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UI Researcher Studies Businesses That Create Their Own Competition

By Phil Rooney, Staff Writer

Watch your back!

That could be the lesson taken from new research by a University of Iowa economics professor that suggests it's not the shop across the street that firms need to worry about, but the competition that comes from within the cubicles inside their own walls.

April Franco studies "spin-outs" at UI's Henry B. Tippie College of Business. Those are businesses started by employees who leave a company and compete in the same industry.

Her findings, based on knowledge-based industries, demonstrated that it's not unusual for spin-outs to take customers and market share away from the parent company.

"For a lot of firms it's hard to produce multiple products at the same time," Franco said.

For example, should a computer firm produce the other products that can be used with the computer or simply concentrate on its core business?

Some companies are so focused on serving their customer base they don't see other opportunities, and Franco agreed that some of the problem may stem from companies taking their employees for granted; but there is some disagreement among those who have studied spin-outs.

"There's lots of thoughts about why they don't take advantage of the ideas their employees have," Franco said. "Maybe it's a strategic disagreement."

Franco found several examples in the computer hard drive industry, including some that outperformed their parent company over time. Shugart Associates, for example, was an IBM spin-out, which in time surpassed IBM, the industry's one-time dominant player.

In turn, Shugart spawned Seagate Technology, which proceeded to become one of the leading players in the industry while Shugart eventually disappeared.

Often the competition comes from employees whom a company would seemingly want to keep and develop.

"This is one of the big puzzles that we face," Franco said.

She suggested what firms might do is provide those individuals with the capital to start up a new firm, something that rarely is seen.

In many cases, employees take a great new idea to management and get little support in return, Franco said. They then become frustrated and often leave to start a new company.

Franco's research found that companies that create their own competition through spin-outs do not suffer as much from a lack of technological knowledge as from a failure to understand how to effectively use that knowledge. The incidence of spin-outs is highest, Franco found, when companies create new knowledge but fail to put it to good use.

Franco believes it's likely that established companies are missing out on growth opportunities by not staying alert to new developments.

"I think that's true. It's really quite impressive how many times they do," she said. "Typically we think of diversifying firms as being more successful than ... firms that start up and are brand new."

Her research separated spin-outs from pure start-ups. The spin-outs performed better and in many ways were more successful than the diversifying entrants that remained part of established companies.

One reason the spin-outs may be more successful than other new enterprises is that the founder is making all the final calls, she said. The spin-outs bring knowledge and connections that help successfully launch a new firm.

"It also turns out that spin-outs come from better firms, not surprisingly," Franco said.

The results of the research are expected transfer to industries other than hard drive manufacturers, and work is continuing in that area.

"It's true in industries where human capital is important," Franco said.

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