Innovating successfully : helping classical division organizations survive

Innovating successfully

helping classical division organizations survive

Name

Student Number

Due date

Study

Track

Lotte Bogerd

10687866

January 31st 2016

Executives Programme in Management Studies

Strategy

Statement of Originality

This document is written by Student Lotte Bogerd 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 ... 6

Introduction ... 7

Innovations ... 9

Research Question ... 10

Theoretical background ... 11

Uncertainty ... 12

Proposition 1 ... 13

Financially judge investments ... 13

Proposition 2 ... 15

Difficulties faced when investing in innovations ... 16

Proposition 3 ... 17

Multi-disciplinary ... 17

Proposition 4 ... 19

Proposition 5 ... 20

Continuity ... 20

Proposition 6 ... 23

Proposition 7 ... 24

Proposition 8 ... 25

Other influences ... 25

Proposition 9 ... 25

Proposition 10 ... 27

Organizational culture ... 27

Proposition 11 ... 28

Proposition 12 ... 28

Implementation of the project ... 29

Proposition 13 ... 30

Research model ... 31

Moderators ... 32

Mediators ... 33

Research method ... 34

Analyses ... 37

Analysis strategy ... 37

Analysis techniques ... 37

Analysis approach ... 38

Results ... 39

Learning ... 40

Investment process ... 40

Proposition 1 ... 42

Proposition 2 ... 44

Gut feeling ... 46

Proposition 3 ... 46

Proposition 4 ...49

.

Politics...50

Proposition 5 ... 52

Organize for innovation ... 53

Proposition 6 ... 58

Proposition 7 ... 59

Proposition 8 ... 60

Proposition 9 ... 62

Proposition 10 ... 63

Proposition 11 ... 65

Proposition 12 ... 66

Proposition 13 ... 67

Discussion ... 69

Future research ... 72

Conclusion ... 74

Acknowledgements ... 75

References ... 77

Appendix I information sent beforehand ... 85

Appendix II information about interviewees ... 87

Appendix III topics in interviews ... 88

Appendix IV audit questions ... 89

Appendix V code tree ... 90

Appendix VI interview 1 ... 95

Appendix VII interview 2 ... 107

Appendix VII interview 3 ... 123

Appendix X interview 5 ... 145

Appendix XI interview 6 ... 156

Appendix XII interview 7 ... 167

Appendix XIII interview 8 ... 172

Appendix XIV interview 9 ... 183

Appendix XV interview 10 ... 195

Appendix XVI interview 11 ... 203

Appendix XVII interview 12 ... 218

Appendix XVIII interview 13 ... 230

Abstract

Many aspects are taken into account when making investment decisions,

especially investments in innovation projects for classical division

organizations. Some companies are only slightly familiar with innovation

projects, but are forced by changes in the market to focus more on innovation.

Uncertainties, culture, the way resources are allocated and the many

possibilities of developing innovation, result in difficulties faced when making

an investment decision. This research presents propositions in which the

different expected influential aspects on investment decision for innovation

projects are included. Some propositions are supported by the interviewees

while others are not. For this exploratory research thirteen people are

interviewed to investigate their view on important elements for investment

decisions in innovation projects.

Although a lot of research is done on it in the recent past, Open Innovation

does not appear to be implemented, and there are only weak linkages to the

use of the real option approach to calculate expected results of investments.

Also, it is not mentioned by the interviewees that investments in innovation

projects that are related to core competences or that could create market

power are worth more for the company than other projects. Multiple

interviewees make notion of the influence of gut feeling on the

decision-making. It appears that some results of past research on start-ups might be

applicable for classical division organizations as well.

Elements like trust and freedom, supportive leadership, creating innovation in

modules, and remain flexible are influencing the chance of success for the

project positively. The findings result in a recommendation for future research.  

Introduction

Nowadays, innovation becomes more and more important to stay competitive.

Innovations can be used to make the tasks inside the company easier and

could result in substantial costs reductions. Innovations can also help meeting

current customers demands, or could create total new markets. Classical

division organized companies are forced to start focusing on innovation as

well in order to secure their continuity for the future. This switch of focus

results in many difficulties faced by these companies. Investments in

innovations have to be made, but it is not clear how to do this.

This research will explore what elements are important and should be

incorporated in the decision-making process for investments in innovations

and how these elements should be applied to have an as successful as

possible investment. Much research has been done about investments and

developments of innovation, like research about financially judge innovation

investments (Christensen et al., 2008), the structure of the companies

(Neilson et al., 2008), resource allocation (Kaplan & Norton, 2004, 2008), the

management of companies that want to invest in innovation (Christensen,

2013), and successful innovative start-ups (Moore 2014; Ries, 2011).

In this qualitative research cases are selected and interviews are conducted

to explore important elements of the investment decision. Thirteen cases were

selected before the point of saturation was reached. The sample exists of a

mix of people involved in the decision-making process for investments in

innovation and working at different companies in different industries in order

to explore as much as possible and to make the results more general. The

functions of the interviewees are divers: managers, CEOs, principals,

innovators, directors, coordinators, coach, co-founders, head of R&D, product

owners and business developers. Some are shortly working on innovation and

others have years of experience.

The data collected during the interviews are coded and these codes are

tabulated. The data of the interviews will then be categorized into analytical

categories to identify relationships and patterns of similarities and differences.

The results of this analysis will be compared to the propositions in order to get

a better understanding of these propositions and the effects on investment

decisions for innovation projects.  

This thesis starts with illustrating the theory used for this research. Innovation

is introduced, which includes the definition of innovations and ways to

innovate are elaborated. Following to the introduction innovation is linked to

the investment decision. Topics covered are amongst other things the

financial side, flexibility, culture, multi-disciplinarity, continuity, and

implementation. The propositions are appointed based on theory, and ideas

and expectations for classical division organizations. After the theory part, the

research models are described and explained.

The research method part introduces the way the research is performed. It

explains why certain people are selected to be interviewed and how the

interviews are prepared. It goes more into detail of how the interviews (almost

all conducted in Dutch) have taken place. How the interviews are coded,

which analyze techniques are used and how the analysis is approached is

explained in the Analysis section. The analysis leads to the part where the

results of this research are being displayed and discussed. The results are

supported by quotes, analyzed in detail, compared to theory, and discussed.

Conclusions are made based on the overall experience of this research, the

results, and by comparison with theory. Also, recommendations for future

research are formulated and substantiated.

Innovations

Innovations start with inventions. According to Rogers (2010) an invention is

‘the process by which a new idea is discovered or created’. Many companies

have Research & Development departments where people look for and

create, among other things, new ways to innovate. For some companies, a

successful innovation is an innovation that leads to a patent, which protects

the rights of the inventor for a period of time. Garcia & Calantone (2002)

stated that the term innovation is used in multiple ways with different

meanings when it comes to product innovation. For this research the following

definition of innovation is used.

When we do business we need to keep or get a competitive advantage. A

company can do this for example by being smarter than or outperform the

competition using their inventions. These inventions are helping to maximize

profit or minimize costs to. Thus, an innovation is successful when someone

is willing to pay more for the commercializing of the invention than the total

costs of the innovation

either with the purpose to cut costs or to seize

opportunities. In this way, innovations create value and in the end: create

welfare. Innovations are the commercialization of inventions.

According to

Lettice & Thomond (2002) a disruptive innovation is ‘a successfully exploited

product, service or business model that significantly transforms the demand

and needs of an existing market and disrupts its former key players’. In this

way, the innovation becomes the new standard.

Verganti (2013) is explaining three ways value can be created based on the

type of innovation. He is explaining this based on two dimensions: existing or

new technology and existing or new meaning. First, he explains ‘market pull’

where the value creation is the lowest of the three options. In this user driven

way to innovate where users ask for innovation. This is based on the existing

technology and meaning. Second, ‘technology push’, where innovation is

established based on disruptive technologies. The value creation can be

1 _{Sawhney, M., Wolcott, R. C., & Arroniz, I. (2011). The 12 different ways for companies}

to innovate. MIT Sloan Management Review, 28-34.

2 _{Ries, E. (2011). The Lean Startup – How constant innovation creates radically}

medium to high, depending on the adaption of the customer. The third way to

innovate is ‘design driven’ and is based on new meanings for which both

existing and new disruptive technologies can be used. The value creation

could be high, but does also depend on the adaption of the customers.

There are multiple sources where innovations could come from. Keeley, et al.

(2013) are looking at the different possibilities when it comes to innovation,

while not limiting their view on technology as others are doing. Their book

‘Ten types of innovation: the discipline of building breakthroughs’ is

introducing the following ten types of innovations: profit model, network,

structure, process, product performance, product system, service, channel,

brand and customer engagement. These types can be used to create

competitive advantage and even though the types are different, they can be

used at the same time.

Even if the idea for an invention is assumed to be a big success, there are

many pitfalls on the way to achieve success. The company possibly needs to

change processes, people can put their personal goals first, the continuity of

the company must be ensured, resources need to be reallocated, and

organizations need to adapt to the new situation. This all happens in an

environment of uncertainty where for example the market can develop in a

different direction, where the requirements for internal and external funding

can change, not knowing how customers and competitors will react. All of this

together makes investing in inventions or innovations a process where the

risks have to be managed carefully.

Research Question

How to make the decision about what innovations to invest in as

successful as possible in a classical division organization that already

invests in innovations when the investment has a multi-divisional

character?

Theoretical background

Regular investment decisions are made based on different inputs. The

projects need to be judged financially, as well as the opportunities and the

threats of the project, the balance of the project portfolio of the company and

the potential implication for the continuity of the company. When a project

involves team members of different divisions, the way the employees are

working together is influencing the successfulness of the project. During or

after developing the innovation, it needs to be implemented. After all, an

innovation that is not sold, used or implemented was a chance to be

successful, but ends as a waste of resources.

The way the innovation process is set up, could be done in different ways.

The innovation could be treated like a stand-alone project, where the

resources are separately distributed for the innovation. The innovation could

also be part of a single or multiple division(s). The classic method for strategy

execution is the bottom-up resource allocation process (Bower, 1986) that

includes funding and the organization of innovation projects. For

interdisciplinary projects this classical method of Bower does not seem to

meet the requirements (Bower & Gilbert, 2005). Also, the budget-driven

method is not effective in a knowledge economy (Kaplan & Norton, 2004).

The question is if these aspects are important for investments in innovations

and how the total costs of the innovation relate to these aspects.

If companies want to invest in innovation, the management of the companies

faces multiple dilemmas according to Christensen (2013), based on five

principles. First, the company is not totally independent to decide what to

invest in. Clients and shareholders dictate the way money is spent. A

possibility to circumnavigate this is to create a new company for innovations.

Second, in order to keep the stock price at a certain height, they need to grow

by a certain percentage. The bigger the company, the more difficult it gets to

keep the growth rate at the same level. Third, it is impossible to analyze

markets that do not exist already. At companies where calculations of

investment decisions are always made as extensive as possible, innovators

are unable to match the current way of working. Instead, discovery driven

planning will match the uncertain situation the company is facing. Fourth, the

core competences of a company determine her handicaps. Managers select

employees to work on innovations based on their qualities. When more

employees get involved, it is not said that these employees are having the

qualities needed to work on innovations, but the companies target system and

common values could be used to bring out the best in these employees.

Also, processes that are used in the company could work perfectly for what

they are used for right now, but for creating different products or services

these same processes could work counterproductive. The fifth principle tells

us about the mismatch between technology and market demand. Disruptive

innovations often exceed the needs, which results in far less developed

products or services that could meet the current needs much cheaper or

easier. By analyzing the way the innovation is used and assessed by the

customers, companies can control the risk of having competitors meet the

same customer needs with their, maybe even cheaper, products or services.

Uncertainty

While companies want to be as successful as possible, it is assumed that they

are aiming to manage the risks to acceptable proportions and remain flexible

to deal with uncertainties. Innovation projects are uncertain by definition,

especially the disruptive innovation projects (Verganti, 2013). Hargadon &

Douglas (2001) argue in favor of flexibility to make the company responds to

threats. There are different ways to deal with uncertainty.

One way to deal with uncertainty is to pursue Open Innovation with open

business models. As Chesbrough et al. (2006) are defining Open Innovation

as “Open Innovation is the use of purposive inflows and outflows of

knowledge to accelerate internal innovations, and expand the markets for

external use of innovation, respectively.” where knowledge flows freely in the

market for everyone to use. The company is externally focused.

Other ways to deal with uncertainty is to elaborate multiple scenarios by

scenario planning (Romani et al., 2005), or to fund the project in phases

(Gilbert & Bower, 2002).

Another influencer of the successfulness of innovation is modularization, or to

‘design artifacts modular’ as Baldwin & Clark describe it (2002). Instead of

creating a project from start to finish, one can divide the projects in blocks and

produce parts along the way. This way of producing innovations reduces

risks, because it is possible to check if what is being developed is what the

clients want. Also, assumptions made at the start of the project could change

along the way. If what is being developed is not what clients want,

adjustments can be made or even the whole project could be shut down. This

could save a lot of resources compared to finish an unwanted end product.

The most difficult part about decision-making for investments is that we do not

have a crystal ball. We cannot predict the future, like what Mintzberg (1994)

subscribes as the ‘fallacy of predetermination’ when it comes to strategy

making. This seems to be a too simplistic idea. By controlling for uncertainty,

one is able to make the future less uncertain. Hargadon & Douglas (2001)

state that flexibility is preserved when moves are chosen that are not only

responding to the threats, but also ‘advanced a particular strategic gambit’.

This all leads to the following proposition.

Proposition 1:

Incorporating flexibility to react on possible risks

and opportunities improves the successfulness of the

project.

Financially judge investments

The goal of a firm is to maximize value (Brealey et al., 2012). In order to see

whether a possible investment will create value, different calculation methods

are used to predict future results as good as possible. Hilier et al. (2011) are

stretching among other things the downfalls of calculation methods like the

payback period, ration comparison approach, competitive analysis approach,

real option approach, the Net Present Value (NPV), and the Discounted Cash

Flow (DCF).

These calculations are made based on the initial investment, extra

investments along the way, expected risks and expected returns. The

numbers used in this calculation are estimated compared to other projects.

Both ways of calculating the results of a project have negative sides as well.

The NPV does not control for alternatives or the possibility to seize

opportunities along the way. One can imagine that when opportunities come

along, the company wants to chase them. This is possible with the ‘discovery

driven planning’ described by McGrath (2013) and McGrath & Macmillan

(2013). For the DCF, as Hilier et al. (2011) explained, tends to ignore indirect

cash flows that in fact are positive results of an investment.

Christensen et al. (2008) stated that investments in innovations should not

only be based on the NPV or DCF for two reasons. First, one does not take

into consideration what happens when the company does not invest. There

are multiple examples of companies who did not invest, or invested to late in

innovations and were worse off or sometimes almost even went bankrupt.

Second, future cash flows are very hard to estimate. The further in the future

the estimations have to be made, the more unlikely the calculation is coming

to be.

In the real option approach, it has been made possible to deal with uncertainty

and flexibility (Trigeorgies, 1996). The real option approach is according to

(Luehrman, 1998) a tool to ‘complement the existing capital-budgeting’. The

real option approach takes timing and flexibility into account to prevent

companies being over-cautious to invest. When based on the NPV several

investment options are refused based on the negative outcome. The same

investment option could result in positive outcomes when making an

investment decision based on the possibilities now and the expectations of

future possibilities and threats. After a certain amount of time, the company

can make a decision for example to continue, to expand, and to retract. By

that time the decision can be made based on the current situation at that

moment.

It could be expected that the more extensive the calculation is made, the

longer it takes to make an investment decision. Jansen (2004) explains the

need to keep the momentum going in a situation of strategic change. The

question is if these outcomes are applicable for investments in innovations.

In making an investment decision, the way the investment and most

importantly its results are presented influences the decision. According to

Tversky & Kahneman (1981) the way uncertainty is handled and what the

attitude towards risk is, is based on the ‘framing of the act and outcomes’.

One can expect that when the calculation of expected results and perceived

risks is made as expensive as possible, there will be less room for

interpretation. So, the influences on the investment decision by the way the

investment is presented could be control for by making the calculation as

extensive as possible.

When classical division organizations want to invest in innovations, it is

expected that these companies make the decision whether or not to invest the

same way they make other investment decisions. Which include calculating

the expected returns as extensive as possible. It must also be investigated

which risks are part of the project. Another important part of the decision

making when it comes to finance is the decision when to stop, which is

comparable to the ‘exit rule’ of Eisenhardt & Sull (2001). What are the

boundaries of the project, when is it finished and when will it be labeled as

failure?

Proposition 2:

Calculations of expected returns and perceived risks

should be made as extensive as possible in order to

signal possible threats and prevent these threats to

Difficulties faced when investing in innovations

Investments in innovations are definitely not always resulting in success.

Lately, a lot of books and papers are written about how to prevent your

investment to become unsuccessful. Ries (2011) talks about the fastest way

to learn how to handle an innovation project using the ‘build-measure-learn’

loop to reduce time to receive feedback. ‘Build’ refers to creating the minimal

viable product as Ries calls it. This product should also incorporate the

assumptions one wants to test. In the ‘measure’ phase the answer is given to

the questions: Did the energy to create the minimal viable product create

progress? And is the progress interesting enough to continue? An important

aspect is that the assumptions one had are tested, where it is important to

make sure the results are realistic and are based on facts to prevent believing

in vanity metrics. Through these phases one has learned a lot. With this new

information, the product or process must be adjusted and development can

continue.

Moore (2014) states that focus is the most important thing. This means

focusing on one part of the innovation at once. When this part is finished, then

the focus can be shifted to another part. Moore (2014) explains that every

innovation can find a couple of clients. But to make money on innovation there

are more clients needed than only the innovators and early adopters. By

crossing the chasm between the early adopters and the early majority, his

message is to focus on one goal per iteration.

While working on innovations in many companies is an ‘extra’ task nowadays,

it needs perseverance and commitment of the employee. Still, the question is

if there is a difference between regular projects and innovation projects. Like

Strikwerda & Van der Weg (2014) have shown the challenges a company and

her employees face when the project is seen as something extra that needs to

be done. When the project is incorporated in the daily work, results are

expected to be better for the project.

But, only focusing on innovation could backfire by gaining less knowledge. In

a knowledge economy, knowledge is created in innovation projects and in

operations as well. This results in employees needing to divide their time and

attention between short-term results and long-term results (Boisot, 1995;

Kaplan & Norton, 2008; Stiglitz & Greenwald, 2014). One can expect that it is

possible to control this negative effect. For example letting employees

alternate between focusing on current operations and innovation, this after

completing a certain part of the innovation or after a certain amount of years

working on innovation.

Proposition 3:

Employees should be completely focused on the

innovation project to prevent them of being

distracted by other tasks and duties, which lead to

bad results for the innovation project.

Multi-disciplinary

Govindarajan & Trimble (2010) came up with recommendations on how to

make an investment in innovation successful. They state that senior

leadership has to be involved, individual incentives need to meet the demands

of the innovation project, resources should be allocated to the shared staff,

and the management control system has to be supportive. This is especially

important when the investment has a multi-divisional character.

Overall, they explained the importance of having operation and innovation

working together. Both sides need to acknowledge the importance of having

the others on board. Without operations, there is no funding for innovation.

Without innovation, there is no future for operations. This trade-off between

investments for the short-term and for the long-term is an ongoing process.

In the case of investments with a multidisciplinary character, goals of the

investment could be conflicting with personal (Montgomery, 1994) and team

goals (Alchian & Demsetz, 1972). This could lead to confusion for managers

and team members, which can result in thwarting of the investment and less

productive employees. Managers need to understand that most things are

connected (Bower, 2000), so their action could have results elsewhere in the

company. The way to manage this is called the ‘levers of control’ by Simons

(1995). Also, Schon (1983) stated that managers are learning by doing.

According to Kaplan & Norton (2004) managers should make clear what to do

and give guidance how to handle the innovation for the research and

development portfolio. A manager is responsible for making decisions and on

periodically reviewing these decisions in order to adjust to accommodate new

situations if needed.

Overall, it is the companies’ job to select the best possible investment. Which

way of investing is the ‘best’ can differ from company to company. It could

mean that the investment will create value or that the investment will prevent

more losses.

The leadership of the company must create the right environment to innovate

(Hamel, 2006). When a leader creates this kind of environment, the

employees are not afraid to ask questions, propose new ideas, or challenge

each other and most importantly: employees are not afraid to work on

innovation projects that fail. Like Day (1994) explained managers could have

three roles to bring innovations further: orchestrator, retroactive legitimizer, or

judges. When the principal champion is at a higher level in the organization,

the greater the innovativeness of the venture will be. This relates to the

research of Simon (1982), in which he states that in order to survive

organizations need to be complex. People at the front line need to have

freedom to experiment with new requests from the environment in order to

identify new solutions. To make this possible, loose programming and soft

control are necessary.

Simultaneously, leadership should make sense of the change in the

organization, while at the same time signaling the reaction on these

messages in the organization (Gioia & Chittipeddi, 1991). Sense making and

sense giving need to be decentralized especially in a dynamic, complex, or

difficult to predict markets. This sense making should result in understanding

why the company needs to change. This motivates people to work on the

innovations and results in innovation projects to emerge bottom-up.

Proposition 4:

The leadership of the company must create an

environment of trust and freedom to help innovation

projects to emerge and succeed.

Working together across different departments is difficult. These departments

have different focuses and priorities, which could be contradictive to each

other. Knowledge about each other’s priorities and associated risks helps with

this dilemma. Companies could change their structure to solve this problem,

but according to the theory of Neilson et al. (2008)

_{the structure of the}

company should not been changed instantly. While it is expected that the

current change is not the last change, it could be considered to create an

actor-oriented scheme (Fjeldstad et al., 2012)

_{in order to have everybody}

working towards the same goal with a minimum of contradictions or

counter-productive actions.

When multiple units are involved in the investment and implementation,

resources must be (re)allocated. The classical division organization (Bower,

1970; Bartlett & Ghoshal, 1993) might not be supportive to the goals of the

investment and the company anymore in that case. The resource allocation

process of the company needs to be redefined in order to become supportive

of the companies’ goals again (Kaplan & Norton, 2004, 2008). Also, the

organization of information and the process to make decisions might need to

change to support the companies’ goals (Neilson et al., 2008).

Sometimes there is a need for sustained innovation. Three key aspects need

to be considered to make sustained innovation possible (Dougherty & Hardy,

1996). First, the resources must deliberately be allocated for innovation.

Second, the structures and processes need to be aligned with the goals of the

innovation to make sure that people involved in the innovation can make

decisions about what to do. Third, in order to create involvement and integrate

the innovation in the organization, the strategic value and meaning must be

communicated to everyone in the organization.

Proposition 5:

When companies start to focus on innovations, the

structure must change along with this change of focus

in order to make the investments in innovation as

successful as possible.

Continuity

Corporate portfolio management is one specific type of strategic decision and

includes the key decision for the corporate strategy (Nippa et al., 2011). So,

the decision making process could also be about whether or not to invest in

innovations. The decision to innovate will have effect on the corporate

portfolio and the future decisions. If a company wants to focus on innovations,

they can decide whether to make or buy the innovations, or create the

innovation. Deciding to vertically integrate, diversify, or to outsource could do

this, as well as open business models. When the company is already focusing

on innovation, they have to make decisions about continuing in the current

way, or changing or selling certain innovation projects. Ansoff (1957)

explained this as well. First the company has to decide in their strategy

whether or not to invest in innovations. If the company wants to invest in

innovations they have to find opportunities that match the corporate strategy,

while managing on flexibility, long-term and short-term developments, and

uncertainties. Prencipe et al. (2003) state that this is not all if system

integration plays a role. In that case, the company needs to manage this as

well.

Balancing the portfolio

Corporate portfolio management was not perceived to be an interesting field

of research for a long period of time. Due to the shift from the Resource

Based View (Barney, 1991; Peteraf, 1993) to the Knowledge Based View

(Kogut & Zander, 1992) synergies need to be created by the company.

Lately, the field of corporate portfolio management seems to get more

attention, like Nippa et al. (2011) stated. Different articles are published with

an overview of the former research (Nippa et al., 2011; Gilley & Rasheed,

2000; Meskendahl, 2011). Some research focuses on diversification (Nippa et

al., 2011; Goold & Luchs, 1993; Floricel & Ibanescu, 2008), but not all are

arguing in favor of diversification. Diversification was restricted by the capital

market in the eighties, because of a negative break-up value. Many firms

were forced to reduce their diverse portfolio of unrelated activities (Hitt et al.,

1994). Campbell (2005) stated that the effects of diversification are depending

on certain aspects, like value advantage, leadership, existing business, and

the profit pool. Only if the results in these four areas are expected to be

positive the company should diversify, according to Campbell (2005).

In the research field about outsourcing and vertical integration, some research

argues in favor of outsourcing, some argue against it (Schoar, 2002). Gilley &

Rasheed (2000) stated that the effects on productivity are based on the

relatedness of the outsourced activities to the core competences of the firm.

Through more focus, the productivity of the company will improve when the

activities are related to the core competences.

Moore (2006) argues that a sustainable company needs to have a balanced

portfolio with projects in three different horizons. Projects in ‘Horizon 1’ are

comparable to the ‘cash cows’ of the growth-share matrix of the Boston

Consulting Group and provide stability and financial security for the company.

Given the limited growth potential of these projects, new projects are needed

to enter the ‘Horizon 1’.

Projects in ‘Horizon 2’ are the projects that are having the potential to become

‘Horizon 1’ projects. They are comparable to the ‘stars’ of the growth-share

matrix. In his book Crossing the chasm – Marketing and selling disruptive

products to mainstream customers, Moore (2014) emphasizes the need for

focus. Companies can normally only handle two or three projects in ‘Horizon

2’ to prevent distraction and increase the chance of becoming successful. The

projects in ‘Horizon 2’ are a selection of projects from ‘Horizon 3’, where many

new projects are initiated. These projects are comparable to the ‘question

marks’, where it is still unknown whether the projects will be successful. To

decline the risks for ‘Horizon 3’ projects as much as possible, Ries (2011)

states: “the goal of a start-up is to figure out the right thing to build- the thing

customers want and are willing to pay for- as quickly as possible”.

Shareholders can diversify their own risks by investing in different businesses.

This raises the question what the companies’ roles are in the field of

innovations. Should headquarters adapt the role of financial control, strategic

control or strategic planning (Chandler, 1991)? And ‘does the parent add

more value than any other parent could’ or would the business be better of

stand-alone (Goold & Campbell, 1991)? The parent or headquarter can add

the most value by seeking and creating synergies, where synergies refers to

“the ability of two or more units or companies to generate greater value

working together than they could working apart” (Goold & Campbell, 1998).

Overall, synergies are created for example when resources are

simultaneously applied in multiple processes, or when a general process is

shared resulting in lower total costs for every business unit involved. Kaplan &

Norton (2006) explains the enterprise-level synergies, based on four

perspectives: financial synergies, customer synergies, internal process

synergies, and learning and growth synergies. Overall, there seems to be four

types of synergies. Actually multiple synergies exist: financial, brand, market,

product, knowledge, process, architecture, and infrastructure (Strikwerda,

2008).

In order to simplify the diversifying decision for corporate portfolio

management, different models are created. These models seem to disagree

about the important elements of a corporate portfolio decision and the

expected developments in the future.

Dyer et al. (2003) stated that core competences and relatedness to the

company must be the main driver in the corporate portfolio decision. In the

growth-share-matrix by the Boston Consulting Group (Hedley, 1977), the

projects need to be balanced as well. In this model, the projects are classified

by their growth-potential and the relative market-share. It seems like these

models are still used by companies, even while Armstrong & Green (2007)

are

arguing, based on different studies, that competitor-oriented objectives, such

as focus on market-share, are harmful. Also, the core competences of a

company determine her handicaps as explained before (Christensen, 2013).

Companies need to be considered as a continuous stream of projects

(Strikwerda, 2013). Even though the BCG matrix and similar portfolio planning

techniques like the Horizon model of Moore is outdated according to Goold &

Luchs (1993), it still does make sense that companies need to have a certain

balance in order to secure their continuity. This results in horizontal

boundaries when it comes to investment decisions. For example, their

financial assets are limited, because the focus has shifted to knowledge:

human capital is not immediately and completely exchangeable, and other

resources are not unlimited available. The continuity of the company should

always be considered when making an investment and maybe even during

the execution of a project, while opportunities and threats are ever changing.

This applies for an innovation project or any other project.

Proposition 6:

The portfolio of all the investments (innovation and

non-innovation projects) should be in balance after

the decision to invest in an innovation project is

made.

Christensen et al. (2008) emphasize that the way fixed and sunk costs are

handled could unnecessary negatively influence the decision making in

innovations. When a company is considering investing in innovation, they

sometimes take the fixed and sunk costs into account. This result in a much

less attractive business case than if this is not being done. Start-ups for

example have no or very little fixed and sunk costs, so they are having a

different outcome for the same investment. According to Moore (2014) the

first mover advantage is important to help the investment succeed. When

fixed and sunk costs are taken into account which results in the decision not

to invest, the company could miss the first mover advantage or gets stuck to a

failing strategy. Especially when resources are having a longer usable lifetime

than a competitive lifetime the company is seduced to take fixed and sunk

costs into account for innovation investments. Christensen et al. (2008) are

coming up with a solution as well. Consider the investment like an ‘attacker’, a

company that is trying to conquer a new market, would and value the strategy

not the projects.

The same counts for the focus on earnings per share. While the average

shareholder is only having the stocks in portfolio for less than 10 months, the

goal of the shareholder is a different goal than the managers have. When an

investment in innovation takes time to become successful, there arises a

principal-agent conflict. Where the principal, the shareholder, has a different

focus than the agent, the manager. Another element that influences the

negative effect of focusing on earnings per share is that the worth of shares is

(partly) based on expectations, where no arguments and facts are necessary

to come up with these expectations.

To avoid this negative effect, fixed and sunk costs should not be part of the

financial assessment of the project. On the contrary, investments to lower or

cut out fixed and/or sunk costs having a positive effect for fixed and sunk

costs. If the negative effects are not incorporated in the financial assessment,

the positive effects should not be part of this assessment as well. Only if a

project has the sole purpose to eliminate fixed costs these positive effects

should be incorporated, otherwise it would not be interesting to invest in these

projects.

Proposition 7:

Fixed and sunk costs must not directly be part of the

financial decision making of innovation projects,

they should be incorporated in the balance of the

portfolio.

Investments not only are confronted with sunk costs from the past, the new

investments can create sunk costs as well. To deal with uncertainty in the

future, one can assume it would help future investments to be successful if

the sunk costs of an investment are kept to a minimum. When the sunk costs

are ‘minimal’ and if this is enough, is dependent on the situation of the

company. As explained before, this could be done for example by modularity

(Baldwin & Clark, 2002).

Proposition 8:

The sunk costs the innovation project will create,

must be kept to a minimum in order to remain flexible

in future investment decisions for innovation

projects.

Other influences

Montgomery (1994) explains three views that initiate the need for diversifying,

which has different effects on the firm’s performance and social welfare. One

could think about innovations as a form of diversifying.

The first view Montgomery (1994) explains is the market power view.

Companies diversify to get conglomerate power, which can result in

cross-subsidizing, mutual forbearance among rivals, and reciprocal buying. This

market power has a positive effect on the companies’ performance, but a

negative effect on social welfare.

While the effect on the companies’ performance is positive, projects that

create market power are expected to be worth more to the company

compared to other projects.

Proposition 9:

Innovation projects that create market power are

worth more to a company than innovation projects that

do not create market power.

The second view of Montgomery (1994) is based on the agency theory, where

managers want to diversify based on their own self-interest. This leads to

empire building, management entrenchment and employment risk spreading,

which only benefits the employee(s). Hambrick & Mason (1984) and Simon

(1982) are explaining that managers are bounded rational. Leadership could

be influenced in the decision making by his personal situation or

characteristics. For example, when the leadership is dependent on the income

of one employer, it is possible that this dependency influences the

decision-making in a more risk averse way. Also, some people are more risk averse

than others. The effect on the performance of the company and on social

welfare is negative when decisions for diversification are solely self-interested

(Montgomery, 1994). So, this should be avoided.

When dealing with cross-divisional innovation projects, the projects can create

chaos and uncertainty. The employees could be forced to work on the project,

but are obliged to do other tasks as well. This new situation asks for the

resource allocation process needs to be redefined (Kaplan & Norton, 2008).

Strikwerda & Van der Weg (2014) state when the project is incorporated in the

daily work, results are expected to be better for the project instead of having

employees doing ‘extra’ tasks. Also, by aligning the incentives of the

employees, the company can also reduce confusion and communicate the

most important corporate goals (Obloj & Sengul, 2012). It is not expected that

only aligning incentives resolves the internal problems of the company. An

important aspect to take into account when formalizing incentives is the

counterproductive behavior it sometimes causes. As Bowles (2008) explains

that economic incentives may work counterproductive, which results in

negative synergies with social preferences. This seems to be an issue to take

into account when deciding what innovations to invest in. Especially when the

innovation project is contradicting with the existing goals of the company. In

that case it sounds logical to adjust the existing incentives, which include the

common goal of the innovation project. The incentives should also allow for

the way ‘individuals are able to become, act, think, and feel as a psychological

group under particular circumstances’ (Haslam, 2004).

People who operate in teams seem to be not only motivated by financial

incentives. According to Bridoux et al. (2011) the best incentive to motivate

people is based on the amount of two types of people in the team:

self-regarding people and strong reciprocators. Lazega (2000)

_{explains the way}

that peers can motivate individuals.

Ostrom (2014) shows seven

contradictions to the assumption of self-interest of the agency theory. People

punish, cooperate, or are solely looking for their personal wins, which has

influences on the collective action of a team.

Proposition 10:

When dealing with innovation projects, incentives for

the people involved should have no negative effect on

the innovation project itself.

Organizational culture

First, lets establish what organizational culture is. Based on Hofstede (1980),

Schein (2010) and Prahalad & Krishman (2008), organizational culture is the

collective programming of the mind.

Hatch (1993) is mentioning the way organizational cultures are created. The

culture of a company is influenced by national cultures, where four different

dimensions are resulting in a different way of interacting with each other:

power distance, uncertainty avoiding, individualism, and masculinity. All these

dimensions can influence the successfulness of the innovation project. Where

innovations are by definition uncertain, especially the attitude towards

avoiding uncertainty has an effect on innovation projects. In a culture the role

of the founder of the firm is important as well. The organizational culture exists

of three levels according to Schein (1990): Beliefs & assumptions, norms &

values, and artifacts.

So, the processes and its content create an organizational culture. The

question is when innovation implies abandoning the past, whether culture is

an asset or a liability. Many authors think culture is an asset, because they

confuse culture with psychological climate (Schein, 2000). Some things

changed in the field of employment since the article of Schein was published.

The level of education increased, people are not aiming for a lifetime

employment anymore, and media started to have a bigger influence on

culture. Due to these changes it is possible that the concepts of Schein are

outdated.

Proposition 11:

The selection of new employees should focus on people

who fit in the needed culture of the company.

The last view Montgomery explains is the resource based view. Excess

resources that cannot be sold in the market are used to diversify. She states

that resources are indivisible, resources can be used in multiple ways and

every day new resources are available. When this view is applied, the results

have a positive effect on the firm and social welfare.

When investing in innovation projects, a company wants to enjoy the benefits

of their investment as long and intense as possible. Financially this means

that the company gets the highest possible return on their investment. A

company is able to do this when they are creating something that the market

is demanding and competitors are having a hard time copying or replacing. To

get and keep having a competitive advantage, the company should focus on

their strengths. The innovation project of an existing company should be

related to core competences (Prahalad & Hamel, 2006; Campbell, Goold &

Alexander, 1995) in order to add more value than any other parent could or in

other words: to keep the competitive advantages as long as possible. But,

there are examples that show the opposite as well. Like ASML who became

even more successful after being privatized out of Philips.

Proposition 12:

Innovation projects that arise from core competences

have a higher chance to be successful than other

Implementation of the project

After the strategy of the company has been determined, the strategy needs to

be implemented. Different researchers addressed this subject, due to the

many difficulties faced by the companies (Franken et al., 2009; Mankins et al.,

2005). Many times, the strategy is unsuccessful because of the errors made

in the implementation phase. On can expect the same counts for

implementing projects.

The investment decision whether or not to invest in a project is among other

things depending on the perceived risk of the project. One can assume that

when the process of the implementation is set beforehand, uncertainty about

the outcome declines. Less uncertainty leads to more accurate ideas of which

risks to expect. If one knows the risks, they can look for opportunities to lower

the risks, like learning (McGrath & MacMillan, 1995), and focus (Ries, 2011;

Moore, 2014). Garud & Van de Ven (1992) are explaining learning by

trial-and-error, but at the same time they are warning against continuing if

outcomes are sustainable negative. In the end, this process should result in

lower risk rates and by that, a more attractive innovation project to invest in.

When the decision is being made on what innovations to invest in, the

implementation can be taken into account. This could for example be done by

thinking about the capabilities of the employees who will be working on the

project, thinking about the cooperation with changes, and the capabilities of

the leader to make the team focus on the innovation project.

Making implementation part of the project is expected to improve the chance

of the project to be successful. At the same time it does create some

challenges. The most important challenges are faced when it comes to the

people, them working together, and taking responsibilities.

First, people. The time they invest can only be used once. So, the more time

spent early on in the project, the less time could be spent working on other

tasks. While the innovation results in something new, information and

knowledge about the innovation needs to be transferred to colleagues when

the project is being implemented in the regular processes. To gain this

information and knowledge, people could for example have meetings. The

time spent on meetings result in less time spent on other tasks, which could

influence the speed of progress of the innovation project. Thus, the questions

to asks are:

• when does the implementation phase start?

• when to involve colleagues?

• what are the effects of this?

• how can we keep the negative effects to a minimum while getting the

best results?

Second, working together. Working together to implement the project seems

to be very difficult. Even if people are working for the same company and in

the end are having the same goals, this does not mean their incentives and

targets are the same. There could be a clash between incentives, which

results in different priorities and focus. These matters can influence the

successfulness of the innovation project negatively. Overall, incentives should

at least not be counteracting with each other. The time invested to implement

the innovation should be in balance with the results of this invested time.

Third and last, responsibility. Who is responsible when things go wrong at

which point. Several companies made the person who developed the

innovation responsible in order to prevent them for cutting corners during the

development phase.

Proposition 13:

Implementation of the innovation project should be

part of the investment decision-making process to

Research model

There are different reasons why a company wants to innovate. First of all,

they could face a problem and want to solve it. Some companies are pushed

to innovate in order to stay in competition. Others could come up with a new

idea by thinking differently. Like Levitt & Dubner, 2014 explained the question

of a contestant in a hotdog competition was not “How to win the hotdog eating

competition?”, but “How can I eat as much hotdogs in a certain amount of

time as possible?”.

For every company and maybe even every investment decision, there is a

different definition of ‘success’. Do you want to make the most profit, do you

want to lock-in customers, do you want to prevent your competition to go in a

certain direction. To control for these differences, this research focuses on

how to be as successful as possible in the decision making process. Because

in the end, we do not want to spent more resources or creating at a bigger risk

than necessary.

The elements taken into account in the decision-making process are the

elements that make the investment more successful or prevent threats and

risks that could make the investment less successful. Some elements have a

direct effect on the innovation project (moderators), while others are indirectly

connected (mediators). The elements could influence multiple other elements.

It is also possible that elements are mediators on the short term, but become

moderators on the long term. For example, supportive leadership: where on

the short term people might get energy of working on innovation. But when

the leadership is communicating to focus on other things or acting like

innovation is not important, on the long term people will stop working on

innovations. The same counts for flexibility, selection of new employees and

culture, where on the long term these elements could result in the innovation

projects to stop completely.

Moderators

Moderators are the elements that could let the whole project fail or not start at

all. Moderators can influence to projects at different stages. In order to be able

to start the project: resources are necessary, like for example money, people,

time, energy, and raw materials. In the end, one needs money to buy and/or

use the resources, which makes the need for a balanced portfolio a

moderator. Also, the focus on an innovation project of the employee, makes it

possible in the first place to create the innovation and finish the project. From

the point of view of the project some resources are needed, but at the same

time the company is having other projects to take care of as well. There needs

to be a balance between the investment of resources and the results. So, the

company needs to decide what their goal is. Do they want to be the best and

get a ‘A+’ and invest proportional much more resources, or is a ‘B’ good

enough?

When some resources like money and raw products are allocated for the

innovation project, it does not mean the project will always be successful. For

example, when leadership does not support people to work on the innovation,

but instead is forcing them to work on their ‘regular’ tasks, The point is, it is

expected that a total package of resources must be allocated to make the

innovation project as successful as possible.

Mediators

Other elements could influence the successfulness of the project, but are not

assumed to let the whole project fail. These are the incentives of the

employees. When these incentives do not meet the projects requirements, it

could result in employees paying less attention to this part of the job, but it

might also not influence the effort of the employees at all. The other way

around: when the incentives meet the requirements of the project, it could

possibly positively influence the outcomes of the project. The same goes for

taking implementation and extensive calculations into account in the

decision-making process. It could save money in the end, but not including

implementation in the decision-making does not mean the project cannot

succeed.

In this research an extensive calculation, structure supportive to innovation,

have no or little fixed and sunk costs are mediators as well. Also, based on

what the innovations are initiated like core competences or gaining market

power are mediators. If a company wants to remain flexible, it could take

measures during the decision-making process. Also, these elements do not

prevent the project to start, or letting it fail instantly, but could influence the

outcome of the project positively or negatively.

Research method

This multiple case study studies ‘a contemporary phenomenon within its

real-life context’ (Yin, 1984). In this qualitative approach cases are selected and

interviews are conducted to explore important elements of the investment

decision. Cases will be selected by determine whether a company matches

the theory. The way the cases are selected will influence the generalization of

the results (Eisenhardt, 1989). The sample will exist of a mix of different

companies in different industries in order to explore as much as possible and

to try to make the results more general:

• According to Moore (2006) and Quinn (1985) there tend to be

differences between the risks for these different companies in

resources, focus, market access, attitude towards risk, introspection

and the corporate portfolio. The sample of this research will therefore

exist of a mix of companies with different years of age.

• The size of the company could influence the risks a company is willing

to take. For this matter, companies that are selected will be a mix of

bigger and smaller companies.

• Different (tax)laws could influence the risks of companies to invest in

innovations. To account for this influence, companies with a focus on

national and international markets are selected.

• The companies already invest in innovation projects.

When the companies meet the requirements of this research, employees are

approached to do an interview. These employees need to be involved in the

decision making process. At least two companies are selected where multiple

people will be interviewed to look for differences in one company. Sometimes,

the snowball sampling method is applied in order to get in contact with new

possible interviewees.

Before the in depth interviews are conducted all participants receive the same

information about the purpose of the interview face-to-face, by telephone or

by email (appendix A). Information about the interviewee is selected during

the interview or by using for example ‘LinkedIn’ (appendix B). Some topics will

be covered in each interview (appendix C). To explore the research topic as

much as possible the interviewees are encouraged to add topics and provide

more information about the research topic. It could be possible that some of

these added topics become a standard topic for next interviews.

During the in depth interviews the interviewer will take notes when the body

language adds extra or opposite information to the oral information given. The

interviews are audio taped. The interviews will take place at a location where

the participant feels comfortable. The participant will make the choice whether

or not they want the transcription of the interview to become anonymous and

if the information shared by the participant must be kept confidential.

The interviewer will start the interview with a brief introduction in the topic of

research. The interviewee is supported to mention their ideas of important

topics for innovation investments. The interviewer tries to get a better

understanding of the ideas mentioned by the interviewee by keep on asking

question. During the interview the interviewer tries to compare the answers to

previous answers given in the interview when answers appear to be

contradictory to make clear what the interviewee is trying to explain.

While this research is initiated to explore important elements of innovation

investments, the interviewer will not influence the interviewee by talking about

theory directly. The interviewer will use the theory described in the theory

chapter to cover the topics described in former research. When the

interviewee is not mentioning a certain topic, the interviewer could ask what

the interviewee thinks of this specific topic.

The topics covered in the interviews that are subtracted from theory are if

applicable: structure of the organization, working together with other divisions,

freelancers, on base on what information the investment decision is made,

possible differences innovation investment and other investments, balanced

portfolio, external influences, human capital, incentives, and implementation.

During the interviews the interviewer will have a neutral appearance to

prevent influences of the interviewer on the participant. All things that could

influence the interviewee are noticed as good as possible and are considered

during the evaluation of the results.

An important limitation of using the interview technique is that people tend to

be more positive than the actual results in order to prove that they are doing a

good job. Boyce & Neale (2006) call this phenomenon ‘prone to bias’. To

control for this biased, audit questions are prepared and used when needed

(appendix D).

Interviews are conducted until the point of saturation is reached. Later, the

collected data needs to be qualitatively analyzed. The interviewer will

transcribe the interviews, where silences, laughter, disturbances, and the

literal words used are noticed. The data of the interviews will be categorized

into analytical categories to identify relationships and patterns using the path

of O’Dwyer (2004). This path of data reduction, data display and data

interpretation is followed. The categories will be analyzed to see whether the

categories are seen as important to the interviewees (Saunders, Lewis &

Thornhill, 2012). Later, the different interviews are compared to each other to

find patterns of similarities and differences. The results of this analysis will be

compared to the propositions in order to get a better understanding of these

propositions and the effects on investment decisions for innovation projects.

In this way literal replication can be found. While the propositions are not

predicting contrasting results, this research will not be analyzed for theoretical

replication. Interesting results for future research will be mentioned and

discussed. Overall, this way of research will lead to a relatively exhaustive set

of dimensions.