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Divided We Stand

Smart firms expand in pieces, spinning fast-growth units into standalone entities.
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During the recent holiday season, newsstands and mailboxes were packed with the usual bevy of buying guides for electronic gifts. The idea, of course, is to whet our appetites for the latest and greatest. But I always find these guides sobering, even a little depressing. That's because almost as soon as these shiny new gadgets appear, they're already en route to the graveyard, victims of high tech's light-speed obsolescence. Enjoying that plasma TV, the hottest product of 2004? That's a shame because the newest LCD wide screens offer a better picture for less money. Finally upgrade to a state-of-the-art five-megapixel digital camera? Good for you, except that the state of the art just jumped to 15 megapixels.

It's tough enough knowing that our cherished new toys are about to be eclipsed by something better. But what happens when the same dynamic begins to apply to your business? How can you run a company when your very business model constantly teeters on the edge of irrelevance? Unfortunately, that's the world we live in. Technology is working its way into an ever wider array of products, frequently reinventing them, and the Internet has made word of mouth nearly instantaneous. The result: an increasingly unpredictable landscape of "instant markets" that requires new levels of speed and agility. "The life cycles of goods and ideas are getting so short that essentially as soon as you begin on a product or idea you have to start thinking of a new one," says Peter Nijkamp, an economics professor at the Free University of Amsterdam who studies innovation.

High-tech companies have a way of coping. The basic idea is deceptively simple: Instead of thinking in terms of expanding the company as a whole, focus on new, fast-growth, "spin-up" business units with their own identities -- even if it means letting other parts of the company languish. Seen many commercials for Apple Macintosh computers lately? Probably not, but you can't escape those dancing silhouettes with the white ear-bud cords. The iPod is the spin-up that ate Apple -- and Apple isn't complaining, given that the iPod has handed the company its first runaway hit in years. Hewlett-Packard's photo-printer business has likewise exploded -- to the extent that Wall Street now regards the unit as representing virtually the entire value of the company.

The trickiest part of the spin-up is to have the flexibility to bring a promising new aspect of a business quickly to the fore without worrying about what gets left behind. It's sort of the opposite of brand extension: Rather than building on an existing brand identity, a spin-up creates a new one, often overshadowing or even subsuming what came before. It's a different way of thinking about a company -- not as a seamless whole but as a fractured conglomeration of potentially independent units, some leaping into being and growing fast, others withering away. Mathematicians have long been taken with the concept of fractals, which posits that patterns are made up of smaller, self-contained patterns. A tree, for example, contains limbs shaped like mini-trees, which in turn are composed of tree-shaped branches. Fractals pop up in nature everywhere, from snowflakes to clouds, and are characterized by fast growth and resilience.

Companies can be fractal too. Being fractal means following three basic principles: Grow in pieces instead of holistically; be as quick to shrink or get rid of logy pieces of the company as to invest in the promising ones; and be prepared to reorient your efforts around any of the pieces. Fractal companies "are more focused and faster," says Mario Benassi, a researcher at the University of Milan. "They can quickly get rid of activities they're not interested in anymore." Traditional companies, by contrast, tend to be so fixated on preserving the same core business that potentially hot new markets are poorly served -- if they serve such markets at all.

Taken to an extreme, being fractal can change the very notion of what it means to run a company. Scientific Generics, headquartered in Waltham, Mass., and Cambridge, England, is a 300-employee firm built almost completely around spin-ups. It offers consulting services but has no real main line of business. Instead, the company looks for interesting unserved niches in any market, creates a unit to develop or acquire technology aimed at that niche, then does whatever seems most profitable with the technology: license it; build a business unit around it; spin it off into its own company; partner with another firm; or just let it die should demand wither or fail to materialize. Over the past 17 years, Scientific Generics has created or partnered in some 70 companies and business units, whose products range from display screens to toys to medical devices. Sometimes the spin-ups generate spin-ups. That's what happened in 1998, when a business unit developing a sensor-equipped stylus for Palm-like hand-held devices spawned a unit that developed position-tracking devices for automobiles. "Companies focus their R&D only on their existing strategic needs," says Geoff Waite, the company's vice president. "That makes them less idea-rich, and they miss opportunities."

You don't have to be high tech to be fractal. Savvy restaurateurs like Danny Meyer in New York City (Union Square Cafe, Gramercy Tavern), for example, grow not by making individual restaurants bigger, nor by opening clones of the same restaurant, but by creating entirely new concepts -- occasionally closing or reinventing existing ones when their cachet fades. Smart fashion and sporting goods firms also whip up new independent brands to surf the fad of the moment.

The approach works in less sexy industries, as well. Take Center City Pretzel Co. in Philadelphia, which bakes some 30,000 soft pretzels a day for the city's street vendors. In 1997, founder Anthony Tonelli and his two partners realized there was a market no one was tapping: the growing legion of aging pretzel-loving Philadelphians moving to the Sunbelt. So they spun up A Little Bit of Philly to sell packages of pretzels -- 10 for $22.95, including mustard and salt packs -- that could be shipped around the country. Goosed by an investment of about $100,000, sales grew to about 10,000 boxes a year, and last year one partner took the spin-up out of Center City. Meanwhile, another venture aimed at selling pretzels to hotel guests was slow to catch on, and the company let it fade. That flexibility distinguishes a spin-up from a spinoff: A spinoff sinks or swims on its own, while a spin-up can take over the company, melt into the background, or morph into a classic spinoff.

Or consider ThreeWire, a Minnetonka, Minn., firm that helps health care companies recruit and track patients. The company found that some of its clients were also asking for help with advertising and marketing materials, work ThreeWire was passing on to other firms. "It hit me like a two-by-four," says ThreeWire founder and CEO Mark Summers. "We needed to be in that business." So in late 2003, ThreeWire spun up Dash Two Advertising, which brought in $1.5 million in its first year -- about half of the company's revenue. Summers's next move: Spinning up a business to market a service to improve the information available to surgeons in the operating room. Summers remains committed to ThreeWire's original patient-tracking business. But he intends to follow the growth opportunities wherever they are.

A few tips on making the fractal approach work:

  • Give each spin-up independence. Dash Two and A Little Bit of Philly, for example, each had dedicated managers and their own business plans. Benassi says spin-ups should even be free to strike deals with the mother company's competitors.
  • Distinguish between spin-up creators and spin-up managers. Some managers, says Scientific Generics' Waite, are good at creating one spin-up after another, while others are better at focusing on one spin-up and making it work.
  • Keep replacing losing spin-ups with new ones. You're a genius if only 60% of your spin-ups fail, according to the Free University of Amsterdam's Nijkamp, so keep the churn rate high.

If you do get a spin-up to fly, here's a good way to celebrate: Run out and grab that 52-inch LCD TV you've had your eye on. Check for it in the clearance section.

David H. Freedman, a Boston-based writer and former Inc. senior editor, is the author of several books about business and technology.

Last updated: Mar 1, 2005

DAVID H. FREEDMAN

A Boston-based contributing editor, Freedman is the co-author of A Perfect Mess, which examines the useful role of disorder in daily life, business, and science.




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