PlaceWare: Structuring a Xerox Technology Spin-off



Management of Technology: Assignment 2

PlaceWare: Structuring a Xerox Technology Spin-off

|Code for Course: |MBL410-Y |

|Assignment Number: |02 |

|Student number: |750-163-3 |

|Group Code Number: |BOT1000 |

Table of Contents

Introduction 4

Q1: Why has Xerox chosen to commercialise PlaceWare outside of Xerox? 5

Q2: Discuss the rationale behind this decision (Q1). 8

Q3: Which options should Bruce recommend for structuring the spin-out of PlaceWare? (Discuss various structures and provide the advantages and disadvantages of each approach) 11

Q4: Will the PlaceWare development team support your recommended choice of structure? 14

Q5: Discuss in detail the value that has been created in the PlaceWare project thus far. 16

Q6: What valuation would you give to PlaceWare in June of 1996? 18

Q7: What percentage of value should Xerox expect for its intellectual property? 19

Bibliography and References 21

Web Presentations 21

“Lessons From Xerox's History With Technology Spin-off Organizations” 21

“From PARC to PlaceWare: Life in an Internet Start-Up” 21

Table of Figures

Figure 1: Open Innovation – A new paradigm for managing technology (Source: Henry Chesbrough, “New business strategies for R & D”, Presentation to OEC Conference, 2001 pp 2.) 6

Figure 2: Open Innovation – A new paradigm for managing technology (Source: Henry Chesbrough, “New business strategies for R & D”, Presentation to OEC Conference, 2001 pp 12.) 7

Figure 3: Toward an Assessment Framework (Source: R.A.Burgelman, “Managing Corporate Entrepreneurship: New Structures for Implementing Technological Innovation,” Technology in Society (December 1985), pp. 91-103.) 9

Figure 4: Organizational Designs for Corporate Entrepreneurship (Source: R.A.Burgelman, “Designs for Corporate Entrepreneurship in Established Firms,” California Management Review (Spring 1984), pp. 154-166.) 10

Figure 5: Relationship between Ownership/Risk and Reward Motivation and Empowerment from the employees’ perspective 14

Figure 6: The Business Model Mediates between the technical and Economic Domains (Source Chesbrough, Henry, 2000. “The Role of the Business Model in Capturing Value from innovation: Evidence from Xerox Corporation’s Technology Spin-off Companies, Harvard Business School, pp 32.) 16

Introduction

Increasingly organisations are trying to capture value from discovery-orientated research that does not fit with the mainstream business of the company. Some practitioners argue that is simply doesn’t make sense for private firms to conduct basic research activities inside the firm (Moore, 1996). Other scholars claim that the ability to capture value from innovation depends crucially on the patent regime (Kortum and Lerner, 1999), or the appropriability regime of the industry in which the firm competes (Teece, 1986; Levin et al, 1987). Some recommend policies to provide better protection of intellectual property (Jorde and Teece, 1989) or the optimal scope of patents (Gilbert, 1990) to address the problem. A fourth perspective is that managers must develop new processes to manage technologies that disrupt the mainstream business of the firm, and that firms generally must become more adept in nurturing new technologies, even as they continue to exploit current technologies (Christensen, 1997;Tushman and O’Reilly, 1997).

The Placeware spinout from Xerox is a particularly good company to study when it comes to examining all these variables. Xerox has wrestled extensively with the problem of how to manage technologies that don’t fit with its mainstream business. Over the past twenty years, the Xerox Corporation has conducted what amount to a series of organisational experiments on corporate venturing to commercialise technology outside the mainstream business. Whilst each of the companies that has spun out of Xerox differ in important ways, what unites them is that they were all organised as attempts to capture value from technology that did not fit with Xerox’s current business. In answering the questions provided some clear conclusions should be reached as to what options are available for Placeware in being spun-out from Xerox.

Q1: Why has Xerox chosen to commercialise PlaceWare outside of Xerox?

I feel this was due to two issues. Firstly, “Xerox management didn’t feel it was a strategic technology” – Bob Krivacic. Secondly it was in line with the business model being followed at the time by Xerox. Lastly, “it wasn’t seen as a source of competitive advantage for Xerox. Also the user base for PlaceWare outside of our research labs was hard to see. I saw the spinout as a good outcome, both for Xerox and the founders” – Mike Myers.

Over the 20 year lifespan of Xerox, it’s management of research and development can be classified into four distinct phases. These are outlined below: -

Regime 1 – Laissez faire (1979-1982)

Spin off’s weren’t encouraged or discouraged.

Regime 2 – Ad hoc (1983 – 1988)

No specific approach was taken towards spinout’s

Regime 3 – XTV proactive financial gain (1989 – 1995)

Internal venture capital arm created inside of Xerox called Xerox technology ventures was created.

Regime 4 – XNE proactive strategic focus (1996 – 1999)

Coincided with the termination of Xerox technology ventures. They were proactively looking for opportunities. Focus wasn’t purely financial but they tried to find synergies with Xerox’s business.

In summary Xerox was using a closed innovation system as highlighted below for Regime’s 1 and two and illustrated in figure 1. This system is typical of the paths used by most organizations for their R& D from the Post World War 2 era through to the mid 1980’s. This model was particularly useful where the company was guaranteed that anything they developed could be quite easily introduced onto the market. In other words, they had considerable control over the downstream market

[pic]

Figure 1: Open Innovation – A new paradigm for managing technology (Source: Henry Chesbrough, “New business strategies for R & D”, Presentation to OEC Conference, 2001 pp 2.)

From the Mid 1980’s until now organizations have begun to explore new opportunities which has meant that they are not only focused on the existing markets and internally based knowledge. Rather there is a trend towards obtaining internal and external knowledge and using this to develop new products and new markets. Since these new products and markets may not necessarily align with the strategy of the organization one has to carefully consider spinning them out.

About the time of the beginning of regime 3, the book Fumbling the Future was published. The story and the evidence contained in the book was damning: many of the key technologies that had fueled the booming personal computer industry had been developed within the four walls of Xerox PARC. It argued that Xerox had “fumbled the future” by not capitalizing on the technology it created: “How could Xerox, sired by one radical technology, bring forth yet another extraordinary

invention, only to fumble away most of the economic opportunity it promised? It doesn’t have

to happen this way.” (Smith and Alexander, 1988: 20) The impact of Fumbling the Future was wide-ranging within Xerox, and it stimulated many responses. Xerox decided to take additional organisational steps to capture value from its technology. I believe that for Xerox this point in time was a turning point[1]. They were forced to rethink their existing business model with regard’s to R& D and adopted the approaches outlined in Regime 3 and 4. Effectively, they made a shift from a closed to open innovation paradigm to follow an approach more in line with that outlined in Figure 2.

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Figure 2: Open Innovation – A new paradigm for managing technology (Source: Henry Chesbrough, “New business strategies for R & D”, Presentation to OEC Conference, 2001 pp 12.)

Q2: Discuss the rationale behind this decision (Q1).

A high level view of the rationale has been explained in question 1. A more detailed look will solidify my thinking in question 1. In theory the spinout decision has to do with the strategic management of corporate research. There are important issues associated with the strategic management of R & D activities in general, such as (1) whether the firm is putting it’s R & D dollars into those areas of technology that will provide the highest economic returns, and (2) how tightly R & D projects are linked to business objectives in those promising areas of technology[2]

Rosenbloom and Kantrow[3] have provided a useful overview of the functions of corporate research; it indicates that corporate research helps meet the innovation challenges associated with: -

1. Support of existing business processes (Induced Process)

2. New strategic directions (Autonomous strategic processes)

Corporate research generates technologies that cannot easily find a home in the firm’s existing product development infrastructure as is the case with Placeware. These require special arrangements to facilitate the technologies (autonomous strategic processes).

A first step in understanding the rationale behind the decision to spinout PlaceWare is recognizing that different ventures have different needs and not all ventures can be effectively treated in the same way. Therefore, an analytical framework needs to be developed that can be used to assess entrepreneurial initiatives and that leads to tentative conclusions about the variety of organisation design alternatives to effectively structure the relationship between entrepreneurial initiatives and the corporation. The proposed conceptual framework focuses on two key dimensions of strategic decisions making concerning internal entrepreneurial proposals: -

1. The expected strategic importance for corporate development and

2. The degree to which proposals are related to the core capabilities of the corporation (i.e. their operational relatedness). (See Figure 3 below.)

Figure 3: Toward an Assessment Framework (Source: R.A.Burgelman, “Managing Corporate Entrepreneurship: New Structures for Implementing Technological Innovation,” Technology in Society (December 1985), pp. 91-103.)

These two key dimensions of strategic importance and operational relatedness have certain implications on the administration and operations of the organisation. If an R & D project has high levels of strategic importance and operational relatedness this means it can quite easily be folded into the existing organisation. On the other hand where these linkages are low, as in the case of Placeware management should consider spinning off the project.

The level of strategic importance to the organisation combined with the level of operational relatedness will determine to some extent how the firm should be structured. This is illustrated in figure 4 below.

Figure 4: Organizational Designs for Corporate Entrepreneurship (Source: R.A.Burgelman, “Designs for Corporate Entrepreneurship in Established Firms,” California Management Review (Spring 1984), pp. 154-166.)

This figure can be related to the Regimes mentioned in question 1. It is quite clear that Regime 3 of the Xerox life cycle sits in the sector 5 of the diagram. With the transition to Regime 4 meaning that Placeware now sits in segment 9. The indications are that Placeware is not of strategic importance to Xerox and does not have any operations relatedness and can therefore be spun off. This has certainly been clarified and reiterated by statements made by senior management within Xerox i.e. that Placeware is not strategically important to them nor does it have operational relatedness or competencies that make is suitable to retain within Xerox.

Q3: Which options should Bruce recommend for structuring the spin-out of PlaceWare? (Discuss various structures and provide the advantages and disadvantages of each approach)

The structuring options as well as pros, cons and issues are as follows.

1. Licensing Agreement

Pros, Cons and Issues

a. Weak legal protection for the licensor of the technology.

b. Potential loss of control for the future of employees ideas.

c. Critical selection of licensee – issues to consider here are whether a non exclusive or exclusive license should be granted. If this is structured incorrectly the whole project and technology would be at risk.

d. No more money would have to be invested by Xerox – the licensing company would fund the additional. In addition to this Xerox would also potentially have an ongoing source of revenue in the form of royalties which would go straight to the bottom line of the profit and loss. i.e. there would be no cost of sale element or operational expense deduction from these royalties or license fees.

e. Teams long term financial benefit is not clear for employees.

f. Xerox retains right to technology

2. Strategic Alliance

Pros, Cons and Issues

a. More than one firm to target servers and users

b. Development team could continue to influence direction and development of the project

c. Lead time advantage

d. Can take advantage of the current internet explosion

e. Can use existing marketing & distribution channels

f. Use allies expertise

g. Potential requirement for Xerox to Contribute more funding.

h. Xerox retains right to technology

3. Venture community

Pros, Cons and Issues

a. Go to commercialising mode immediately

b. Risky

c. If successful – High Return

d. Failure – team members fired

e. Valuation unknown

f. Will need to establish own marketing and distribution channels

g. Potential loss of technology investment

4. Bootstrap

Pros, Cons and Issues

a. Low cost commercialisation.

b. High risk for team members.

A study on the success of spinouts at Xerox indicated certain key discoveries when it comes to the spinouts at Xerox which I feel are important to mention here[4]. Out of the four regimes identified that are mentioned in question 1, the regime in which the spin-offs were most successful was regime 1. In other words there was no particular spin-off structure or type that ensured the spin-off would be successful. This is evidenced by the fast that regime 1 was the most successful spin-off period and this was at a time when there was no serious effort to make money out of spin-off’s. What is also important to mention is that the success of the spin-offs did not solely depend on whether the technology was good.

There were two key characteristics that were involved in spin-off successes according to the study. Firstly spin-off’s tended to be more successful where there was a very small percentage ownership by Xerox. Secondly spin-offs tended to be more successful where the organisation adopted an appropriate business model to take the technology to market

Using the lesson’s learned from the historical evidence presented and taking into consideration the 4 spin-out options mentioned above my personal preference would be to go for option 3., Venture capital. This, I believe would fit most appropriately with the business model currently being pursed by Xerox and would enable Placeware to develop a business model of it’s own. Even though other options (like strategic alliance) look attractive this does not fit their business model. This spin-off should be structured in the following way: -

1. Xerox should use the value of the intellectual property to buy their shareholding in Placeware thus ensuring they maintain a continuous return on their initial investment in the form of dividends.

2. Xerox should enable Placeware to own and develop the initial technology but have non exclusive grant back license to the technology so that they can continue to earn revenue on future technologies developed as well as protect themselves from competing technologies that may be developed.

Q4: Will the PlaceWare development team support your recommended choice of structure?

The issues to consider here are Ownership and Risk versus Reward and Motivation. The diagram below depicts the relationship between these variables. Increased levels of ownership in the company by employees means that the rewards should be greater for the employee but this is also more risk as if the venture fails they may be out of a job. As related by Pavel Curtis a software engineer at Placeware “You wake up every knowing that 90% or more of startup companies fail. Therefore there is no slack, it’s unbelievably tight[5].”

Figure 5: Relationship between Ownership/Risk and Reward Motivation and Empowerment from the employees’ perspective

Having high ownership in the company means that the employees should be motivated to make the company succeed. At the very least, it means that they have a choice as to how the company will be run and ultimately succeed. This is very important since the choices of, for example, which partners to choose will significantly impact their business. In fact it is essential that the employees are involved in these types of decisions since they are most conversant with the technologies.

One the benefits of the spinout structure proposed is that it empowers the employees in many different ways. For employees who do not have the necessary business skills this can be seen as an opportunity to develop them. As mentioned by Pavel Curtis, “ I now know why I need a CEO, I now know why I need a CFO, I also now know the difference between a good CEO and bad CEO as well as a good CFO and a bad CFO[6].”

Some other empowering aspects in the area of group dynamics, outlined by Pavel are[7]: -

• Dedication to same goal

• Everyone pitching in where needed

• Shared trials bringing people together

The fact that employees are focused on a particular goal rather than many different projects should significantly improve their chances of success from the technological perspective. The business skills will need to be learnt and can perhaps be enhanced by brining in new people with the appropriate business skills.

I believe that the structure I have proposed here will be supported by the Placeware development team as well as Xerox since it results in a win-win scenario. The employees win by gaining ownership, reward and motivation. The employers win by allowing the value of their investment in intellectual property to be maximized by letting it free. This allows both parties to focus on what is most important and strategic to themselves.

Q5: Discuss in detail the value that has been created in the PlaceWare project thus far.

In the words of researcher Bob Krivacic, it was “a platform in search of an

Application.” The only value that has been created is in the technology itself. Having good technology is no guarantee that a business will succeed, what is crucial is how the technology will be taken to market and for this an appropriate business model needs to be developed. Therefore the value that has been created in Placeware thus far is fairly low as it is sitting in Intellectual Property which may or may not be utilized. “A successful business model unlocks latent value from a technology, but constrains the subsequent search for new, alternative models for other technologies later on – an implicit cognitive dimension overlooked in most discourse on the topic. The quest for a viable business model creates a valuable framework for learning, creating a basis for economic success in the future[8].”

Figure 6: The Business Model Mediates between the technical and Economic Domains (Source Chesbrough, Henry, 2000. “The Role of the Business Model in Capturing Value from innovation: Evidence from Xerox Corporation’s Technology Spin-off Companies, Harvard Business School, pp 32.)

The value created in Placeware so far consists really of intellectual property. That is the technology they have developed of the platform as well as the skills that created that technology. To assess how much intellectual property Xerox has and in turn assess the value created so far one should examine the a 3 part model[9] to which I have added a fourth component which could in some ways be part of the second component but for purposes of this case should really be separated.

1. The Human Capital – High Level in Placeware

This consists of the knowledge that resides in the human brain

2. Structural Capital – Low levels in Placeware

This is the know-how contained in the company’s distinctive processes and competencies. Since Placeware is in its infancy at this point in time I do not believe they would have distinctive processes and competencies.

3. Customer Capital – Low levels in Placeware

This is the value of the firm’s relationships with its customers and at this point in time Placeware has no customers

4. Technological Capital – Medium

Placeware has developed a platform and has yet to develop an application at this stage. The platform cannot be proven until a business model is applied so I would rate this as medium

My overall assessment is that Placeware has some good technological and human capital but low levels of structural capital and customer capital means that an appropriate business model needs to be developed to bring the technology to market. This business model should perform the following functions: -

• Identify a market segment and opportunity

• Articulate the value of the proposed offering to customers in this segment – value proposition or externally focused idea i.e. what customer problem is being solved.

• Focus on the key attributes of the offering that the customers will pay for in that segment.

• Create a method for delivering the offering to the customers (e.g. via the internet).

• Establish a cost structure appropriate to what customers are willing to pay.

• Justify the assets needed to realize the model.

• Provide a path to scale up the business[10].

Q6: What valuation would you give to PlaceWare in June of 1996?

The business should be valued on the Net Present Value of the future cash flows. This is made up of the cash from operations and should also take into account any capital budget for the business. An interest rate of 5% is assumed bringing the value of the business to approximately $10 million.

|CASH FLOW STATEMENT | |1996 |1997 |1998 |1999 |2000 |

|Sources | |0 |2,966,612 |20,160,824 |66,326,177 |139,796,523 |

|Uses | |1,670,324 |6,631,094 |20,538,883 |59,850,205 |119,511,830 |

|Increase (decrease) in cash | |(1,670,324) |(3,664,482) |(378,059) |6,475,971 |20,284,694 |

|Cash at beginning of period | |4,000,000 |5,329,676 |1,665,194 |1,287,136 |7,763,107 |

|Cash at end of period | |2,329,676 |1,665,194 |1,287,136 |7,763,107 |28,047,800 |

|Capital Raised | |(4,000,000) |(3,000,000) |  |  |  |

|Free Cash Flow from Operations | |(5,670,324) |(6,664,482) |(378,059) |6,475,971 |20,284,694 |

| | | | | | | |

|Interest Rate |5% |(assumed) | | | | |

|NPV of future cash flows |9,449,614 |(sum of free cash flows from 1996 - 2000 discounted at 5%) |

| | | | | | | |

|Valuation of the company is about $10 | | | | | | |

|million | | | | | | |

Q7: What percentage of value should Xerox expect for its intellectual property?

Thoman who was appointed CEO of the $20 billion Xerox Corporation last summer believes that one of the strategic keys to Xerox’s future is something so intangible, so invisible to traditional bottom-line thinking can corporate practice, that it doesn’t even show up on the balance sheet. “My focus is intellectual property,” he declares. “I’m convinced that the management of intellectual property is how value is going to be created at Xerox. And not just here, either. Increasingly, companies that are good at managing IP will win. The ones that aren’t will lose[11].”

What is amazing is to contrast this statement with that of Mike Myers a previous CEO at Xerox.

“Xerox has a corporate challenge. As a $20 billion company that wants to grow at the rate of our markets, we need to add 2-3 billion in new revenues every year. Our equity investment in a successful spinout deal might yield us a payment of $10-50 million, so a smattering of these over time won’t make a dent. We just can’t meet our growth goals using these spinout mechanisms[12].”

Although this may be true in the short term this statement does not take the long-term view. What also needs to be considered is that any revenue earned from IP tends to go directly to the bottom line. What is certain in comparing these two statements is that Xerox has made a strategic shift in the way they are dealing with their spin-offs and has been making such shifts in various phases for the last 20 years.

Clearly it is important that Xerox try to attain as much value out of its IP as possible. Xerox should receive a 100% return on the value of their intellectual property as well as a continuing return in the future. How the IP is valued and how this is used to gain an initial and future return is another matter for discussion. At this point in time the value of intellectual property is not high but it has this great potential in the future. For these reasons, Xerox should ensure that it obtains a shareholding in the company at least equal to the value of its investment in the intellectual property. For reasons mentioned earlier this shareholding should be small. Apart from enabling them to gain and initial stake in the company, the shareholding will also provide them with dividends in the future. They would therefore effectively be earning a return on their initial investment in intellectual property.

Secondly, they should also ensure that they have the rights to technology that might develop as a result of spinning out of Placeware are maintained. I would therefore recommend a non-exclusive grantback license to the technology. This would ensure that Xerox ensure that maintains control over any new technologies that are developed as a result of their initial technology investment. It would also protect them from Placeware becoming a competing company which has happened in the past with many of its other spin-off companies.

Bibliography and References

Burgelman, RA., Maidique, MA. and Wheelright, SC., 2001. “Strategic Management of Technology and Innovation”, McGraw-Hill Irwin.

Caulkin, Simon, “The Knowledge within”, Management Today, August 1997, p28.

Chesbrough, Henry, 2001. “New business strategies for R & D”, Presentation to OEC Conference.

Chesbrough, Henry, 1998. “PlaceWare: Structuring a Xerox Technology Spin-off.” Harvard Business School case #9-699-001.

Chesbrough, Henry, 2000. “The Role of the Business Model in Capturing Value from innovation: Evidence from Xerox Corporation’s Technology Spin-off Companies”, Harvard Business School

Chesbrough, Henry and Richard S. Rosenbloom, 2000. “Chasing Economies of Scope: Xerox’s Management of its Technology Spin-off Organizations”, available at

Rayport, JF. and Jaworski, BJ. 2001. e-COMMERCE. Singapore: McGraw-Hill Book Co.

Rivette, KG and Kline, D., “Discovering New Value in Intellectual Property”, Harvard Business Review, January – February 2000, pp. 54 – 66

Web Presentations

“Lessons From Xerox's History With Technology Spin-off Organizations”

Speaker : Henry Chesbrough

Available at

“From PARC to PlaceWare: Life in an Internet Start-Up”

Speakers: Richard Bruce, Pavel Curtis, Mike Dixon, Bob Krivacic, and David Nichols

Available at

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[1] Chesbrough, Henry, 2000. “The Role of the Business Model in Capturing Value from innovation: Evidence from Xerox Corporation’s Technology Spin-off Companies”, Harvard Business School

[2] R.N. Foster, “Linking R & D to strategy,” The McKinsey Quarterly, Winter 1981.

[3] “The Nurturing of Corporate Research.”

[4] “Lessons From Xerox's History With Technology Spin-off Organizations.” Speaker: Henry Chesbrough

Available at

[5] “From PARC to PlaceWare: Life in an Internet Start-Up. “Speakers: Richard Bruce, Pavel Curtis, Mike Dixon, Bob Krivacic, and David Nichols. Available at

[6] “From PARC to PlaceWare: Life in an Internet Start-Up. “Speakers: Richard Bruce, Pavel Curtis, Mike Dixon, Bob Krivacic, and David Nichols. Available at

[7] “From PARC to Placeware: Life in an Internet Start-Up. “Speakers: Richard Bruce, Pavel Curtis, Mike Dixon, Bob Krivacic, and David Nichols. Available at

[8] Source Chesbrough, Henry, 2000. “The Role of the Business Model in Capturing Value from innovation: Evidence from Xerox Corporation’s Technology Spin-off Companies, Harvard Business School, pp 32.

[9] Caulkin, Simon, “The Knowledge within”, Management Today, August 1997, p28.

[10] “Lessons From Xerox's History With Technology Spin-off Organizations”. Speaker : Henry Chesbrough. Available at

[11]Rivette, KG and Kline, D., “Discovering New Value in Intellectual Property”, Harvard Business Review, January – February 2000, pp. 54

[12] “Lessons From Xerox's History With Technology Spin-off Organizations.” Speaker: Henry Chesbrough

Available at

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