The applicability of a scoring model as portfolio
management method for a service provider within the
public lighting industry
Master thesis Business Development
Student: M.R.J.G. Roelfsema
Student number: 1926039
University: Rijksuniversiteit Groningen
Supervisor thesis: Chintan Shah
Internship company: Ziut B.V.
Supervisor internship: Cas Disse
Summary
This research study examines whether a scoring model is applicable as a service portfolio management method for a service provider in the public lighting industry. In literature, the scoring model is recognized as an effective and efficient product portfolio method. Little is known about the applicability of this portfolio management method in the service sector. By a case study, executed at a service provider in the public lighting industry in The
Netherlands, the applicability of the scoring model is tested for this type of service industry. The conclusion of the research is that a scoring model is applicable in the service industry of public lighting, under the condition that the scoring model is customized, based on the context of this service industry.
Preface
I would like to thank Ziut for offering me the opportunity to do an internship and enable me to write my master thesis at this company. I want to thank in particular Mr. Disse and Mr. De Jonge for their support and input during this internship. I would also like to thank my
supervisor Mr. Shah for his assessment, feedback, and support during the writing of the thesis, and Mr. Reezigt for his assessment as second supervisor. The internship and the process of writing this thesis were instructive, and can offer me support in my professional career.
Mark Roelfsema
Groningen, November 2013
Table of contents
1. Introduction 5 2. Research design 7 2.1 Interviews 7 2.2 Focus group 7 2.3 Soundboard group 83. What are the differences and similarities between products
and services? 9
3.1 Definition of products 9
3.2 Definition of services 9
3.3 The relationship between products and services 9
4. What are the key market factors for a service provider
that operates in the public lighting industry? 22 4.1 Definition of the street lighting sector in public areas 22 4.2 Functions of street lighting in public areas 22 4.3 Key factors of the street lighting market 23 4.4 Key developments on the street lighting market 24 4.5 Administration and maintenance of street lighting 25
5. What is portfolio management? 26
5.1 Portfolio management 26
5.2 Negative consequences of poor portfolio management 27 5.2.1 Lack of strategic criteria for project selection 27
5.2.2 Low value projects 27
5.2.3 Lack of focus 27
5.2.3 Selection of the wrong projects 27
5.3 Key reasons why portfolio management is used by organizations 28
5.3.1 Financial 28
5.3.2 Maintain or improve the competitive position of the business 28 5.3.3 Proper and efficient allocation of scarce resources 28 5.3.4 Create the link between project selection and business strategy 28
5.3.5 Achieve better focus 28
5.3.6 Achieve the right balance 28
5.3.7 Improve communication within the organization 28 5.3.8 Provide better objectivity in project selection 29 5.4 Portfolio management in the service industry 29
6. What is a scoring model? 31
6.1 The scoring model as a portfolio management method 31
6.2 The scoring model at Ziut 33
7. Case study at Ziut: the applicability of a scoring model
in practice 38
7.1 The business problem at Ziut 38
7.2 The current service portfolio of Ziut 39
7.2.1 Substitution and periodic group substitution of streetlights 39
7.2.2 Stability test of lampposts 39
7.2.3 Stabilization of lampposts 39
7.2.4 Mechanical cleaning of lampposts and streetlight armatures 39
7.2.5 GPS registration of lampposts 39
7.2.6 Execution of damage and malfunction management 39 7.2.7 Specialized detection of cable malfunction 40 7.3 Reasons for service portfolio management at Ziut 40 7.3.1 Strategic direction to project selection 40
7.3.1.1 Customer unburdening 40
7.3.1.2 Corporate Social Responsibility (CSR) 40
7.3.2 Achieve focus 41
7.3.3 The right project selection 41
7.3.4 Maintain the competitive position 41
7.4 Ziut as a market player 41
7.4.1 Constructor 41
7.4.2 Service facilitator 42
7.4.3 Asset manager 42
7.4.4 Asset owner 42
7.5 Service improvement of Ziut 42
7.5.1 Increasing the amount of objects 42
7.5.3 More service offering for current objects 42 7.5.3 Anticipate on increasing complexity of products on the market 42
7.6 The new services of Ziut 43
7.6.1 Energy saving light solutions 43
7.6.2 Knowledge as a service 43
7.6.3 Light as a service 44
7.6.4 Maintenance of more street objects 44
7.6.5 Ziut as a knowledge supplier for specialized detection
of cable malfunction 45
7.7 Conclusions for Ziut 45
8. Conclusions 46
References 48
Appendices:
Appendix 1: interviews at Ziut 50
Appendix 2: focus group meetings 54
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1. Introduction
This research examines whether a scoring model is an applicable service portfolio evaluation method for a service provider within the public lighting industry. For this research, a case study is executed at Ziut to test this applicability in practice.
Ziut offered an internship for support in creating new services for the company, and for creation and implementation of a scoring model as portfolio management tool for service project evaluation, because Ziut wanted to innovate its service portfolio. As a student Business Development, this internship was very interesting and challenging for the researcher, because innovation is a key point in the program Business Development. This internship at Ziut offered the possibility to execute service project innovation and service portfolio management in practice.
Ziut appeared not to be able to rank and prioritize new service projects. Ziut therefore wanted to implement a scoring model as a guidance tool for decision-making in service portfolio management. A scoring model is generally considered as an effective and efficient product portfolio management method for the evaluation of new projects, and is a model with many strengths and few weaknesses. A scoring model is in practice overwhelmingly used as a ranking or prioritization tool, where the project score is used to rank order projects.
It is not scientifically shown that a scoring model is applicable to a service provider in the public lighting industry. The business problem of Ziut offered the possibility to examine the applicability of the scoring model as service portfolio evaluation method for a service provider in the public lighting industry. This topic is interesting for the public lighting industry, because the scoring model can also be used by other companies in the public lighting industry when it is applicable to Ziut, and in that case offers the industry a new service portfolio evaluation method.
Portfolio management is considered as critical for the success of a business. It is described as the manifestation of an organizational strategy, that dictates where and how a company has to invest for the future. In literature, portfolio management for product innovation has received much attention (e.g. Cooper et. al., 2001).
New success of a business very much depends on the project selection and the portfolio choices that are made by the organization. Portfolio management is not only critical for the development of new products. Services increasingly play an important role in our daily lives, and also a service portfolio needs to be properly managed. Although the importance of service portfolio management is generally recognized; this subject has received little attention when compared to product portfolio management. In literature, little is known about service portfolio evaluation methods. It is argued in literature that products and services show many resemblances (e.g. Vargo and Lusch, 2004a). Because a scoring model is generally considered as a valuable method for product portfolio management, it is examined whether a scoring model is also applicable to the service industry of public lighting, because
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of the similarities between products and services, and the applicability of a scoring model to some other service industries.
The first sub-question examines the differences and similarities between products and services, based on which the relationship between product portfolio management and service portfolio management could be justified. The second sub-question examines the key market factors for a service provider in the public lighting industry, to examine criteria which have to be implemented in a scoring model. In the third sub-question the importance of portfolio management is provided, to justify why organizations use portfolio management. The fourth sub-question defines what a scoring model is, to understand the important issues of a scoring model. In the case study it is researched whether a scoring model is applicable to Ziut.
This research examined the following main research question: can a scoring model be applied as portfolio management method by a service provider within the public lighting industry?
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2. Research design
2.1 Interviews
For this research, the data collection is gathered by interviews with organizational members of Ziut (see appendix 1). For the gathering of information about market criteria in de public lighting industry, organizational members of Ziut were interviewed. This qualitative research method offered the possibility to uncover the market characteristics in the public lighting industry, according to the perception of different organizational members of Ziut, by expressing their own opinions about the market situation. By holding interviews, the
researcher was able to learn what the organizational members consider as important market factors. Because there can be crucial differences among the opinions of organizational members, this qualitative research method is preferred to a standardized measuring
instrument. The interview technique had to reduce bias of results, because of the possibility for the interviewees to clarify or further explain themselves. It offers the possibility for the interviewer to let interviewees elaborate on certain points.
The research is executed at Ziut, because this company had trouble with the selection of new services. To solve this problem, organizational members of this company were interviewed for creating a scorecard for this company. The interviews at Zuit gathered the market criteria of the public lighting industry. For this research, 8 organizational members of Ziut were interviewed. Because of the repetitive answers of the organizational members of Ziut, these answers can be considered as representative for the whole public lighting industry, and therefore more interviews at different companies in this industry would not have added value.
The following organizational members of Ziut were interviewed:
Simon Buwalda – Consultant
Cas Disse – At. int. Division manager
Frederik de Jonge – Team leader operations
Jan Poel – Accountmanager
Ruud Kymmell – Accountmanager
Martijn Koning – Maintenance technician
Willem van Leusden – Manager Product management and R&D
Roel Middel – Coordinator Measuring service
2.2 Focus group
For the case study at Ziut, a focus group is used (see appendix 2). A focus group is a group of people that is interviewed at the same moment1. The focus groups consisted of 2 persons. The advantage of a focus group is that it provides more insight into differences and
similarities among the opinions of group members. Furthermore, another advantage of a focus group is that the remark of another group member can stimulate the interviewees to clarify and further explain themselves. A focus group can be used at several moments in the
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research. A disadvantage of a focus group can be that people do not feel able to speak freely, because of the attendance of other group members. This may inhibit the gathering of information.
For the case study at Ziut a focus group is chosen, because with this research method the organizational members were able to complement and correct each other. A focus group meeting can therefore reduce bias of results. These focus group meetings resulted in clear business information. It was also important that the focus group could be used at several moments during the research, because it was impossible to gather all necessary information at once for the design of a scoring model.
The focus group for the case study at Ziut consisted of 2 organizational members, and these group members were interviewed at 3 meetings. A 4th meeting was scheduled for the assessment of the new services with the designed scoring model. The 2 organizational members were important stakeholders of Ziut, and were highly involved in the business problem. The focus group offered the possibility for these organizational members to
complement and correct each other about the business problem, and provide corresponding business information that was important for the design of the scoring model. The focus group of Ziut consisted of the following persons:
Cas Disse – At. int. Division manager
Frederik de Jonge – Team leader operations
2.3 Soundboard group
The members of the focus group were also involved in a soundboard group. The goal of the soundboard group was to get support and gather input for new service development at Ziut. With this soundboard group, and the other organizational members who were interviewed for the analysis of market factors, conversations took place for support in the development of new services. These persons informed the researcher about possible market
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3. What are the differences and similarities between
products and services?
3.1 Definition of products
Products are mostly associated with physical objects (Vargo and Lusch, 2004a). Prahalad and Hamel (1990) characterize core products as the physical embodiments of one or more core competencies. These authors also describe core products as the tangible link between identified core competencies and end products.
3.2 Definition of services
According to Judd (1964), services are defined as: “activities, benefits or satisfactions, which are offered for sale, or are provided in connection with the sale of goods”. In his article, this author mentions his definition of a service from the perspective of a marketed service. According to Judd (1964), a service is a “market transaction by an enterprise or
entrepreneur, where the object of the market transaction is other than the transfer of ownership (and title, if any) of a tangible commodity”. Judd (1964) distinguishes 3 types of services. These types of services are: rented goods services, owned goods services and non-goods services. The author describes these types of services as follows:
Rented goods services – the right to posses and use a product
Owned goods services – the custom creation of, repair, or improvement of a product
Non-goods services – no product elements, but rather an experience or what might be termed experiential possession.
According to Vargo and Lusch (2004a), services are often seen as processes or performances. Vargo and Lusch (2004a) define services as the application of specialized competences (knowledge and skills) through deeds, processes, and performances, for the benefit of another entity, or the entity itself. Vargo and Lusch, (2004b) argue furthermore that a service is sometimes provided directly, and sometimes provided indirectly, through the provision of tangible goods. In the latter case, goods are distribution mechanisms for service provision. Lovelock and Gummesson (2004) argue that “services offer benefits through access or temporary possession, instead of ownership, with payments taking the form of rentals or access fees”.
3.3 The relationship between products and services
In literature, there are different opinions about the relationship between products and services. Rathmell (1966) argues that an implicit distinction is to consider a good (product) as a thing, and a service as an act. When a good is purchased, the consumer acquires an asset, and when a service is purchased, the consumer incurs an expense. According to this author, another distinction between goods and services is the nature of the product’s utility. When the utility for the consumer lies in the physical characteristics, it is called a product. When the utility for the consumer lies in the nature of the action or performance, it is called a service. According to Rathmell (1966), there are very few “pure” products or “pure” services. Rathmell (1966) claims that: “the satisfaction, or utility, deriving from a work of art, such as a
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painting or a sculpture, lies solely in the good itself. The benefit, or utility, arising from legal counsel, proceeds exclusively from the service rendered”. In the former example, there is not an act performed, and in the latter example, there is not a good involved.
Apart from these examples, most goods, whether consumer or industrial, require supporting services in order to be useful, and most services require supporting goods in order to be useful. So in most cases, for a service to have any meaning, a goods component must be present. Service would contribute time and place utility; the good aspect would be the physical commodity made available, and the service would be the act of making it available for a prescribed period of time, as an alternative to outright purchase (Rathmell, 1966). An example of this definition is booking a hotel room. This mixed nature of most economic products could also be illustrated by the example of a car. When a car is purchased, it is, from the economic perspective, considered as a good (product). But if a car is rented or leased, it is, from the economic perspective, considered as a service that transports someone from one destination to another destination. According to Rathmell (1966), the former example is primarily a good with service support, and the latter example is primarily a service with goods support. “Most goods are a complex of goods and facilitating services, and most services are a complex of services and facilitating goods” (Rathmell, 1966). Rathmell (1966) argues that most marketers have some idea of the meaning of the term goods, but that services seem to be anything else. The author identified 13 market
characteristics of services. Vargo and Lusch (2004b) criticize the 13 market characteristics defined by Ratmell (1966), because in this article services are just seen as what tangible goods are not. Although Vargo and Lusch (2004b) do not agree with the distinguishing market characteristics as defined by Rathmell (1966), Vargo and Lusch (2004b) do agree with the claim of this author that services and products are interrelated. Vargo and Lusch (2004b) further argue that in this time period services were defined “by exclusion from products”, and agree with the argument of Judd (1964), who already claimed that this approach has defect, because nothing can be learned about what the “essential characteristics of a service” are. Later on in this paragraph, there will be elaborated on the point of view of Vargo and Lusch (2004b) concerning the relationship between products and services. In the next part, Rathmell (1966) will be discussed as being one of the first researchers who examined the relationship between products and services.
Rathmell (1966) identified the following 13 market characteristics of services in comparison with goods:
1. Rathmell (1966) argues that the monetary values of a good are stated in terms of price, where services are more likely to be expressed as rates, fees, admissions, charges, tuition, contributions, interest, and the like.
2. In many types of service transactions, the buyer is a client rather than the customer of the seller. When the client buys a service, this person “figuratively or literally places himself in the hands of the seller of the service”. Rathmell (1966) mentions the examples of the relationship between the student and the college, the patient and the hospital or physician, and the relationship between the passenger and the airplane. The author argues that the buyer is not free to use the service as he wishes, as would be the case in the purchase of a good. The buyer of the service must abide by certain prescripts, which are laid down by the seller, in order for the service to make any contribution.
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3. The various marketing systems in the services category have taken on highly differentiated characteristics. Rathmell (1966) agrees that contrasts do exist in the marketing systems that have evolved for different types of physical goods, but these are primarily differences of degree. The author argues that in the case of services, the marketing of recreation bears little resemblance to the marketing of medical service.
4. Rathmell (1966) argues that services are acts or processes, which are produced at the moment that they are consumed. Services therefore, cannot be inventoried, and there cannot be a merchant middleman, since only direct sales are possible. Rathmell (1966) mentions that in a number of instances agent intermediaries are utilized in the marketing of services. As an example, the author refers to insurance agents and travel agents.
5. According to Rathmell (1966), the question can be raised as to the economic nature of certain products in the services category. For example, payments to charitable and religious organizations, and non-profit organizations. The author questions whether these
organizations are economic entities on the supply side, since they compete for the dollar of the consumer.
6. Rathmell (1966) argues that there appears to be a more formal or professional
approach to the marketing of many services, compared to goods. The author mentions as an example the financial, medical, legal, and educational services.
7. Rathmell (1966) argues that services cannot be mass-produced, because the standards cannot be precise. Although services procedures can be standardized, their actual
implementation will vary from buyer to buyer. The author does mention that, because of the increasing use of service technology at the expense of personalized service, perhaps there will be a standardization of services, especially in medicine and education. The author argues that this would mean that services will follow goods from customized to mass production and standardization.
8. According to Rathmell (1966), “price-making practices” vary greatly within the services category. The author argues that public agencies rigidly control utility and transportation rates, that interest rates show characteristics of price leadership, and that some service charges are established on the basis of what the traffic will bear.
9. Rathmell (1966) argues that, because of the intangible nature of a service, the economic concepts of supply, demand, and costs are difficult to apply to a service. The author also argues that values of some services are difficult to fix. As an example, the author questions what the value is of the service of a lawyer in a losing case, when compared with a successful one.
10. Rathmell (1966) argues that most fringe benefits take the form of a service (e.g. pensions, insurance, unemployment benefits, eye and dental care, and psychiatric service). The author argues that benefits are seldom in the form of goods. The author further argues that, “if benefits are created by the employer, then in a marketing sense this employer is selling a product ( in lieu of higher wages) to a market segment that consists of his own employees. If the service is created by an outside specialist, such as a life insurance
company, than in a marketing sense the employer is an agent between the seller/creator of the service and the buyer/consumer”.
11. Rathmell (1966) argues that there appears to be limited concentration in the services sector of the economy. The author argues that there are few service chains; “carriers and utilities are regulated”.
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12. Rathmell (1966) argues that, until recently, service organizations failed to differentiate between the production and the marketing of services. Performance was equivalent to marketing the service.
13. Rathmell (1966) argues that, in the case of services, symbolism derives from performance rather than from possession.
The point of view concerning the relationship between products and services is evidently changed in the 21st century we live in nowadays, due to economical, political, and
technological factors, of which there are clear examples in our current society. Economical changes are standardization of services (e.g. cash withdrawal at an ATM, online shopping, online check-in at the airport) and customization of products (e.g. watches, cars, boats). Political changes in regulations made possible that services are privatized (e.g. airplane and railroad companies). Internet and digital data storage made possible that students do not longer always have to be physically present to acquire education. These technologies enable consumers to acquire a service at a later time, and without direct interaction with the service provider. More examples will follow later on in this paragraph. The reason for implementing the arguments of Judd (1964) and Rathmell (1966) is to provide an image of the first thoughts in literature about the relationship between products and services. In the next part Zeithaml et. al. (1985) will be discussed, with their literature study that offers distinguishing factors between products and services, which are currently still subject of debate.
In their study, Zeithaml et. al. (1985) argue that there are notably 4 unique characteristics of services, which are consistently cited in literature. These characteristics, which distinguish services from tangible goods (products), are: intangibility, inseparability of production and consumption, heterogeneity, and perishability. The unique service characteristics and their resulting problems found by Zeithaml et. al. (1985) are shown in table 1.
According to Zeithaml et. al. (1985), in literature intangibility is described as the critical goods-services distinction from which all other services emerge. Because services are performances, rather than objects, they cannot be seen, felt, tasted or touched in the same manner in which goods can be sensed (Zeithaml et. al. 1985).
Inseparability of production and consumption, which characterizes most services, implies that production and consumption are a simultaneous process. Goods are first produced, then they are sold, and then they are consumed. Services, on the other hand, are first sold, and then they are produced and consumed simultaneously. Inseparability causes that many services can only be distributed directly, and therefore the customer must be present during the production of these services (Zeithaml et. al., 1985).
Heterogeneity concerns the potential for high variability in the performance of services. The quality and the essence of a service vary with producer, customer, and from one day to another, because of inconsistency in human behavior. This makes heterogeneity in service output in particular a problem for labor intensive services (Zeithaml et. al., 1985).
Perishability means that services cannot be saved. When hotel rooms are not occupied, seats of an airplane are not purchased, or the capacity of a telephone line is not used, this
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service cannot be reclaimed. Services are performances that cannot be stored, and therefore service businesses frequently have difficulty to synchronize supply and demand (Zeithaml et. al., 1985). Sometimes there is too much demand (e.g. a popular restaurant at the weekend), and sometimes there is too little demand (e.g. a boat rental company on a rainy day).
Unique service characteristic Resulting problems Intangibility Services cannot be stored
One cannot protect services through patents One cannot readily display or communicate services
Prices are difficult to set
Inseparability The consumer is involved in the production Other consumers are involved in the production
Centralized mass production of services is difficult
Heterogeneity Standardization and quality control are difficult to achieve
Perishability Services cannot be inventoried
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According to Zeithaml et. al. (1985), in literature there are strategies to solve the problems which are caused by the 4 unique service characteristics. These strategies are shown in table 2.
Unique service characteristics Strategies to solve problems Intangibility Stress tangible cues
Use personal sources more than non-personal sources
Simulate or stimulate word-of-mouth communications
Create a strong organizational image Use cost accounting to help set prices Engage in post-purchase communications
Inseparability Emphasize selection and training of public contact personnel
Manage customers Use multisite locations
Heterogeneity Industrialize service
Customize service
Perishability Use strategies to cope with fluctuating demand
Make simultaneous adjustments in demand and capacity to achieve a closer match between the two
Table 2. Unique service characteristics and strategies to solve these problems (Zeithaml et. al. 1985).
Vargo and Lusch (2004b) argue that these 4 characteristics are still seen in literature as the unique distinguishing characteristics between products and services. The next part of this paragraph will discuss articles which reject the claim that these 4 characteristics completely separate products from services.
Vargo and Lusch (2004b) refer to the 4 stereotypical characteristics described by Zeithaml et. al. (1985), which have been identified as distinguishing services from products. Vargo and Lusch (2004b) argue that these characteristics ( intangibility, inseparability, heterogeneity and perishability) appear to have “near-uniform and almost unquestioned acceptance in literature, and are repeated in almost every context without any discussion of the
undermining logic”. The authors further argue that this list of service characteristics “implies a definition by exclusion, by first assuming commonly accepted characteristics of (tangible) goods, and then identifying services in terms of the absence of these properties” (Vargo and Lusch, 2004b).
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Vargo and Lusch (2004b) argue that the distinguishing service characteristics are described as follows:
Intangibility – lacking the palpable or tactile quality of goods
Heterogeneity – the relative inability to standardize the output of services in comparison with goods
Inseparability (of production and consumption) – the simultaneous nature of service production and consumption compared with the sequential nature of production, purchase, and consumption, that characterizes physical products
Perishability – the relative inability to inventory services as compared to goods Vargo and Lusch (2004b) argue that these characteristics fail to delineate services from goods adequately, and that they are inaccurate and misleading about the nature of market offerings, that their implications for marketing strategy are contradictory to a market and consumer orientation, and that their implications should be inverted. These authors further argue that “the strategy of differentiating services from goods should be abandoned and replaced with a strategy of understanding how they are related”. Vargo and Lusch (2004b) claim that service is the common denominator in exchange, and not some special form of exchange, since a number of scholars have noted that both goods and services render service.
According to Vargo and Lusch (2004b), intangibility is normally considered to be the primary characteristic that distinguishes services from products. But essentially all products have a service component, and essentially all services have some form of tangible representation, and therefore it can be argued that, based on the intangibility criteria, there are no “pure” goods. According to Vargo and Lusch (2004b), in literature it is argued that “service
processes and their outcomes result in specific sensory impressions that are stored in the mind as concrete, tangible facts”. Therefore this distinction could be considered as
“illusionary”. Another weakness of the differentiation between services and goods based on intangibility, is that the distinction represents the producer’s orientation, rather than the consumer’s, and thus what should be the marketer’s orientation. Vargo and Lusch (2004b) argue that consumers purchase satisfactions and benefits. Vargo and Lusch (2004b) further claim that in literature it is stated that: “customers do not buy goods or services”. Instead customers “buy offerings which render services which create value”. Tangible objects are only important to the extent that they serve as the equipment and supplies for the
extraction of service production processes. Vargo and Lusch (2004b) argue that selling the intangible benefits is more important than selling the tangible attributes, even when tangible products are being offered.
The second characteristic is heterogeneity, and here the focus is on standardization. The opinion is that services cannot be standardized like goods, because humans have to be involved in the provision of services. Vargo and Lusch (2004b) argue that “if human input is the constraining factor, then tangible goods cannot be inherently more homogeneous than services”. These authors claim that “human activity is the common, instead of the
distinguishing factor, in the provision of both services and tangible output”. Although products can be produced homogeneous, it is the perceived opinion of the customer that makes a product just as heterogeneous as a service. Furthermore, Vargo and Lusch (2004b) argue that, historically, goods production has been characterized as heterogeneous. The
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authors refer to the pre-industrial cottage industry, which typically produced non-standardized output, later followed by the industrial era, in which mass production was implemented. “Standardization, or more precisely the goal of standardized output, is an outgrowth of more recent mass production, not an inherent characteristic of tangible output, and even after 150 years of implementation, it remains a manufacturing goal, not a reality”.
The authors further argue that “at least parts of many services, such as airline
transportation, medical procedures, or the provision of information through commercial databases, are as standardized and homogenized as the production of the airplanes, medical instruments, and computers on which they rely”. Vargo and Lusch (2004b) also refer to literature in which it is argued that service providers such as retail banks offer highly standardized services, and that possession-processing services (e.g. house painting) and mental-stimulus-processing services (e.g. education) are often provided homogeneously. For the perception of relative homogeneity and heterogeneity, the critical issue is who is making the judgment. Vargo and Lusch (2004b) argue that standardization is fundamentally
concerned with quality, but that this association is manufacturer-centered, motivated primarily by the advantages in efficiency that are offered by standardization. Because standardization is more efficient from the manufacturers perspective, it has (had) become the standard of quality. However, from the consumers perspective this issue is different. “For example, automobile manufacturers offer relatively uniformly produced automobiles, composed of standardized parts that are perceived very heterogeneously in the marketplace by individuals with different and changing preferences for attributes” (Vargo and Lusch, 2004b). The authors argue that the principle of heterogeneity “has nothing to do with goods versus services”. Instead, this principle is based on the “producer versus consumer
perspective”.
According to Vargo and Lusch (2004b), the idea that services have a disadvantage when compared to goods for the reason that services cannot be as easily standardized as goods, is rather easily accepted by service scholars. These authors claim that it is generally suggested that service providers must try to find ways to increase standardization. Vargo and Lusch (2004b) argue that, in reality, the situation may be the exact opposite. The authors state that “although standardization may provide for manufacturing efficiency, this efficiency comes at the expense of marketing effectiveness”. According to Vargo and Lusch (2004b), the
standardized tangible goods, instead of services, could possibly be at a disadvantage, since the “normative prescription of the consumer orientation screams heterogeneity”. The third characteristic, inseparability, implies that services demand direct consumer
involvement. Unlike products, for a service to be received it is argued that the consumer and the service provider have to interact simultaneously, and therefore a service cannot be received away from, or without the involvement of the consumer. Vargo and Lusch (2004b) refer to literature where inseparability is considered as a “dangerous oversimplification” ,because “many offerings that are typically classified as services are partially, if not largely, produced separately from the consumer”. As examples the authors mention financial, entertainment, and information services. According to Vargo and Lusch (2004b), separability is primarily important from the manufacturer’s perspective. From the consumer perspective, this issue of separability is both undesirable and impossible. Vargo and Lusch (2004b) argue
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that consumer involvement, to some degree, is always necessary for the production of tangible goods, since consumers have to adapt them to ‘their own individual needs, within latitudes bounded only by their own idiosyncratic behaviors, and often at great variance with the specifically intended purposes of the producer”. Tangible offerings (products) “cannot provide service (desired benefits) unless the customer or potential user interacts with the goods”. According to Vargo and Lusch (2004a), the benefits from goods are obtained by using the goods, and therefore products are merely a “distribution vehicle or channel for service provision”. Goods have to be considered as appliances. Vargo and Lusch (2004a) argue that “essentially all durable goods require knowledge acquisition, proper utilization, inspection, and some provision for maintenance by the consumer”. It is therefore arguable, more importantly because more and more products are customized, that
inseparability is not a characteristic that is only important for services. When the issue of inseparability is viewed only in terms of “tangible production output”, then much of the process of product manufacturing takes place without interference of the consumer. But because customization also takes place in production of goods, inseparability cannot be considered as a unique characteristic of services (Vargo and Lusch, 2004b). The authors argue that offerings produced without the relative involvement of the consumer, are at a disadvantage, because the idea of perceived quality points out toward maximizing provider- consumer interaction, rather than minimizing it.
Perishability is the fourth characteristic that is considered as a distinguishing factor between products and services. This characteristic is closely linked to tangibility. According to Vargo and Lusch (2004b), perishability implies that services cannot be produced at one point in time, inventoried, and then sold at a later time when demanded. These authors argue that products are also perishable, since products can become rusty, become inoperative, or can rot. Likewise, inventoriability is not only a characteristic of tangible products. Vargo and Lusch (2004b) refer to literature that argues that “the claim that services cannot be stored is nonsense. Services are stored in systems, buildings, machines, knowledge, and people. The ATM is a store of standardized cash withdrawal. The hotel is a store of rooms”. Vargo and Lusch (2004b) further argue that “airline and theater seats are routinely inventoried for a period of time prior to production, purchase, or consumption; they just are not inventoried after production”. Similarly, universities can hire a new professor, or assign a classroom for a lecture in a future period, and by doing so, it is, in effect, “inventorying educational
services”. Students can internalize the values of an university program, and with that they have “inventoried the knowledge and skill base for lifelong learning”. Created human capital, fitness, or surgery, are all examples of supposedly perishable services, which can provide benefits over time (Vargo and Lusch, 2004b).
The authors argue that perishability is highly dependent on the perspective. According to Vargo and Lusch (2004b), the dimension of perishability is a temporal concept, which requires specification of an observer. “Perhaps none of the other stereotypical services characteristics so clearly changes depending on whose perspective is driving the perception than does perishability. From the producer’s perspective, the important measure of time is the period between when an offering is produced and when it can be sold to produce income. It is from this perspective that tangible goods appear to be imperishable. This is a perception that is largely illusionary. From the consumer’s perspective, and thus from a marketing perspective, the important time is the period that the offer can deliver benefits
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after acquisition, and from this perspective, this illusion of imperishability of goods largely vanishes. That is, from a demand perspective, all market offerings are subject to
perishability, because styles, tastes, expectations, and consumer needs are not static variables regardless of the existence of material content” (Vargo and Lusch, 2004b). The material of which a product is made can be considered as relatively imperishable, but the benefit that a product provides, and thus the value as perceived by the market, is not. The underlying assumption in noting that services are perishable, is that they put managers in a disadvantage, because they cannot be inventoried, like products. But the storage of products after their production is not a goal. It is “a reaction to the uncertainty and fluctuation of demand, coupled with limitations in production planning and execution. Perishability in value potential is not just a characteristic disadvantage of services, but instead is a
characteristic of all market offerings. Vargo and Lusch (2004b) argue that “inventoriability (storage of output) is not (should not be) a normative goal for what are traditionally categorized as either goods or service firms. The normative goal should be to find ways to maximize the service flows desired by consumers, while minimizing output inventory and its limitations.
Lovelock and Gummesson (2004) also recognize that the 4 characteristics intangibility, heterogeneity, inseparability, and perishability are generally considered as making services uniquely different from goods.
According to Lovelock and Gummesson (2004), intangibility can be described as an
“ambiguous and surprisingly limited concept”. It appears that this characteristic is primarily associated with pre-purchase activities, where the customer does not have prior experience with the service, but for goods this situation is also valid (Lovelock and Gummesson, 2004). The authors argue that there is a distinction between physical intangibility; that which is impalpable or cannot be touched, and mental intangibility; that which cannot be grasped mentally. According to Lovelock and Gummesson (2004), the degree of mental intangibility, inherent in a service, and physical intangibility, are not necessarily correlated. Lovelock and Gummesson (2004) argue that “many services involve tangible performance activities, that users experience during delivery through one or more of their 5 senses”. The customer’s key goals of services like surgery, haircuts, and health clubs, are “to obtain tangible changes in themselves, or their possessions”. The tangible output of these kinds of services; a feeling of physical well-being, will vary “from ephemeral, to permanent and irreversible”. Lovelock and Gummesson (2004) argue that intangibility “is not an universally applicable characteristic of all services during all stages from pre-purchase through delivery, consumption, and output”. According to Lovelock and Gummesson (2004), heterogeneity is primarily discussed in literature “in relation to the difficulty of achieving uniform output, especially in labor
intensive services”. The challenge for this issue is establishing standards when the behavior and performance vary among service employees. Furthermore, this behavior and
performance does not only vary under service employees, but also in the interaction between a service employee and different customers, and from one day to another. Furthermore, every customer is different from another, and therefore can have unique demands, and experiences the service in an unique way. Zeithaml et. al. (1985) argue that these issues are related to inconsistency in human behavior. There are also additional factors which create variability in service performance, like the behavior of other customers
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during service delivery, variations in weather conditions, and differences between service locations (Lovelock and Gummesson, 2004). Lovelock and Gummesson (2004) argue that although heterogeneity, which these authors prefer to call variability, appears to be an inherent characteristic of labor-intensive service, this claim cannot be made for machine-intensive service operations. Through the years, there has been a significant trend toward replacing labor in the service sector for atomization, to achieve standardization and improve productivity. Moreover, despite the efforts to improve physical product quality in product manufacturing industries, customer complaint data, products recalls, and negative product evaluations from testing prove that variability is also evidenced in the product sector. Lovelock and Gummesson (2004) argue that “better quality control procedures,
standardization of modules, and the trend toward automation mean that many services are no longer highly variable in terms of technical quality”. The authors claim that heterogeneity (or variability) should no longer be considered as a characteristic that distinguishes all services from all products (Lovelock and Gummesson, 2004).
According to Lovelock and Gummesson (2004), “inseparability of production and
consumption is linked to the concepts of interaction and the service encounter”. Lovelock and Gummesson (2004) argue that there are many types of services that are provided without direct customer involvement; so called separable services. As examples, these authors offer freight transports, laundering of clothes, cleaning activities, and maintenance of many equipment and facilities. This also holds for many government activities, such as maintenance of infrastructure and defense activities. These examples prove that production and consumption of services do not always have to be simultaneous, since these services are commonly executed in the absence of the customer. In fact, customers who purchase
services like a car wash, profession cleaning, and parcel delivery do this to avoid having to involve themselves in these activities (Lovelock and Gummesson, 2004). They are willing to pay for these services to save time and effort, and to outsource activities which they consider as unpleasant, or these customers consider professional organizations as more capable than themselves. Moreover, in many separable services there is an inevitable decoupling of production and consumption. In cleaning, repair, and maintenance service-activities, for example, the consumption of the benefit can only take place after the customer has reclaimed the item, “typically some moments after production has been completed” (lovelock and Gummeson, 2004). In some cases, consumption of benefits actually takes place before production of the service. Take, for example, a customer of a bank who pays his bill with a check. This check may not be processed until a couple of days later. Lovelock and Gummesson (2004) argue that for inseparable services, the simultaneity of production and consumption is indeed a distinguishing characteristic when services are compared to goods. However, the authors conclude that “there are far too many separable services to justify the generalization that inseparability is a distinctive characteristic of all services”.
Lovelock and Gummesson (2004) state that there are multiple perspectives to the meaning of perishability. In literature it is commonly argued that “services cannot be saved, stored for reuse at a later date, resold, or returned”. Another claim is that “the unused service capacity of one time period cannot be stored for future use”. The last implication of services is that when demand is low, unused capacity is wasted, and when the demand is higher than the capacity, business may be lost. Balance between supply and demand is difficult for a service,
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when compared to goods. This aspect is also mentioned by Zeithaml et. al . (1985). Lovelock and Gummesson (2004) argue that achieving efficient capacity utilization is a problem for both producers of goods and services: “Perishability of productive capacity is as relevant to the manager of a factory producing beds as it is to a hotel manager worried about unrented rooms”. The authors claim that there is a distinction between perishability from the
producer’s perspective and from the consumer’s perspective. Perishability of capacity from the producer’s perspective is not the same as a perishable experience for a customer. And perishable capacity is not the same as perishable output, because most service organizations are not able to create output without customers who want to make use of the service. Although service performances are commonly transient experiences, this does not imply that the output of a service is perishable. Producers and consumers may have a different view on what the output is. Take, for example, a surgical procedure. From the perspective of the hospital, it is the surgical procedure that represents the output; but from the patient’s perspective, the output of the service is the outcome of that surgical procedure. Also, service firms can be able to produce for inventory and sell their products later. Types of
performances like education, entertainment, or music can be recorded for subsequent use through broadcasting, or transformed into reusable storage goods like tapes or DVD’s to be sold (Lovelock and Gummesson, 2004). According to Lovelock and Gummesson (2004), perishability is not a characteristic that separates all services from all products. This claim is too general and therefore needs significant qualification, because it is “a multidimensional concept encompassing productive capacity, the producer’s output, the performance experienced by customers, and the output they obtain from the service” (Lovelock and Gummesson, 2004). In both manufacturing and service businesses the productive capacity is perishable, and therefore wasted if not used. Manufacturing businesses can make use of post-production inventory, to use as a buffer between production and fluctuations in demand, but this inventory also has its costs. Lovelock and Gummesson (2004) argue that services can indeed have perishable capacity , but this is only the case for service industries “in which demand is subject to wide fluctuations”. Service providers in the information-based industry are an important exception to the generalization that all services are
perishable, because of the possibility of recording activities on storage goods for later reuse or sale (Lovelock and Gummesson, 2004). Therefore the claim that all services are perishable is incorrect.
It appears that there are strong arguments why products and service are not as different as previously suggested. These arguments show that is incorrect to claim that the 4
characteristics, which are considered as differentiating products and services, do indeed uniquely separate products from services. Every product has a service aspect, and every service has a product aspect. Apart from the claim that it is incorrect that intangibility, inseparability, heterogeneity, and perishability do uniquely separate products from services; it is also questionable whether these distinctions are desirable. Both goods and services render service, and therefore service is the common denominator in exchange, instead of some special form of exchange. Rather than differentiating products from services, it could be more desirable to emphasize how they are related.
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Table 3 gives a summary of the different approaches to the relationship between products and services.
Characteristic Old approach of service attribute
New approach of service attribute Intangibility Lacking the palpable or tactile
quality of goods
Difference between mental and physical intangibility
Mental tangibility: many services involve tangible performance activities, that users experience during delivery through one or more of their 5 senses.
Physical tangibility: many services offer tangible output.
Heterogeneity The relative inability to standardize the output of services in comparison with goods
-The perceived opinion of the customer makes a product just as heterogeneous as a service. -Heterogeneity appears to be an inherent characteristic of labor-intensive service, but this claim cannot be made for machine-intensive service operations. Service providers increasingly try to achieve standardization, and improve productivity, by replacing labor in the service sector for atomization.
Inseparability (of production and
consumption)
The simultaneous nature of service production and consumption compared with the sequential nature of production, purchase, and consumption, that
characterizes physical products
-Consumer involvement, to some degree, is always necessary for the production of tangible goods, since consumers have to adapt them to their own individual needs.
-There are types of services that are provided without direct customer involvement; so called separable services. Moreover, the benefit
experienced by the customer can sometimes only take place after the service is executed.
-Consumption of benefits can take place before production of the service.
Perishability The relative inability to inventory services as compared to goods
-Products are also perishable, since products can become rusty, become inoperative, or can rot. -Services are stored in systems, buildings, machines, knowledge, and people.
-Although service performances are commonly transient experiences, this does not imply that the output of a service is perishable.
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4. What are the key market factors for a service provider
that operates in the public lighting industry?
4.1 Definition of the street lighting sector in public areas
Street lighting includes all street lighting in public areas in the Netherlands.2 Street lighting is a segment of the public lighting market. Mainly the Department of Waterways and Public Works (Rijkswaterstaat), and the Dutch municipalities determine the size of the market of public lighting. Other organizations which play, to a lesser extent, a role in this market, are the provinces and some Dutch Water Boards (Waterschappen). More than 95 percent of the public lighting is managed by governmental institutions. Other players on the market of public lighting are airports, harbors, and housing cooperatives. The construction, and the administration and maintenance of public lighting, are mainly outsourced to independent constructors and installation companies. A municipality has full autonomy in its selection of a service provider of street lights. For the selection of a service provider, a municipality commonly offers tenders.
4.2 Functions of street lighting in public areas
Street lighting supports the use of, and degree of experience, of public areas when natural day light is (partly) lacking.3 A street light consists of a lamp post, an armature, and a light. A street light is connected to cables for energy supply. The main function of street lighting concerns creating safety for society and traffic. Another function of street lighting concerns creating atmospheric lighting.
Society has to feel safe and secure when making use of public areas. To a certain degree, this feeling is determined by the perception of overview within the area, created by street lighting. This implies that other people and objects within the area have to be recognizable. Street lighting also supports the safety of traffic by creating a clear overview of the activities and objects around roads. All traffic participants (motor vehicles, cyclists, pedestrians, etc.) should be able to move safely on roads. Because these traffic participants all have their own place on the road, street lighting has to be installed in such a way that it gives all traffic clear overview, so that these participants are recognizable, and are able to make proper decisions. The last function of street lighting concerns creating atmospheric lighting. Because society experiences a public area differently at night, public lighting can be used for aesthetics. A shopping district, a fountain, a monument, and so on, could be lighted with colors, to give the area the desired appearance. It can also be used to create orientation points for people, and in this case in is not necessary to direct light to the streets. Atmospheric lighting has to increase the perception of spatial quality.
2 Criteria voor duurzaam inkopen van openbare verlichting (OVL) 3
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4.3 Key factors of the street lighting market
Corporate Social Responsibility (CSR) is an important issue in many industries nowadays. Sustainability is a key issue in the policy of municipalities that involves CSR.4 The Ministry of Infrastructure and the Environment (Ministerie van Infrastructuur en Milieu) advises
municipalities with criteria, which can be used in their policy for street lighting. These criteria are not regulations, but instead, advises for municipalities. With this policy a municipality determines the criteria for the street lighting in its area. The Dutch government wants to achieve a more sustainable environment, and therefore advises municipalities with criteria for sustainability. Municipalities have, within government regulations, autonomy in their realization of the street lighting policy. In its policy, a municipality has set goals concerning the achievement of sustainability for street lighting. To achieve these goals municipalities developed sustainability criteria for the products and services that they buy. These criteria are obligations and preferences that a service provider of street lighting has to take into account. Therefore the criteria of the municipalities offer, next to regulations, also opportunities for a service provider of street lighting. With these opportunities a service provider of street lighting can differentiate itself in the market.
In its consideration about the implementation of sustainability, a municipality does not only have environmental motives. It also takes economical motives into account. With
sustainable street lighting, a municipality can decrease expenditures on energy costs. Another issue on the street lighting market, that concerns CSR, is social return. Social return has the goal to reintegrate people in the labor market, who are unemployed, and make use of the Dutch welfare system. In its policy a municipality can obligate a services provider of street lighting, that is outsourced by this local government, to implement social return in the activities that it executes for the municipality. Social return has multiple benefits. One benefit of social return is that a municipality takes people out of the welfare system, and reintegrates them into the labor market. Since the costs of the welfare system have to be paid by the municipality, it can decrease expenditures on welfare when a person
reintegrates in the labor market.5 A service provider of street lighting can educate these people for maintenance activities, so that they can work for the company for the period of projects (temporary contract) or, when possible, offer them a fixed contract at the company. When these people get a temporary contract, and therefore do not stay at this company, they are at least enriched with training and experience, which makes it easier for them to participate on the labor market. Therefore social return can be beneficial for the
municipality, the service provider in street lighting, and the unemployed to whom is offered a job.
Another key issue is on the street lighting market is customer unburdening.6 Customer unburdening is a term used for taking over tasks from a customer. The customers of a service provider of street lighting are mainly municipalities. These municipalities are shortened in their budgets because of governmental cuts, and therefore have to execute their tasks with less budget. Municipalities want to outsource more tasks, to be able to cut on assets and loan, to decrease expenditures. Another reason why municipalities want to be unburdened of tasks is the increasing technical complexity of street lighting. Street lighting
4 Criteria voor duurzaam inkopen van openbare verlichting (OVL) / Interviews Ziut 5 www.rechtopbijstand.nl
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involves an increasing degree of automation and technical knowledge. Complexity of products on the market is increasing, and with that the knowledge that is necessary for maintenance of these products. An example of this increasing complexity is LED (Light-emitting diode) lighting which replaces the conventional lights, and will become the
standard for street lighting in the future. The armature of LED is more complicated to repair, compared to the conventional lights, and therefore it requires more knowledge. Also, street lighting nowadays is able to automatically reduce light by dimming, or to switch off. Because of these market developments, more technical knowledge for maintenance and installation is required.
Because of the technological complexity, it takes more time and training of personnel to keep ahead of the latest developments on the market. This requires extra costs for municipalities. The increasing complexity of street lighting also makes it more difficult for customers to make a proper consideration out of the products to choose from. By
outsourcing tasks to a service provider of street lighting, a municipality can decrease expenditures on assets, loan, and training. Also, a municipality can acquire information for maintenance and product choice, by gaining advise of a service provider of street lighting.
4.4 Key developments on the street lighting market
The use of public areas depends on the time of day. Also among different areas within a municipality, the public intensity fluctuates. At night time, residential areas require more street lighting than industrial areas. Also, a shopping district requires more street lighting in the evening than at night time, when the shops are closed. When the use of public areas within a municipality is less intense, it is possible that the areas require less street lighting. It is possible to dim street lighting. By reducing the radiated amount of light, the use of energy, energy costs, and maintenance costs decrease. In most areas within a municipality, street lighting has to increase the perception of social safety. But the presence of street lighting does not imply that a public area is really safe, because safety also requires some form of social control. When social control is lacking, a municipality can choose to switch off street lighting within an area to discourage the presence in that area, and offer alternative routes, which can be considered as more safe. For example, the use of a road through a park can be discouraged at night, by switching off the lights and offering alternative roads through urban areas, which are lighted properly. For traffic participants, street lighting is necessary for being able to gather the required information in the area in case sufficient daylight is lacking. Therefore, the intensity of traffic is an important factor in the decision making process for dimming.
Another energy reduction solution is LED. Many municipalities are currently experimenting with energy saving LED lighting. LED is the abbreviation of Light Emitting Diode. It is
estimated that LED can reduce energy by 50 to 60 percent over a 20 years period. Based on the success of these pilot projects within several municipalities and the developments on the market, LED will probably become the market standard of street lighting in the near future. A growing amount of municipalities requires LED, and this light source is increasingly used on a larger scale within public areas.
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4.5 Administration and maintenance of street lighting
Administration of street lighting concerns the organizational operations which involve the installation and maintenance of street lighting.7 The main activities of administration are registration of street lighting, and scheduling of maintenance activities. Registration of street lighting (lamp posts) is required in order to give municipalities a correct overview of the amount, and locations of lamp posts. This increases efficient maintenance and replacement of street lighting. For maintenance activities, when lamp posts have to be replaced or installed at another location, it is desirable that these operations are adjusted to maintenance activities of streets or underground cables. This enhances effective and efficient maintenance at the lowest costs, and least possible disturbance for the area. Maintenance activities can be divided into 3 categories: pre-emptive, comprehensive, and corrective maintenance.8 Pre-emptive maintenance concerns activities to increase the life span of lamp posts and prevention of street light malfunction. Examples of these activities are repainting of lamp posts, cleaning of armatures, and group substitution of lights. Group substitution of street lighting is a method used to replace lights in groups in a determined area, at a consecutive period of time. This activity has to be executed when the life expectancy of the light, determined by the manufacturer, is reached. Group substitution decreases labor costs, because of less individual replacement, which requires service
personnel to drive to the location, and the quality of street lighting will be improved because of less malfunction of street lights. This can prevent high maintenance costs and unsafe situations. Lamp posts and armatures have to be replaced when the life expectancy,
determined by the manufacturer, is reached. Then comprehensive maintenance is required. Lamp posts and armatures have a life expectancy of respectively 40 and 20 years. After this period, the possibility of malfunction of, or damage to these objects increases, which can cause unsafe situations for the area. The quality of light decreases, because armatures become less translucent, and lamp posts can fall down. Like pre-emptive maintenance; comprehensive maintenance can prevent unsafe situations and high maintenance cost. Corrective maintenance has several causes. When comprehensive maintenance is not sufficiently executed, then in arrears maintenance activities occur. In arrears maintenance activities concern material that already had to be replaced because of its condition or life expectancy. Other corrective maintenance activities can be required because of light malfunction, damage caused by traffic, or vandalism. Corrective maintenance is important for prevention of unsafe situations, and high energy and maintenance costs.
7 Ziut, Onderhoud (Productinformatie) / Interviews Ziut 8
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5. What is portfolio management?
5.1 Portfolio management
Portfolio management for new product development is considered as critical for new product success. Introducing new products on the market is essential for the competitive position and long-term survival of a company (Cooper, 1998). Cooper et. al. (2001) describe portfolio management for product innovation – picking the right set of development projects - as the manifestation of a business’s strategy, that determines where and how a company should invest for the future. According to Cooper et. al. (2001), “Portfolio management is a dynamic decision process, whereby a business’s list of active new product (and 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 de-prioritized; and resources are allocated and re-allocated to the active projects. The portfolio decision process is characterized by uncertain and changing information, dynamic opportunities, multiple goals and strategic considerations, interdependence among projects, and multiple decision-makers and locations”. The authors hereby support the definition of Cooper et. al. (1999).
Also Cooper et. al. (1999) and Cooper and Kleinschmidt (2007) argue that effective portfolio management is vital to successful product innovation. These authors argue that portfolio management is about making strategic choices, resource allocation, focusing on project selection, and creating a balance. According to Cooper et. al. (2004), with portfolio management each new project has to be considered as an investment, and portfolio
management techniques have to be applied for investing in the right projects. The key issues of portfolio management include the selection and prioritization of high-value projects (and killing poor projects), ensuring that there is the right balance and mix of projects in the portfolio, and balancing the limited amount of available resources against the demand to do even more projects.
According to Urli and Terrien (2010), portfolio management is important because it ensures that efforts are allocated to the best projects, it ensures that the new project supports the business strategy, and it ensures that resources are allocated to the right projects. Cooper et. al. (1999) argue that the key issue of portfolio management is to allocate resources to achieve the new product and technology objectives of the business. Portfolio management and selecting the right projects is critical to maintaining the competitive position of the business. Other critical reasons for portfolio management are having efficient resource allocation, creating a link between the business’s strategy and project selection, and achieving a focus for picking the right projects. Cooper et. al. (2001) confirm these critical issues, on which will be elaborated further in this chapter.
According to Cooper et. al. (2001), the 3 most important reasons for companies to use portfolio management are financial reasons (to maximize return, to maximize R&D
productivity, to achieve financial goals), maintaining the competitive position of the market, and proper and effective allocation of scarce resources. These authors state that the
