Incumbents to Innovate

A common paradigm in innovation managementstates that even though large companies are oftenbased on radical innovations, today they mostlyrely on incremental innovations to maintain their

44

c© 2009 Wiley Per iodicals , Inc .Publ ished onl ine in Wi ley InterScience (www.interscience.wi ley .com)Global Business and Organizat ional Excel lence • DOI : 10.1002/ joe .20267 • May/June 2009

Exhibit 1. Incumbents’ Innovation Limitations

Field Barriers

Incumbent curse Innovations with less than critical mass are neglectedStrategy per definition rejects innovations that are too radical or noncorePortfolio management prevents projects with a weak strategic fit from being funded

R&D operational problems Difficult transfer of R&D results to receiving unitsLack of business and marketing competence in R&DHigh-potential employees commercialize promising ideas externally on their own

Missing the window of opportunity Wrong timing of innovationsLack of marketabilityLack of entrepreneurial pushLack of customer relevance in innovations

competitive position, leaving the radical innovationsto smaller competitors. Even though it has beenshown that this is not true in all cases, there area number of limitations that prevent large incum-bent companies from successfully competing withsmaller, more agile competitors (see Exhibit 1).

Incumbent Curse

One of the most important competitive advantagesof large companies is their size itself. By focusing onproducts with high revenues, they can use economiesof scale that allow them to offer products at lowerprices or generate larger margins. In consequence,large companies have to focus on products that arelarge enough, have synergy with other products, orenhance the footprint of the company in their exist-ing markets.

In order to ensure that only products are developedand introduced that fit the above criteria, multiplefilter mechanisms are in place. These mechanismsinclude portfolio management in new product de-velopment (NPD), prioritization in the allocation ofmarketing budgets, and refocusing of the existingproduct portfolios.

The result of such mechanisms is what we call theincumbent curse. Through this filtering, companiesreject ideas, concepts, projects, and products that:

� have less than what is considered critical mass,which is usually the case for new products in newmarkets;

� are radical or noncore, which will prevent thedevelopment of new business; and

� have a limited strategic fit, with predefined strate-gic directions or strategic business fields.

This results in a filtering of many promising growthand innovation opportunities.

R&D Operational Problems

As a consequence of the strong division of labor inlarge companies, R&D results are generally trans-ferred from R&D to market-oriented units for theircommercialization. In many companies, the market-oriented units are good in marketing and sales ofexisting products but ill equipped for commercial-ization of completely new products.

Another operational problem is that employeesmight take their innovative idea to market outsideof their company and the innovation is lost forthe incumbent. Two major reasons exist that fuelthis threat: the high availability of venture capitalto kick-start a new business and the possibility ofoutsourcing any missing corporate functions forcommercialization of new products.

Global Business and Organizat ional Excel lence May/June 2009 45DOI : 10.1002/ joe

Exhibit 2. Differentiation in Internal and External Venturing

Characteristics External Venturing Internal Venturing

Idea origin • Inside the parental organization (Keil, 2004) • Inside the parental organization (Keil, 2004)Idea realization • Externally (Keil, 2004; Sharma & Chrisman,

1999)• Internally (Burgelman, 1983a, 1983b)

Idea commercialization • Creation of spin-outs, investing in start-upcompanies EIRMA, 2003; Tidd & Barnes,2000

• Creation of teams or units inside thecompany (Sharma & Chrisman, 1999)

Level of autonomy • High • Low to medium

SAP is one such example, where five former IBMemployees took their idea external and founded theirown company, which today is the global marketleader in enterprise software solutions and the third-largest software company worldwide.

Missing the Window of Opportunity

Many innovations in the past have been successfullycommercialized not by the inventing company butby a competitor that copied the product and enteredthe market later, at a time when customers whereready to adopt the product.

Examples include the videocassette recorder (VCR)and the personal digital assistant (PDA). In thesecases, the major reason for the lack of success waswrong timing. In particular, technology-driven in-novations tend to be ahead of customer demand.

In comparison with small companies, incumbentsoften miss the window of opportunity because of alack of entrepreneurial push, customer relevance tothe innovation, and a lack of marketability.

Corporate Venturing to Overcome Limitations

One tool used by large companies to overcome theselimitations is corporate venturing. Although differ-ent definitions exist, corporate venturing is generallyused to describe the activities of companies aimingto enter new businesses or expand into existing ornew markets. This can be done internally by creating

dedicated teams or units, or externally by foundingstart-up companies (see Exhibit 2).

In a number of studies, it has been shown that cor-porate venturing is an important tool for identifyingand exploiting new market opportunities, especiallyif they are outside the company’s core competencies.In addition, it was shown that corporate venturingfacilitates the identification and integration of exter-nal knowledge into the company.

External Venturing

According to Sharma and Chrisman, externalcorporate venturing “refers to corporate venturingactivities that result in the creation of semi-autonomous or autonomous organizational unitsthat reside outside the organizational domain,”while Keil defines external corporate venturing“as a new business creation activity of establishedorganizations, in which the corporation leveragesexternal partners in the process of creating aventure or developing an internal venture.” Keilargues further that, characterized by a support andenabling function, external venturing enables thedevelopment of new capabilities and the adaptationand recombination of existing capabilities. Bysponsoring and investing in start-up companies,either with financial assets or other resources, themain aim of the organization is to gain knowledgeand intellectual property and access to innovationfor future sustainable growth. Examples of external

46 May/June 2009 Global Business and Organizat ional Excel lenceDOI : 10.1002/ joe

Exhibit 3. Goals of Corporate Venturing and the Spin-Along Approach

Corporate venturing goals

Strategic Financial

Innovation Growth ROIProfitInternal value

creationInnovation Growth ROIProfit

Internal value

creation

Spin-along goals

• Alternative path for innovationsthat are non-core or radical

• Driving business modelinnovations

• Innovation in areas with littlesynergy with existing business

• Innovating closer to the market

corporate ventures are joint ventures, investments instart-up companies, spin-outs, and venture-capitalactivities.

Internal Venturing

In contrast to external venturing, internal corporateventuring focuses on activities that aim to createteams or units internally. According to Sharma andChrisman, “corporate venturing activities result inthe creation of organizational entities that residewithin an existing organizational domain.” Internalventuring activities require the commitment oforganizational resources and the commitment ofmanagement. The management enables internaland external communication and stimulates aninteraction among resources, technologies, andentrepreneurially motivated employees. The maindriver behind internal corporate venturing istypically top management’s quest for new growthopportunities.

Deutsche Telekom’s Spin-Along Approach

The motivation to engage in corporate venturing ac-tivities at Deutsche Telekom Laboratories (T-Labs)

is mostly based on the perceived limitations of largecompanies to successfully implement radical innova-tions outside their core competences. In addition, de-veloping organizational practices to overcome thesecapabilities is judged to be critical for successfulgrowth both inside and outside current markets.

Goals

In the literature, a set of five different goals of cor-porate venturing has been discussed (an overviewis given in Exhibit 3). A first differentiation can bemade between financial and strategic goals.

Financial goals include profit generation from open-ing new businesses or return on investment (ROI)from the margin of the initial investment and theprice paid by another company, from a publicoffering or from a management buyout where thecompany is purchased by the management team.

Strategic goals are fostering innovation, which in-cludes allowing noncore R&D and buying intonew technologies or new capabilities; growth,which aims to extend the current business and


developing new business; and internal value cre-ation, which aims to enhance current business anddevelop new business internally.

For Deutsche Telekom, innovation and growth werethe overall aims. More specifically, DT followed fourconcrete goals:

� Proposing alternative paths for radical and non-core innovations. The spin-along approach al-lows the development of radical and noncoreproducts through alternative paths that are notsubject to the filtering of marketing and productportfolio management.

� Driving business model innovations. With thespin-along approach, DT can experiment with al-ternative business models without damaging theirbrand or company image.

� Innovation in areas with little synergy with exist-ing business. DT uses the spin-along activities todevelop new business despite little synergy withtheir current business.

� Innovation closer to the market. A further goalof spin-along activities is the ability of beingcloser to the customer. Through the spin-along,the founders are able to interface directly withtheir customers, obtain deeper insights into theirneeds, and adapt the product faster to changingneeds.

With the spin-along approach, DT can experimentwith alternative business models without damagingtheir brand or company image.

Organization

Within DT, the spin-along activity is run withinDeutsche Telekom Laboratories, the corporateR&D unit. T-Labs drives R&D with a time horizonthat is beyond that of the business units and R&Din areas that affect more than one business unit.

T-Labs is organized as a university-industry researchcenter (UIRC) that is an integral part of both DT andthe Berlin University of Technology.

The spin-along initiative was started in 2005 as apossibility for project teams—whose projects havenot been successfully transferred to business units—to take their innovation external by creating aspin-out company. These companies are financedby the R&D budget, corporate venture capital(T-Venture), and external investors, such as venture-capital funds, seed capital, or business angels.

A corporate venture board within the R&D unitsupports the entrepreneurially motivated employeeswith the development of business models, businessplanning, and acquisition of investors. Further sup-port might be given by a business unit that is inter-ested in the product and wants to keep a close rela-tionship with the spin-along, but is not interested inlaunching the product under its own brand.

The first spin-out company was successfully foundedin 2006 and is cofinanced by an external investor.It is a localization-based service that allows usersto find points of interest, friends, as well as publictransport with their mobile phone. A second com-pany was founded in 2007 and has also obtainedfinancing from internal and external sources.It works in the field of virtualization of ITinfrastructure.

Even though the spin-along activities at T-Labs havenot been running long enough to draw final conclu-sions on success and value contribution, it shouldbe highlighted that having a spin-along scheme inplace has intensified the internal transfer discussionbetween R&D and the business units. It has alsoraised the pressure on the business units to considerthe integration of R&D results in their product port-folios more thoroughly. No product manager wantsto be beaten in the marketplace by a spin-along thatwas created because he did not want to implementthe product within his own product line.


Exhibit 4. Spin-Along as a Combination of Spin-Out and Spin-In Aspects

Spin-inSpin-out Spin-along

• Commercializing R&D results

• Outsourcing non-coreactivities

• Acquiring technologies

• Entering new markets

• Accessing new knowledge

• Externalization of innovation activities

• Enabling entrepreneurial push

• Fostering growth through non-core and radical innovation

Benefits

The spin-along approach combines benefits of thespin-out and spin-in activities. From our analysis wehave identified three major benefits of the spin-alongapproach (see Exhibit 4).

First, the spin-along approach at DT offers the pos-sibility to externalize innovation activities and tofacilitate the cooperation with external partners. Inconsequence, risk can be reduced by sharing it withthe employees (i.e., the founders of the start-up com-pany) and, more importantly, with other investors.

Second, founding a start-up company to externalizeinnovation activities encompasses the benefit of theentrepreneurial push that per se is difficult to stim-ulate in a large company but can enhance the or-ganization’s innovation activities. Having a smaller,more agile entity does also enhance the market andcustomer proximity, or, as one executive has put it:“An employee in a spin-along who has been thrownout of the door will come back with his innova-tion through the window. Such behavior is needed

and will never be witnessed with corporate R&Demployees.”

Third, founding of the spin-alongs has allowedthe development of noncore and radical innova-tions, such as the two companies in the areas oflocalization-based services and virtualization. Thishas laid the groundwork for growth that wouldhave been lost if the activities had needed to prosperwithin established structures.

Conclusion

Although establishing venturing activities carries ahigh level of risk and uncertainty, many organiza-tions do well at it. Venturing is especially strong andeffective if business and strategic goals require thedevelopment of new businesses and the diversifica-tion into new markets.

The first evidence from the assessment of the spin-along approach at DT suggests that it is an effectivealternative innovation path, that it is successful at


increasing the innovation capacity for radical inno-vations, and that it is a promising way for incum-bents to foster innovations in fields having little syn-ergy with existing business.

A further study on the progress of the spin-alongpractice at DT will need to show how the downsidesthat have been reported in similar approaches can beovercome. At Cisco, which has a similar scheme, thetwo major downsides that have been reported arethe difficulty of reintegrating the spin-out manage-ment after it has become used to a high level of free-dom, and the creation of envy among the employeesthat remain in the internal innovation managementand have financial rewards that are nowhere nearthe amounts attained by spin-along founders afterthey have been acquired back.

References

Burgelman, R. A. (1983a). A model of the interaction ofstrategic behavior, corporate context, and the concept ofstrategy. Academy of Management Review, 8, 61–70.

Burgelman, R. A. (1983b). A process model of internal corpo-rate venturing in the diversified major firms. AdministrativeScience Quarterly, 28, 223–244.

European Industrial Research Management Association(EIRMA). (2003). Innovation through spinning in and out.Research Technology Management, 46(5), 63–64.

Keil, T. (2004). Building external corporate venturing capa-bility. Journal of Management Studies, 41, 799–825.

Sharma, P., & Chrisman, J. J. (1999). Toward a reconcili-ation of the definitional issues in the field of corporate en-trepreneurship. Entrepreneurship: Theory & Practice, 23(3),11–27.

Tidd, J., & Barnes, S. (2000). Spin-in or spin-out? Corpo-rate venturing in life sciences. International Journal of En-trepreneurship and Innovation, 1, 109–116.

ADDITIONAL READING

Arthur D. Little. (2002). Venturing for innovation—Developments in the area of corporate venturing based on

a global Arthur D. Little study. Thalwil, Switzerland: ArthurD. Little.

Birkinshaw, J. (1997). Entrepreneurship in multinationalcorporations: The characteristics of subsidiary initiatives.Strategic Management Journal, 18, 207–229.

Burgelman, R. A., & Valikangas, L. (2005). Managing in-ternal corporate—Venturing cycles. MIT Sloan ManagementReview, 46(4), 26–34.

Carrier, C. (1996). Intrapreneurship in small businesses: Anexploratory study. Entrepreneurship: Theory and Practice,21, 5–20.

Chandy, R. K., & Tellis, G. J. (2000). The incumbent’s curse?Incumbency, size, and radical product innovation. Journal ofMarketing, 64(3), 1–17.

Chesbrough, H. (2000). Designing corporate ventures in theshadow of private venture capital. California ManagementReview, 42(3), 3–49.

Christensen, K. S. (2004). A classification of the corporateentrepreneurship umbrella: Labels and perspectives. Interna-tional Journal of Management & Enterprise Development,1(4), 1–1.

Cohen, W. M., Levin, R. C., & Mowery, D. C. (1987).Firm size and R&D intensity: A re-examination. Journal ofIndustrial Economics, 35, 543–565.

Dushnitsky, G., & Lenox, M. J. (2005). When do firmsundertake R&D by investing in new ventures? StrategicManagement Journal, 26, 947–965.

Ernst, H., Witt, P., & Brachtendorf, G. (2005). Corpo-rate venture capital as a strategy for external innovation:An exploratory empirical study. R&D Management, 35,233–242.

Freese, B. (2006). Corporate-venture-Capital-Einheiten alsWissensbroker: Empirische Untersuchung interorganisa-tionaler Beziehungen zwischen Industrie- und Start-up-Unternehmen, Wiesbaden: Dt. Univ.-Verl.

Kambil, A., Eselius, E. D., & Monteiro, K. A. (2000). Fastventuring: The quick way to start Web businesses. MIT SloanManagement Review, 41(4), 55–67.

Maula, M., Autio, E., & Murray, G. (2005) Corporate ven-ture capitalists and independent venture capitalists: What dothey know, who do they know and should entrepreneurs care?Venture Capital, 7(1), 3–21.


Miles, M. P., & Covin, J. G. (2002). Exploring the practice ofcorporate venturing: Some common forms and their organi-zational implications. Entrepreneurship: Theory & Practice,26(3), 21–40.

Rohrbeck, R., & Arnold, H. M. (2006). Making university-industry collaboration work—A case study on the DeutscheTelekom Laboratories contrasted with findings in litera-ture, ISPIM 2006 Conference: “Networks for Innovation.”Athens, Greece: International Society for Professional Inno-vation Management.

Schildt, H. A., Maula, M. V. J., & Keil, T. (2005). Explorativeand exploitative learning from external corporate ventures.Entrepreneurship: Theory & Practice, 29, 493–515.

Siegel, R., Siegel, E., & MacMillan, I. C. (1988). Corporateventure capitalists: Autonomy, obstacles, and performance.Journal of Business Venturing, 3, 233–247.

Zahra, S. A. (1993). Environment, corporate entrepreneur-ship, and financial performance—A taxonomic approach.Journal of Business Venturing, 8, 319–340.

Zahra, S. A. (1995). Corporate entrepreneurship andfinancial performance—The case of management leveragedbuyouts. Journal of Business Venturing, 10, 225–247.

Zahra, S. A. (1996). Governance, ownership, and corporateentrepreneurship: The moderating impact of industry techno-logical opportunities, Academy of Management Journal, 39,1713–1735.

Zahra, S. A. (1996). Technology strategy and financialperformance: Examining the moderating role of the firm’scompetitive environment. Journal of Business Venturing, 11,189–219.

Rene Rohrbeck is a senior researcher at Deutsche TelekomLaboratories (T-Labs) and an associated researcher at BerlinUniversity of Technology’s Chair for Innovation and Tech-nology Management. At T-Labs, he also coordinates the tech-nology intelligence activities and works on the improvementof innovation management tools. In 2007, he founded theEuropean Conference on Strategic Foresight, an annual fo-rum for corporate foresight professionals. Before joiningT-Labs, Rohrbeck worked as a business development man-ager for a technology consultancy and for two years as amanagement consultant in the automobile industry. MarioDohler is studying for a graduate degree (diploma) in businessadministration with in-depth studies of organization theoryand innovation management at Chemnitz Technical Univer-sity, Germany. He is currently working on his final diplomathesis in cooperation with Deutsche Telekom Laboratories(T-Labs). His research interests are strategic foresight, back-casting, scenario management, road mapping, and knowledgemanagement. Heinrich Arnold heads the Innovation Devel-opment Laboratory of Deutsche Telekom Laboratories. Priorto this, he specialized in large-scale organizational and strate-gic projects at Deutsche Telekom. Earlier, he worked for aninternational management consultancy firm and as a memberof the management team of a German/Chinese research com-pany. Dr. Arnold studied technical physics at Munich Tech-nical University. He graduated with an MS in engineeringfrom Stanford University; a master of business research fromLudwig Maximilian University, Munich and MIT; and a PhDin technology management. Dr. Arnold is a lecturer in inno-vations management and the author of Technology Shocks,about the management of radical technological change. He isa member of the Innovation Leadership Advisory Boards ofthe School of Engineering at the University of Illinois Urbana-Champaign.


creating growth with externalization of r&d results—the spin-along approach

Documents