Innovation is anything, but business as usual.
A multiple case study into the decision-making process of innovation portfolio
management
Master thesis MSc. Business Administration | Digital business
Eveline Albers 10428178 Final version
Dr. Angelos Stamos June 22, 2018
Statement of originality
This document is written by student Eveline Albers who declares to take full responsibility for the contents of this document.
I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.
The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
Table of contents Abstract 4 Introduction 5 1.1 Background 5 1.2 Research Question 7 1.3 Relevance 7 1.4 Research method 8 1.5 Outline research 8 Literature review 9 2.1 Innovation 9 2.2 Corporate Innovation 11
2.3 Importance of innovation management 11
2.4 Innovation portfolio management 12
2.4.1 Optimization perspectives 13
2.4.2 Strategic perspectives 14
2.4.3 Organizational perspectives 15
2.4.4 Decision-making perspective 15
Power-based decision making 18
Opinion-based decision making 19
Method 21 3.1 Design 21 3.2 Sample 22 3.3 Interviews 23 3.4 Analysis 24 Results 25
General findings on innovation 25
4.1 Evidence-based decision making 26
Strategy alignment 27
Trends 28
Financial factors 30
Feasibility factors 30
Validation 32
4.2 Power-based decision making 33
4.3 Opinion-based decision making 35
4.4 Interaction between the decision-making processes 37
Discussion and Conclusion 39
References 46
Appendices 56
Appendix A - overview cases 56
Appendix B - Interview guide 57
Abstract
Corporate organizations need to constantly adapt due to the rapid change that accompanies globalization and digitalization. To claim and maintain competitive advantage organizations need innovation. However, to manage multiple innovation projects, innovation portfolio management (IPM) is necessary. Even though IPM is widely used in practice, research on decision making process underlying IPM is limited. Based on a multiple case study of fifteen corporate organizations based in the Netherlands, the decision-making process is explored. The research was guided by literature on IPM and the decision-making process, resulting in the examining evidence-, power- and opinion-based decision making on IPM. The finding show that there is support of indication of all three decision making processes. Furthermore, it is concluded that evidence-based decision making is the most influential for IPM, as it is used as a starting point for all IPM decisions. However, power- and opinion-based decision making processes should not be disregarded. This research contributed to gain a more in-depth view of the decision-process of IPM. Furthermore, an agenda for future research is set.
Keywords: innovation portfolio management; innovation; corporate innovation; portfolio
management; decision-making process, evidence-based decision making; power-based decision making; opinion-based decision making; case studies
1. Introduction
1.1 Background
Organizations are driven to adapt, due to the challenges globalization and digitization bring with them (Parida, Sjodin, Lenka & Wincent, 2015). Technology is changing rapidly, product life cycles are shortening and global competition has intensified (Cooper, Edgett & Kleinschmidt, 2006). Innovation can help organizations meet their long-term business objectives by creating differentiated goods and services at lower costs (Porter, 1998). However, innovation is also inherent to a high probability of failure, unpredictability and uncertain future perspective (Holmstrom, 1989).
Managing the process of carrying out an innovation, which is called innovation management (Oke, 2002), is therefore very important. To achieve successful innovation, Goffin and Pfeiffer (1999) state that organizations need to perform well in the five areas, one of which is selection and portfolio management.
Attention towards portfolio management has increased amidst senior management (Cooper, Edgett & Kleinschmidt, 2006). Moreover, it has been identified as one of the most important senior management functions (Cooper & Kleinschmidt, 1996; Miller & Morris, 2008; Roussel, Saad, & Erickson, 1991). Innovation portfolio management (IPM) as defined by Cooper, Edgett & Kleinschmidt (1999), involves the efficient and effective resource allocation across all new product development (NPD) projects of an organization.
These NPD projects are usually executed at the same time and collectively form an innovation portfolio. Effective IPM can therefore ensure a stable supply of high-quality new products (De Maio, Verganti & Corso, 1994). Continuously investing in innovative products,
in turn can lead to building a sustainable competitive advantage (Cordero, 1991; Baregheh, Rowley & Sambrook, 2009).
Research regarding IPM lacks an overall theoretical basis, due to its relative recent emergence and disconnectedness of insights. Which is a result of multiple studies that were conducted from different points of view, lacking in unity (Meifort, 2016). For that reason, Meifort (2016) provided the first review and synthetization on IPM research, focusing on IPM as a concept that has been analyzed from different perspectives. A more elaborate background on the extant literature of IPM is outlined in the literature review (section two). Additionally, Meifort (2016) set a research agenda for IPM. One aspect of IPM that has not been researched extensively is which information and factors are truly important during the IPM decision process.
Making decisions during innovation portfolio management is imperative. Making the right decisions can ensure long-term organizational success (Cooper et al. 1999; Chao & Kavadias, 2008). Additionally, the negative impact of making bad decisions can be substantial (Cooper, Edgett & Kleinschmidt, 2001b). Consequently, it is important to gain insight on how decisions regarding innovation portfolio management are made. Decisions with regards to portfolio management encompasses determining to what extend funding is allocated to what projects at what point in time (Kester, Griffin, Hultink and Lauche (2011). To decide on this, an integrated systems of decision making processes are used. These processes consider information on projects concurrently. Kester et al. (2011) developed a general model regarding the three decision making processes: evidence based, power based and opinion based decision making. All three processes consider projects differently, each fueled by different decision making inputs. The present study means to investigate these different forms
of input necessary for decision making, determining what information plays a role in the decision-making processes (evidence, power and opinion based) and tries to establish which one is most influential for the decision-making processes in the corporate sector. In the literature review (section two) the decision-making process constructs are further discussed.
1.2 Research Question
The main objective of this study is to gain an in-depth understanding of what factors are important for corporate organizations in the decision-making process of innovation portfolio management, as this presently indistinct (Meifort, 2016). Thus, the intention of this study is to discover on what input the different decision processes of IPM are based on and if they are considered equally important by the organizations. Based on this, the following research question is formulated:
What decision making process, consisting of evidence-, power- and opinion based decisions, is the most influential for innovation portfolio management decisions in the corporate sector?
1.3 Relevance
By answering the above-mentioned research question, the current study aims to add to the field of innovation management by gaining an in-depth understanding of the input corporate organizations consider in the decision-making process of IPM. Acquiring this knowledge is very relevant for both theory and practice. As argued by Meifort (2016), a better understanding of the information and factors of decision making regarding IPM is needed, which contributes to scientific knowledge about IPM and therefore innovation management. In turn, this could improve innovation practices of organizations, resulting in competitive advantage or simply their survival. For this reason, it is of great importance additional empirical research is done. Furthermore, there are multiple processes, tasks, tools and instruments available for IPM. However, using these tools without knowing what is truly
important in the decision making of IPM might undermine their use. Knowing what factors play an important role in IPM can therefore be of great use to innovation (portfolio) managers. The results of this study could lead to adjustment in the strategy used for IPM, which in turn could benefit innovation practices and thus improve the competitive advantage an organization has (Cordero, 1991; Baregheh et al., 2009).
1.4 Research method
In order to answer the research, question an exploratory qualitative method is selected. A multiple case study was done by interviewing 15 organizations on their IPM. The aim of the multiple case study was to provide an in-depth understanding of the IPM decision making process from multiple perspectives and sources. It is therefore necessary to do a qualitative method, as a quantitative research would be insufficient to facilitate understanding a phenomenon in such an elaborate way.
1.5 Outline research
The first section of this study covers the introduction of the research topic. In section two a reflection on the extant literature is provided to outline the theoretical background and context of the research. Based on section two, propositions are formulated. The subsequent section provides an elaborate description of the method used for this research. Section four describes the results. Afterwards, in section five the results are discussed and conclusions are drawn. Section six concludes the paper with limitations and suggestions for future research.
2. Literature review
The following section provides a review of the relevant extant literature on innovation portfolio management and derived propositions based on these insights. First, to create an understanding of the concept of innovation, a definition of innovation is provided. Second, research on corporate innovation is outlined, illustrating the need for further research in this domain. Third, literature on innovation management is reviewed. Afterwards, innovation portfolio management is discussed by using the different IPM perspectives from the extant literature. Following, the research done on the decision-making process is presented and evaluated, resulting in expectations for the outcome of the research. The section concludes by formulating working propositions for the present study.
2.1 Innovation
As previously stated, innovation plays an important role in achieving sustainable competitive advantage by creating value (Cordero, 1991; Baregheh et al. 2009). Therefore, it is of importance to know how innovation is defined by extant literature.
Throughout the literature discussing innovation, definitions of innovation vary between different disciplines (Baregheh et al. 2009). Multiple researchers concluded that there is a lack of a common definition and a need for one (Zairi, 1994; Cooper, 1998; Adams, Bessant & Phelps, 2006; Kahn, Franzak, Griffin, Kohn & Miller, 2003). In response to this demand, Baregheh et al. (2009, p. 1334) proposed the following textual definition of innovation “Innovation is the multi-stage process whereby organizations transform ideas into new/improved products, service or processes, in order to advance, compete and differentiate
themselves successfully in their marketplace.” The current study accepts this definition based on its general, integrative and holistic character.
Innovation can be divided using types: product, process and service innovation (Kuratko, Covin and Hornsby, 2014). The difference between these types of innovation lays with the output or the result of the innovation (Baregheh et al., 2009). By means of their literature review, Baregheh et al. (2009) identified a fourth innovation type: technical innovation. However, it could be argued that a technical innovation is already incorporated in the three types of innovation provided by Kuratko et al. (2014), as technical innovations could lead to product, process and service innovation. For this reason, the present study does not regard technical innovation as a distinct type of innovation.
Furthermore, another way to categorize innovation is incremental, radical or disruptive innovation (Kuratko et al., 2014; Bogolyubov, Simeonova, Wijker, & Easterby-Smith, 2017). Incremental innovations are (minor) improvements of existing innovation types, for instance products or processes (Ghosh, Kato & Morita, 2017) and therefore tap into new or larger markets or reduce costs (Kuratko et al., 2014). Radical innovation incorporates changing a technology or process of an organization in a significant, clear and often risky way (Bogolyubov et al. 2017). Organizations usually invest in both innovations at the same time. This distinction is also implicitly evident in the definition of innovation provided by Baregheh et al. (2009). A common definition used to describe disruptive innovation is: technology that enables new product features that are similar but inferior to mainstream features, therefore serving a niche that value these features. However, developments increase the performance, making it sufficient for the needs of the mainstream customer, thus disrupting and invading the mainstream markets (Christensen and Bower, 1996).
2.2 Corporate Innovation
This study focuses on corporate innovation. Corporate organizations both have the need and the urgency to innovate. Zahra and Covin (1994, p. 183) even go as far as to suggest that “Innovation is widely considered as the life blood of corporate survival and growth”.
Additionally, due to their characteristics most corporate organizations have a wide availability of resources, networks, possible partnerships that can be devoted to innovation. This in contrast to small- or medium-sized enterprises (SMEs), that are limited in resources and location factors leading to higher cost bases for new technology (McAdam, Reid & Shevlin, 2014). In a survey from Accenture among executives from large organizations, 67% claimed that innovation was a big factor for their long-term strategy success. However, 50% of them also indicated to have an unacceptable innovation process (Koetzier & Alon, 2013). Taking these factors into account, it is very interesting to see that these organizations need to and want to innovate, however they do struggle with their innovation processes. Researching corporate innovation is therefore managerially very interesting. In addition, the extent to which innovation portfolio management is researched in a corporate environment is very limited, which is discussed in section 2.4.
2.3 Importance of innovation management
The way innovation is managed can determine to what extend innovation is operated and thus is very important. Organizations that have implemented a formal system for innovation received better outcomes and higher levels of satisfaction from their innovation investment (Koetzier & Alon, 2013). Kuratko et al. (2014) ague that creating an effective way of innovating is essential for the pursuit of competitive advantage. Effective innovation means understanding the type of innovation, coordinating managerial roles, effectively using
operating controls and properly training individuals (Kuratko et al. 2014). These factors should be incorporated in the innovation strategy of an organization, which is mostly determined by senior management. Even though senior management often gives strategic direction, middle management of an organization has a great effect on and plays significant roles within innovative and strategic processes (Hornsby, Kuratko, Shepherd & Bott, 2009). Innovation can be driven by senior management as well, however in practice the middle (innovation) manager oversees the management of the day-to-day innovation portfolio.
2.4 Innovation portfolio management
In prior research on portfolio management, the commonly accepted definition is developed by Cooper, Edgett & Kleinschmidt (1999, p.355): “portfolio management is a dynamic decision process, whereby a business’s list of active new product (R&D) projects is constantly updated and revised. In this process, new projects are evaluated, selected, and prioritized; existing projects may be accelerated, killed or deprioritized; and resources are allocated and reallocated to the active projects” (Meifort, 2016). This study accepts this definition of portfolio management, due to its comprehensive nature and acceptance among extant literature.
Important regarding IPM is that it has to cope with the dynamic of innovation projects itself (uncertain information, sudden change, conflict of strategy), the interdependencies between projects from different parts of the organization and therefore multiple decision makers and simultaneously consider individual project assessment and corporate strategy (Cooper & Edgett, 1997; Cooper, Edgett & Kleinschmidt, 1999; Anderson & Joglekar, 2005). The intention of IPM is to turn strategy into action using projects and to make sure growth is not obstructed, by managing the NPD process in such a way, standstill in the portfolio is
prevented (Meifort, 2016). To obtain this, an innovation portfolio needs to be updated timely and efficiently(Repenning, 2001).
Research on IPM has resulted in a very disconnected body of literature. The research that has been done can be divided in four perspectives (Meifort, 2016).
Even though, the research on IPM is scattered, a systematic review of IPM by Meifort (2016) derived four perspectives from the literature to view IPM: the optimization perspective, strategic perspective, decision-making perspective and organizational perspective. All four perspectives brought multiple insights to IPM. To maintain structure, the previous research on IPM is discussed by means of these perspectives, concluding with the working propositions of this research.
2.4.1 Optimization perspectives
The focus of optimization research of IPM is how to include the best projects in the portfolio, thus making sure the value of the portfolio is maximized (McDonough III & Spital, 2003). These researches mostly resulted in optimization models (Blau, Pekny, Varma & Bunch, 2004;) and research on the inapplicability of these models. These models are analytically complex and interpretation is challenging, which results in implementation issues (Chao & Kavadias, 2007; Loch, Pich, Terwiesch & Urbschat, 2001). The optimization perspective coincides with the research selection of projects, which is discussed in the section decision making (section 2.4). Research on IPM optimization does not take strategy into account and results in models that are barely usable in practice and can therefore be considered limited.
2.4.2 Strategic perspectives
IPM can be viewed as the translation of strategy into action, meaning the projects are the implementation of the strategy (Shenhar, Dvir, Levy & Maltz, 2001). Extensive research has been done on the importance of IPM for the strategy of an organization. There is a positive relationship between IPM and technological competence (the development of superior products), NPD speed and NPD program performance (Acur, Kandemir, Weerd- Nederhof, Petra, & Song, 2010). This means that if a portfolio is managed correctly, this will improve NPD considerably. Strategy leading to the a balanced (exploratory versus exploitative) search for innovation projects for influences new product performance. Shenhar et al. (2001) researched how to measure project success by identifying succes dimensions on a project level, being: (1) project efficiency, (2) impact on the customer, (3) direct business and organizational success, and (4) preparing for the future. Chao and Kavadias (2008) first investigated the relationship between environmental complexity (meaning interdependencies among technology and market parameters that determine product performance and instability) environmental instability, the probability of changes to the underlying performance functions and value of incremental versus radical innovation. Environmental complexity shifts the value to radical innovation and environmental instability shifts the value to incremental innovation. Also, Cooper et al. (1997a, 1997b, 1998) conducted multiple studies on IPM, providing empirical evidence and identifying the three main goals for IPM. These goals are maximizing portfolio value, achieving balance between projects within alignment to strategy and selecting the right number of projects (Cooper et al. 2002). Moreover, they developed and optimized the stage-gate process from best practices. Cooper et al. (2002) provided a useful IPM, however did account for decision making as a process.
2.4.3 Organizational perspectives
Research on organizational IPM perspective provide a theoretically solid foundation, illustrated below. Early research done in an organizational context, included mathematical models emphasizing the importance of goal congruence in the R&D process (Hall & Nauda, 1990; Winkofsky, Baker & Sweeney, 1981; Mandakovic & Souder, 1985). Another line of studies researched effective IPM, concluding that interaction is very important, supporting information-sharing, collaboration and eventually organizational consensus on every organizational level (Hall & Nauda, 1990; Brown & Eisenhardt, 1997; Anderson & Joglekar, 2005; Cuijpers, Guenter & Hussinger, 2011; Jonas, Kock & Gemünden, 2013)
The relation between managers and portfolio management was researched. Project managers can contribute on a portfolio level by means of information and efficiency of project management (Martinsuo & Lehtonen, 2007) and quality (Jonas et al. 2013). Multiple studies were conducted on the relationship between project and portfolio level, concluding that there is an important relationship between them (Teller, 2013; Teller & Kock, 2013; Teller, Kock & Gemünden, 2014). For instance, having a formal project process facilitates and improves the quality of portfolio management and can lead to portfolio success. It is therefore important to consider relationships regarding IPM. Additionally, portfolio success can be obtained through dynamic capabilities such as the use of governance (Urhahn & Spieth, 2014) to organize project management in changing conditions (Korhonen & Laine, 2014). 2.4.4 Decision-making perspective
Research has been done on the decision-making process of portfolio management. According to research done by Cooper et al. (1999) and Chao an Kavadias (2008) the decision-making process for the portfolio on NPD opportunities should be effective to ensure long-term
organizational success. Decisions made for portfolio management include deciding on to what extent funding is given to which project at what point in time (Kester et al. 2011). Extant research has focused mostly on this decision process of portfolio management on a individual project level. These researches have mostly investigated two decision making moments: selection and termination of projects. The focus of research on selection of projects has focused mostly on numbers, creating evidence based financial methods for risk-reward calculations of selecting projects. However, these methods are very user unfriendly and therefore rarely used in practice, which brings up the question how portfolio managers do select projects.
Terminating a project is indicated as one of the most difficult decisions to make practically (Balachandra et al., 1996; Calantone, Di Benedetto, and Schmidt, 1999). On one hand the reason for this is that individuals become emotionally involved in a project and therefore do not want it to be stopped, even if it is clear that it probably will not succeed. On the other hand, even when though the decision makers are not involved in the project, they may be too positive about a project due to subjective feelings (Eisenhardt and Zbaracki, 1992; Biyalogorsky et al., 2006). Thus, research on project level has to be about the selection of a project, using financial methods and termination, and looking at personal involvement of project stakeholders. Kester et al. (2011) argued however that decisions are made consecutively during the innovation process and therefore decision making should be researched as an integrated system of processes. To create positive effects for the organization, the decision process should be effective. Kester et al (2011) found that the decision-making processes of organizations are a mixture of evidence-based, power-based and opinion-based decision-making processes. The extent of effective decision making depends on the interplay between the three. Moreover, political interventions should be minimized, collaboration across functions should be facilitated and understanding for strategy
should be created. Kester et al. 2011 researched the decision-making process and identified three decision making processes. Building on the research of Kester et al. 2011, the current study aims to discover if these decision-making processes can be found in current corporate organizations.
Evidence-based decision making
The extant literature of evidence-based decision making is limited. Dean and Sharfman (1996) found that the decision process influences the effectiveness of strategic decision making. They discovered that managers who gathered information and made use of analytical techniques, made decisions that were more effective than managers who did not. Building on this research, the influence of the environment on rational decision making was investigated by Hough and White (2003). They concluded that by definition, the environment is in a constant state of change and the future is uncertain. It is possible that due to new information the decision-making process can be slowed down and thereby influence the performance (Eisenhardt, 1989). Decision makers are able to identify critical variables when the environment is stable using rational processes to gather information (Hough and White 2003). Furthermore, a slower pace of change allows to make decisions from a more strategic, rational position. Briner, Denyer & Rousseau (2009) highlighted the possibilities and opportunities of evidence-based management. It can be seen as a means for professional reflection and used to develop an understanding of how validity and value of various kinds of evidence can be used in decisions. Kester et al. 2011 expanded on this, acknowledging the relevance of evidence-based decision making. According to Kester et al. (2011, p.649) “Evidence-based decision making is the process by which firms use objective information and empirical evidence, while understanding the underlying assumptions, to build an objective decision-making rationale.”
Evidence-based decision making uses empirical evidence to build an objective decision-making motivation. Corporate organizations commonly use empirical data to base decisions on. Moreover, using evidence to build a decision is expected to be viewed as important, due to the uncertainty of innovation. Due to this uncertainty it is expected that innovation managers intend to underpin their decisions with as much evidence as possible. Based on the previous section, the following proposition was formulated:
P1: Corporate organizations use evidence based decision making for IPM.
Power-based decision making
Political power can be of big influence on decision making (Child, Elbanna & Rodrigues (2010). Decision makers can alter the processes and outcomes of strategic decision making by using the power they possess or their influence (Child et al. 2010). This also applies to management decisions (Hurley and Hult, 1998). Their results indicate that when an organization is highly innovative, a culture that emphasize learning, development and participative decision making is developed. Participative decision making being the opposite from power-based decision making. The decisions of managers that were engaged in the use of power or pushed hidden agendas were less effective than decisions of those who did not (Dean and Sharfman,1996). Therefore, using power to make decisions might not be advisable. The influence of political power has on the decision making process on NPD was first researched by the previously mentioned Kester et al. (2011 p. 649) defining power-based decision making as: “Power-based decision making results when an unequal distribution of power allows more powerful groups or individuals to make decisions that reflect their personal interests.” Being driven on personal interests, power-based decision making is
Corporate organizations have a rigid power structure. However, structures are moving from hierarchical structures to network structures (Levy & Reiche, 2018). Meaning that decision making is dispersed further across the organization. This is also reflected in innovation portfolio management, which requires multiple decision makers (Meifort, 2016). However, power could still be a deciding factor for IPM. Based on the previous section, the following proposition was formulated:
P2: Corporate organizations use evidence based decision making for IPM.
Opinion-based decision making
Research also considered subjective information as a ground for decision making, for instance intuition, negotiation and bargaining (Kester, 2009, 2011; Elbanna & Child, 2007; Blichfeldt & Eskerod, 2008; Christiansen & Varnes, 2008). For instance, intuition or experience can help if there is no sufficient information available for the decision making process (Gudonavicius & Savaneviciene, 2005). The flexibility of the decision maker increases because of ambiguity between future preferences and the outcomes of projects, leaving room to advocate for a project (Christiansen & Varnes, 2008). According to Eling, Griffin & Langerak (2014) intuition could be beneficial to increase new product creativity and for making generation and evaluation decisions during the fuzzy front end. The literature on opinions and decision making is mainly descriptive and lacks understanding of how subjective information is incorporated in the decision-making process of IPM. Opinion based decision making for portfolio management according Kester et al. (2011 p.649): “based on overall feelings and personal experience, to build a subjective decision-making rationale.” The present study aims to provide insight how intuition and experience is used by corporate organizations. Moreover, corporate organizations have a major availability of professional
expertise and insights, making it is expected to be used in IPM. Based on the previous section, the following proposition was formulated:
P3: Corporate organizations use opinion based decision making for IPM.
The decision processes are expected to not rule out one and another, for that reason an interaction between them is expected. Therefore, the following proposition was formulated:
P4: There is an interaction between the evidence-, opinion- and power-based decision making process.
3. Method
The following section outlines the method used for this study. First, the design will be discussed. Secondly, the sample used for the present study will be explained. Thirdly, the method of data collection, interviews, is outlined. Concluding with how the data was analysed.
3.1 Design
The present study has both a deductive and inductive nature. First, Meifort (2016) synthesized the extant literature on IPM, providing four perspectives and setting a research agenda. The present study will build upon these perspectives and regards IPM with an integrated view. Furthermore, this study builds on the research of Kester et al. (2011), by empirically investigating the concepts identified in their research in the present corporate field. So, the deductive nature of the research means that there is a construct of IPM decision-making based on existing theory being tested (Saunders et al., 2012). However, this study also considers new factors that may surface and therefore researching the context and exploring the IPM practices can lead to theory building (Saunders et al., 2012). Due to the complex nature of portfolio management, the line between the concept and the context is unclear, making a multiple case study approach the most suitable (Yin, 2003). This study is case-based and empirical and researches multiple cases to create theoretical constructs, propositions and theory (Eisenhardt, 1989). Thus, for this study a combination between deductive and inductive reasoning is used. The theory that is developed is emergent due to the fact it is situated in patterns and relationships between constructs, identified in and across cases (Eisenhardt & Graebner, 2007).
The study aims to answer the research question by doing a mono method, multiple case study with both a descriptive and explanatory nature. The descriptive nature is due to the fact the
study seeks to test the decision-making process theories based on the extant literature of IPM. The explanatory nature is because next to testing the constructs and theories, the research wants to provide explanation for the important factors of decision making in IPM by conducting in-depth interviews (Yin, 2009).
Due to the limited time and resources, the current study is cross sectional, meaning the cases were studied at one moment in time. Moreover, because the case study was executed multiple times the reliability and construct validity will be strengthened (Eisenhardt & Graebner, 2007). This study will be executed in a parallel way, so the interviews were done concurrently.
3.2 Sample
The sample consists of 13 corporate organizations and two small companies. They were selected based on purposeful sampling, which means searching for individuals that are especially knowledgeable or experienced with the subject of the research (Cresswell & Plano Clark, 2011). Multiple cases were used from different geographies, technology orientations and sectors were used to improve external validity. The strategy chosen for the purposeful sampling was theory-based, sample on the basis of trying to find the presence of a theoretical construct (Palinkas, Horwitz, Green, Wisdom, Duan & Hoagwood, 2015).
To gain in-depth knowledge on IPM, it is imperative that the participants manage an innovation portfolio themselves, this way they are familiar with the decision-making process. Therefore, the sample of participants needed to consist of innovation portfolio managers. Moreover, they had to be working at a corporate organization based in the Netherlands. The participants were approached through private network and via business connections. During
the acquisition of the participants, it became apparent that some organizations use smaller companies that are specialized in innovation to help them set up their innovation process and governance. The addition of smaller innovative companies, that help corporate organizations to innovate, was considered a contribution to the purpose of the research. For this reason, innovation portfolio managers of two of such companies were interviewed. The organizations can further be divided insectors, as can be seen in appendix B. Conclusions will be based on IPM of the cases in general and across the cases.
3.3 Interviews
To make sure all the themes of the research are covered, the semi-structured interviews were conducted with an interview guide (See appendix C). The technique for the interviews is based on Leech (2002). Which entails a certain interviewing approach including putting the respondents at ease, briefly restating answers, minding the question sequence and avoiding presuming questions (Leech, 2002). The length of the interviews was estimated on 45 minutes, so there was enough time to gather interesting and significant data, increasing the rigour (Tracy, 2010). The interview questions were based on the literature review and therefore will add to triangulation (Thurmond, 2001). Each interview was done according to the same interview guide, therefore adding to the replicability and therefore credibility of the study. The interviews were held in person at a location and time selected by the respondent, because of their generally busy schedule. Upon permission, the interviews were recorded and transcribed. The transcriptions are not enclosed, as organizations stated that they are not comfortable with that. A summary of the transcription was provided to the respondent afterwards to assure the accuracy and construct validity.
3.4 Analysis
After the interviews were conducted, they were transcribed to make analysis possible. The goal of analysis was to provide conclusions on IPM in general and illustrate cross case differences (Pope et al., 2000).
For the execution of the analysis Nvivo 12 was used. Nvivo is a computerized data analysis software, used to add to the rigour and therefore accuracy of the research (Marschan-Piekkari & Welsch, 2004). For instance, human error can be minimized through electronic word search. Analysis was done by coding the data step by step according to Miles & Huberman (1994). First, all relevant statements were labeled with a code. Similar statements are organised under the same code, thus creating structure in the data, which is called open coding. Therefore, the texts were read and labels were given to the answers of the participants on factors they reported important for decision-making in IPM. Second, the data was re-read, identifying statements that fit in particular categories and subcategories (evidence-, power- and opinion-based decision making), called axial coding. This was to make sure all data was read and nothing was missed. This way new codes came up making the next step more accurate: identifying patterns and explanation. Using this type of analysis is called thematic analysis and brings multiple advantages. For instance, it highlights similarities and differences across the data set and it can generate unanticipated insights (Braun & Clarke, 2006). Meaning that during the analysis, codes on evidence-based decision making were collected. Afterwards, codes that were similar were clustered, resulting in the factors on which the evidence-based process relies, according to the participants. This was also done for power- and opinion-based decision making.
4. Results
Chapter one and two, illustrated the need for further research on the decision-making process. This study aims to gain insight in how these decisions are made, what drives the decision-making processes; evidence-, opinion- and power based. The interviews tried to uncover if, at this moment, for corporate organizations, these decision processes of Kester et al. (2014) actually are in place, by investigating how innovation portfolio management decisions are made.
The following section outlines the results that are drawn according to the analysis of the data. First some general findings providing context is described. Afterwards, the results are discussed according to the working propositions. To provide examples and justification, illustrative quotes substantiate the results. These quotes are chosen because they illustrate the result clearly. To maintain readability irrelevant parts of the quotes are replaced with (...). In appendix C individual cases of the results that are mentioned are shown.
General findings on innovation
Some questions on the importance of innovation were asked, to understand the concept of innovation and therefore some context between innovation at the different corporate organizations. All organizations indicated that innovation is high on their corporate agenda. This illustrates that innovation is viewed important by higher management, as the agenda is set by them, which is an important insight in how important innovation is for the organization. Not only the importance was pointed out, the urgency to innovate was also indicated by most the organizations. Indicating that innovation is an urgent matter for the company confirms the previously stated need of corporate organizations to innovate.
Meaning innovation is considered urgent and organizations are or already have formalized structures to realize innovation.
4.1 Evidence-based decision making
As previously stated, in using evidence-based decision making, organizations attempt to make decisions based on empirical evidence, trying to be objective in their rationale for a decision. Based on the analysis, for evidence-based decision making, the following factors were formulated based on factors named by participators: strategy, trends, financial aspects, feasibility and validation. The reasons for these results are outlined in the following section. The identified patterns and factors, as stated by the participants, are described and are illustrated with relevant quotes.
All participants were asked about how their innovation portfolio is managed. In general, the portfolio is managed by the portfolio manager. This management entails keeping the overview all innovation projects, depending on how the organization is structured. Some have a central innovation department, others have multiple innovation departments between business lines and therefore multiple portfolios. In some cases, the decisions on the portfolio are solely made by the portfolio manager. In other some, there is a committee in place that evaluates the projects and portfolio. This supports the organizational perspective (Meifort, 2014) that considers the multiple decision makers of IPM (Cooper, Edgett & Kleinschmidt, 1999). During the analysis, it became apparent organizations do try to maintain their objectivity on portfolio management, by using tools to structure and evaluate the innovation project.
Interestingly, twelve out of fifteen cases indicated that they use some form of an “innovation funnel” to keep track of their innovation projects progress and use this as their portfolio. This funnel consists of multiple stages, with at the end of each stage, a list of criteria the project must meet. The way these portfolios are structured varies among the cases. In general, the use of funnel with the use of a stage gate is pointed out. Some use the stage gate tool developed by Cooper et al. (2002), others have similar stages, adjusted to their specific organizational needs. For instance, EY has a similar process in place for innovation portfolio management derived from literature, the Cooper et al. (2002) model.
It has four phases, based on the Cooper Edgett Kleinschmidt model (...) including a selection mechanism, we select on certain criteria. (...) If you have the criteria completed for a certain phase, you are more likely to continue to the next phase.
This quote illustrates that the portfolio is structured using a funnel, including certain criteria for the continuation of a project and is therefore part of the decision-making process. During this process, different deliverables are required for the decision. These deliverables are used to help determine if projects can start, continue or should stop. During the interview the participants were asked to elaborate on these deliverables for the projects throughout the portfolio. Based on the answers multiple important deliverables were identified, that are required for and are considered evidence-based. These are revenue, feasibility, strategy alignment, and validation. The subsequent section will elaborate on these factors.
Strategy alignment
For a project to be considered, strategy alignment was indicated (12 out of 15 cases) to be very important. If a project does not align with either the company or the innovation strategy, it was indicated that it most likely would not be started at all. The importance of the organizational strategy was mentioned by a Dutch Bank,
You take a look at the strategy of the bank (...), so we look at how does it empower people - all people - that could use innovation. Besides that, we look at platform strategies. We only invest in platform strategies. So what you need to continue is developing a platform (...) that is relevant and delivers benefit.
The presented quote indicates that if a project does not align with their current innovation strategy, a platform strategy, the bank will not add it to their portfolio. In a similar instance, Akzo Nobel discussed that the innovation strategy is linked with the organization strategy:
We have a business strategy and an innovation strategy. These two are linked because innovation is an important part of our business strategy, we also have a seperate strategy for innovation, how this should look. In fact, we have three themes that are very important, that are linked to our business. (...) It became apparent we had to focus on electrifying. The second that logically follows is sustainability - trying to do processes in a more sustainable way - (...) And finally digitalization is very important, trying to implement industry 4.0 by using smart analytics, sensors, algorithms (...) Those are the three strategic themes we look at and based on that we fill our portfolio. Afterwards we look at - what are the most important projects that have the most chance of succeeding and contribute to our strategic goals.
For most cases the organizational and innovation strategies are set, which innovation portfolio managers use as a given to evaluate and use in their evidence-based decision making.
Trends
Another aspect mentioned by companies (11 out of 15) was the use of trends for decision making. Future scoping was used by multiple organizations to recognize opportunities that should be taken. Because trend watching is based on empirical evidence, it was identified as a factor that influences the evidence-based decision making. Trends as a foundation for their innovation strategy was mentioned by Ikea:
The rest of the company strategies are part of our business strategy (...) But with innovation, we have done a completely different angle. We have done an outside-in perspective on this. So we have worked with externals, consultants, other big companies (...). Where we looked into what is the world in 10, 20 years from today and then we looked into, well what is changing, and how can we use this as -let's say- a completely different perspective, in the strategic landscape. So it's completely different than the others. Which is the fun part when you go into selecting of projects because then, not everything is the same (...). So it's kind of constrained in a discussion: which project helps you to lift things up, or push things out: then you need to say “we are not going to do it, it doesn't make sense twenty years from now. (...) We have used an institute for future studies (...) We mapped all the big trends which everyone is doing. And then we used the big mega trends to look more into industry trends. (...) So it's like megatrends, industry trends -and then we build future world scenarios out of this. Future scoping is thus used to also indicate a direction for innovation and therefore the innovation portfolio to go. However, the intention of following certain trends should be different, according to EY:
We are really careful when people say, we are doing something with Blockchain or RPA or other trends. That way, everything is originated from the technology trend (...) This should never be the starting point, it should enable innovation. If a trend arises that changes customer behaviour, that could be an opportunity, however we do not automatically follow technological trends. Global EY does, however innovate EY says “focus on what the client wants”. I do need to say: technological trends can inspire you to do things differently and built better products. It shouldn’t be just the thing triggering you to improve something. Trends indicate the next big opportunities for organizations. Corporates investigate these trends empirically and try to link them to their portfolio and projects. Trends therefore are indicated to influence the decision on IPM.
Financial factors
The financial factors consist of financial calculations based on facts and expectations for the project. Interestingly, all participants indicated to use some sort of calculation costs versus anticipated revenue is used in their decision-making. This can be by building a business case, forecasting how much budget a project would need, how much profit is foreseen. In general, the portfolio manager asks for an estimation of a costs versus benefit in shape of a calculation that can help them decide if the project is worthy of selection or continuation. For instance, DSM indicated that for a certain project to get a budget future revenue should be indicated:
If you want a certain budget, you have to indicate the amount and expected revenue (...) What kind of profit you are going to make in the future. That is an example of a key performance indicator, kind of a Net Present Value.
Similar statements were made by other organizations, for instance Akzo Nobel stated:
We make use of a business case. We ask a project leader to make a prediction of how much money will be made with the idea, how much needs to be invested and how many it will cost. So we want to develop a new product (..) that involves costs (...). Then it is expected you will sell an x-amount of volume. That brings in profit. Well, you make an analysis of how much a project will eventually generate.
In conclusion, revenue is the calculation of cost versus profit innovation portfolio managers require to report from projects in their portfolio. This way, the managers try to objectively predict how much monetary advantages a project will have and thus if it is worthy of carrying in the portfolio. This is one evidence-based factor that innovation portfolio managers consider for the IPM decision making process.
Feasibility factors
Moreover, by means of the analysis of the data, another factor is identified. Feasibility means the extent to which the project is achievable. The participants (10 out of 15 cases) indicated
providing the project team with tools to structure the goals and provide feasibility to the decision-makers. For this purpose, classic business tools are used including market analysis, proposition canvas, business model canvas, customer journey. The reason they are clustered under feasibility is because they are generic tools, that organizations use to structure the facts and assumptions of the projects and contributes in the attempt of shaping the evidence part of the decision process. This is illustrated by the innovation portfolio manager of ABN AMRO:
We use several common tools to structure the projects (..) You want to innovate and develop projects, but also know it will lead to something, not fail because you did not base decisions on the facts of the project. So you need to know if the project, the problem, you want to solve in the end is feasible (...) We developed a tool we call the ‘kickbox’, containing value proposition, product service description, customer journey (..), market analysis and some more tools help pitch the project.
To be able to get an understanding of the feasibility of a project in the portfolio, ABN AMRO developed a tool using generic business model canvasses to help decide on the start or continuation of the projects. Similar to this, Akzo Nobel uses a maturity score they call the probability of success of a project:
For us, knowing the chance it has of succeeding is by doing a technical probability of success and commercial probability of success. Technical means: how far away is this from your current technology or will it be a part of your technology, we score that on maturity. That ranges from T1 to T10. And commercial - are we talking about products we already sell or markets we already entered - and also score that. If you add those scores you have the overall probability of success of the project.
In conclusion, commonly used generic tools in business are used to structure projects in the portfolio. Additionally, some organizations use their own scores for project feasibility. Because portfolio managers and decision makers have multiple projects to evaluate, these
tools help them form an opinion on the projects. These tools require research on several areas, therefore providing the decision makers with evidence-based information.
Validation
Building on the previous section, during an innovation project, certain assumptions are made on financial aspect and feasibility. Resulting from the analysis (14 out of 15 cases), validation arises as an important factor for IPM. Being aware of the risk of assumptions in innovation, hypotheses need to be tested and those outcomes can influence the evidence-based decision process. In different stages of the portfolio validation plays an important role. Validation consists of problem, client and solution validation. The starting point of the problem validation is stressed by Innovation Booster:
Well, before anything else you need to look at the problem: is it actually there? We look at: What are the problems, what are the challenges, are they even there, and can we solve it? Furthermore, the innovation portfolio manager of ABN AMRO indicated that problem validation is the starting point, which can be done by interviewing parties relevant for the project.
One of our challenges is circular economy, to validate the problems. We interviewed around eight clients and experts on circular economy, testing problems and validating them (...) making sure the problem is actually there.
On a portfolio level, challenges are set out by ABN AMRO and those fill the portfolio with projects. Each project then needs to validate the problem they propose to solve. After making sure the project actually solves a problem, the next important validation should be customer validation. Moreover, according to the innovation manager of IBM, it is of the essence to test your hypotheses with the client:
It is important to know there is traction among clients. Are there any signals people would want it? You need to validate if people are willing to pay for the product you want to offer.
This is in agreement with HighTech XL that states:
I mean, you can you can be hugging your business idea and you can be very confident about it. But no business plan is going to survive a first customer contact, so you need to talk to clients. And if you don't talk to clients you're not going to figure it out.
Validating the problem is a factor emphasized by most organizations and creates a way for the decision-makers to be aware of what assumptions are actually confirmed. This validation process was not evident for all organizations. As DSM stated that they are undergoing some kind of change due to this new validation view on innovation:
Usually it mostly is technology driven instead of market driven. Talking about a technology push instead of a market pull. We are now trying to shift to customer centricity - being externally oriented - to pay more attention to the market.
The importance of validating assumptions of an innovation project is stressed by the cases. Decision-makers use the (in)validations as reasons to start, stop or continue a project.
In conclusion, based on the analysis, certain important factors were identified, based on what participants indicated plays a role in their decision-making process regarding IPM. The factors are: strategy, trends, financial aspects, feasibility and validation. Due to their empirical character, the presented factors contribute to the evidence-based decision making of IPM. Based on this, enough support for proposition 1 ‘Corporate organizations use evidence based decision making for IPM’ is found and accepted. This is in line with the research done by Kester et al. 2011, who stated that empirical evidence is used for IPM.
4.2 Power-based decision making
In using power-based decision making, an unequal distribution of power permits a powerful group or individual to make decisions that reflect their personal interests (Kester et al., 2011).
Based on the analysis, results on power-based decision are presented in the section below.
Participants were asked about how different interests are balanced. Not being as apparent as evidence-based factors, after analysing only a few cases (6 out of 15 cases) indicated power-based decision making for IPM. For instance, Innovation Booster indicated that it is important to indicate boundaries regarding governance:
Governance is important, you need management involvement. But it is important to indicate what is acceptable to dictate. For instance, a CEO can indicate that he thinks something is taking too long, however may not say: “I want that project”. They need to set aside their own interests.
Other cases indicated that some projects are started when their superior they want it to. The participant from the Persgroep indicated:
In the end, if the director says we are doing it, we are doing it. However, they do try to get people involved.
Similar to this, EY that indicated that part of the innovation agenda is set top-down
We also have top down initiatives, where they guide innovation from the board of the Netherlands, EMEA and Global. That’s also how it works. I do not know what their grounds are for a project. I would say they look at the global strategy and envision the direction they want the organization to go.
Indicating that the agenda of innovation can be set by top management, guiding the innovation subjects and direction. However, in no case it was indicated that personal feelings of senior management drive decisions in IPM. In the cases that mentioned senior involvement, either their common sense, expertise and experience is mentioned, not their personal interest that influence the decision-making process.
On another note, the innovation manager of EY also indicated that they motivate project teams, to challenge the management if they think they know it better.
You should show us the reason why you are competing. Is it just a hobby or is it “I need to do this”? (...) That is what makes our job fun. People who - even if the experts say stop - continue. We and our superiors should be challenged by these people. That is why we have the ‘proof us wrong track’ where you can - if you are motivated, because no resources are provided - show us why you should continue.
This does show that the innovation manager is willing to give a second chance to projects that were stopped by them.
In conclusion, the interviewed portfolio managers indicated that when decisions are influenced by powerful individuals or groups, in their opinion, it is not based on personal interest but on strategic insight and expertise. However, power does influence the decision-making process, as illustrated above. Thus, proposition 2 ‘Corporate organizations use power-based decision making for IPM’ is partially supported by the results of this study. In addition, the definition provided by Kester et al. (2011) might not be comprehensive enough.
4.3 Opinion-based decision making
Opinion-based decision making is grounded on feelings and personal experience, building a subjective decision-making rationale. Based on the analysis, a factor influencing opinion-based decision making was identified (9 out of 15 cases). Opinion-opinion-based decisions are influenced by subjectivity, meaning experience and involvement of others. In the following section the results are discussed.
Experience
Most cases indicated that subjectivity is a problem for their employees. However, when asked about their own subjectivity, they indicated making their decision based on the by them mentioned factors. Only a few stated being subjective could influence decision-making. For instance, EY indicated that staying neutral is hard, although the indicated reason for this were not feelings but because of previous experience:
It is hard to stay neutral. We also gain experience. My colleague worked in the venture capital industry, he saw start-ups and he needs to take that experience into account. If we are not a bit caught up in what we are doing than it wouldn’t be worth the while.
The presented quote illustrates that decisions can be based on previous experiences, which are subjective rationales. In a similar case, ISS indicated that some decisions are still based on gut feeling.
I think decision should mostly lay with the portfolio manager - I can assess what is feasible or not (...) We do a lot based on experience, and also - which is a pity - we are far along in some respects, although some things, are still based on gut feeling.
As indicated, some parts of the decision-making process is still influenced by intuition. This quote can be linked to (Gudonavicius & Savaneviciene, 2005), stating that intuition or experience can be helpful if no sufficient information is available for the decision-making process. Furthermore, another factor that reluctantly influenced decision-making was the feeling of involved individuals. A Dutch import organization explained that sometimes instead of stopping a project completely, some projects are freezed to spare feelings of the people involved.
Sometimes it is easier to let a project slumber instead of stopping it. People can get emotionally attached to a project and sometimes slowly letting it die is the easy way out. People hope it can still be a success.
It’s also that - some people get emotionally involved with a project or their it is part of their work - and they are scared that if they indicate is should stop - it could influence their role in the organization. Then sometimes we do not have enough discipline, which is not always wrong. It is all right to to have some projects on hold instead of killing them, however sometimes we could be stricter.
Even though they did not indicate it as subjectivity, by analysing what they are implicitly saying, it did influence their decision-making process. In conclusion, based on the analysis, some decisions can be influenced by feelings due to their empirical character, the presented factors contribute to the evidence-based decision making of IPM. Based on this, support for proposition 3 ‘Corporate organizations use opinion-based decision making for IPM’ is found.
4.4 Interaction between the decision-making processes
The previous section explained the results of the analysis and indicated if the propositions are supported by the findings. Based on the analysis, the cases indicate to use evidence-based decision making as the basis of their IPM. It brings structure and is tangible. One aspect that illustrates interaction between decision making processes is the mention of quality (9 out of 15 cases). Meaning that these participants indicated that after the evidence-based factors are delivered, the decision-makers judge the quality of the factors presented. This is illustrated by OM:
Look, when everything is starting to continue and develop - than we will look at the quality of everything. Do we think - we are the experts - if their analysis is good enough. We guard the quality of it all.
This illustrates that the evidence-based decision making does not stop at handing in te deliverables, they should also be of good quality. To decide this, the decision-makers indicate using opinion-based decision making: their expertise and experience. Therefore, there is an interaction between evidence- and opinion based decision making process.
Furthermore, an interaction between opinion-based and power-based can also be identified. Sometimes, intuition and experience can be clouded by feelings. It is complicated to know where the boundary between for instance ‘own best interest’ and ‘in my experience’ lays. During the analysis, there was little interaction between evidence-based and power-based. However, it can be concluded that if the evidence factors might indicate killing a project would be preferred, power-based decision making can impact the decision-making process and therefore the outcome. For this reason, support for proposition 4: ‘There is an interaction between the evidence-, opinion- and power-based decision making process’ is found.
5. Discussion and Conclusion
Stressing the importance of innovation, the present study contributes to the field of innovation portfolio management, as research on certain aspects of IPM is limited. One of these aspects, the decision-making process, was researched using an exploratory multiple case study within the corporate sector, among innovation managers. Due to its objective to create data richness, flexibility and ability to gain insight into underlying factors this method was selected. Moreover, the literature on decision-making processes was empirically researched in a corporate setting, building on the distinctions Kester et al. (2011) found between decision-, power- and opinion-based decision making in IPM.
To answer the presented research question, first the presence of the decision-making processes needed to be examined and established. The findings of this research indicated there is enough support to establish that the corporate organizations use evidence-based and opinion-based decision making. In managing the innovation portfolio, a lot of support was found that the factors strategy, trends, financial aspects, feasibility and validation are important for the decision process. They viewed as the absolute starting point of an innovation project and insurance to stay in the portfolio. When a project does not have the deliverables ready for the decision makers it is very unlikely the project will start. Therefore, support for proposition 1 ‘Corporate organizations use evidence based decision making for IPM’ is found. This is in line with the findings of Kester et al. (2011). Furthermore, the factors that Shenhar et al. (2001) indicated that can measure project success; (1) project efficiency, (2) impact on the customer, (3) direct business and organizational success, and (4) preparing for the future, are comparable with the factors (strategy, trends, financial aspects, feasibility and validation) used for evidence-based decision making. Indicating that these factors influence decision making and success of projects and IPM. Other research on IPM
