Shaping for profitable growth

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PUBLIC VERSION

Shaping for profitable growth

by

“Creating the breakthrough in

innovation portfolio management”

at

Philips Lighting

BU Luminaires Indoor Europe

Author: N.S. Scherling

Email: n.s.scherling@student.rug.nl / niels.scherling@philips.com

Supervisor University: W.G. Biemans

Faculty: Economics & business

Department: Innovation management & strategy

Second supervisor University: D.J. Kiewiet

Faculty: Economics & business

Department: Innovation management & strategy

Supervisor Philips: J. Rijswijk

Division: Philips Lighting

Department: BU Luminaires Indoor Europe Product Marketing

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Executive summary

This report is the documentation of a graduation assignment on ‘innovation portfolio management’ at Philips Lighting, Business Group Luminaires. An innovation portfolio includes all activities in product innovation between initiation of the idea and market launch. The focus in this assignment is on the business unit Luminaires Indoor on both marketing and R&D departments.

Innovation portfolio management aims at maximising profitable growth by optimising innovation performance. The goal is to optimise the innovation portfolio on 4 elements; innovation portfolio value, strategic alignment, balance, and resourcing.

The research objective is to create an improvement plan that will bring the BU Luminaires from immature to mature in innovation portfolio management practices. The business case proved that this so-called ‘breakthrough improvement’ is expected to lead to a drastic increase in innovation performance. The most important data collection methods are 54 semi-structured interviews with organisational stakeholders, a thorough literature review, and desk research.

The ‘ideal state’ of innovation portfolio management is drawn upon the literature framework presented in chapter 3. Key characteristics of the ideal state are an innovation funnel, focus on the ‘front-end’ of the new product development process and structured innovation portfolio reviews. Fewer, but bigger and better launches, a reliable & efficient process and high margins together leading to increased innovation performance and thereby contribute to profitable growth.

In chapter 4,

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These 5 improvements are incorporated in the improvement plan presented in chapter 5. The complete innovation-to-market process (ITM) has been revised to serve as a framework for improvements. To improve innovation portfolio management activities, new and revised sub-processes have been identified. A consolidation of all organisational strategies is added to enable the organisation to manage strategic alignment of the innovation portfolio. Central resource management and innovation portfolio analysis aim at optimally preparing decision-making in the innovation portfolio review. This innovation portfolio review has been structured and supported with powerful tools, techniques and methods to arrive at the optimal programming decisions. Milestones and phases prior to product development have been proposed to increase the focus on and quality of execution of activities before project start. This was done to assure that the right data in the right time is delivered as input for the innovation portfolio review.

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“Vision 2010” creates a mindset for all of us in which the customer is at the center of everything we do. I call this an alignment because from now on the way we offer our products and services will precisely match our strategic intentions. So everything we make and do now falls within the spaces we most want to be in –

and is aligned with the needs of our customer base.

Gerard Kleisterlee

President & CEO Philips

September 10

th

**_{, 2007*}**

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Preface

This report is the documentation of my graduation assignment of my master Business Development of the University of Groningen. I always desired to finalize my master studies by doing a graduation assignment at Philips, since Philips is absolutely the national and in the international top in the field of business development. The BU Luminaires Indoor luckily gave me this opportunity and offered me the assignment on ‘innovation portfolio management’ at the Philips Lighting headquarter in Eindhoven.

The first months of the assignment were extremely explorative, educative and interesting. The analysis of the current and ideal situation in innovation processes was the main goal of the first months. The last months had a more challenging character, since the final design of the improvement plan was created, presented, discussed and finalised.

What I have found particularly challenging is the complexity resulting from this assignment type. Since two parties are involved – Philips and the University of Groningen – this report serves two purposes. On the one hand, this is contribution to improvements in organisational performance. On the other, this is to be original and thereby make a contribution to the scientific literature. I hope both parties will agree that both purposes have been fulfilled and agree that the two purposes did not affect each other in a negative way.

My word of thanks goes out to all the people that have invested their time and effort in me, which all valuably contributed to this final report. I have constantly been positively surprised about the friendliness and openness of all Philips employees. Despite in another business group, product division or country, everywhere I have received the same warm welcome.

Several persons I would like to thank in particular. First of all to I would like to thank Jeroen Rijswijk, my supervisor at Philips and senior product marketing manager for the BU Luminaires Indoor. He paved the way to the final improvement proposal by setting direction, sharing his experiences and critically reviewing my initial proposals.

Secondly, I would like to thank Wim Biemans, my supervisor from the RijksUniversiteit Groningen. He helped me in structuring the report, assuring that also scientific elements were not overlooked, and the report became more readable for people outside Philips or unfamiliar with the unavoidable company-language.

My third word of thanks goes out to Marcel van Hugten, global technology officer of the BG Lumimaires. By sharing the office with Jeroen and me, he luckily also shared his many years of experience. To all my questions, he provided me his insights and explanations or brought me in contact with the right people in the organisation.

Finally, I would like to thank Allart Beumer, process improvement manager at the BG Luminaires, aimed at improving the product development process. His insights and thorough work in analysing and developing the so-called PRIP of the BG Luminaires have been important building blocks in this report.

If reading this report raises any questions from your side, please feel free to contact me any time at n.s.scherling@student.rug.nl / niels.scherling@philips.com

Niels Scherling,

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List of abbreviations

AOP Annual Operating Plan Finished each year in October

BEST Business Excellence through Speed Improvement teams Business Excellence

& Teamwork

BG Business Group Lighting is divided into 7 business groups

BU Business Unit Luminaires is divided into 3 business units

CEO Chief Executive Officer Head of the BG Luminaires

CFO Chief Financial Officer Financial head of the BG Luminaires

CMO Chief Marketing Officer Marketing head of the BG Luminaires

CPO Chief Purchasing Officer Purchasing head of the BG Luminaires

CSU Country Sales Unit Local marketing & sales offices

EPMM European Product Marketing Manager

FD Factory Development Site where industrialisation and maintenance is done

FPM Factory Product Manager

FYS First Year Sales Amount of sales of a new product in 1st year

HRM Human Resource Management

IC Innovation Centre Site where pre- and concept development of

new products is done (Miribel & Winterswijk)

IKAM International Key Account Management

IPSC Industrial Production & Supply Centre Also referred to as ‘factory’

ITM Innovation-To-Market The ITM-process is the innovation process of the BG Luminaires

KPI Key performance indicator

LiDAC Lighting Design and Application Centre Located both in Eindhoven and CSU’s

MarCom Marketing Communications Group in BG Luminaires

MS Milestone The gates in the PRIP

MT Management Team MT of the BG Luminaires (CEO, CFO, HRM,

Strategy & Business Excellence Manager, CPO, CMO, Sales Manager & Supply Chain Manager)

NPV Net Present Value Discounted cash flow technique to determine

project value

ODM Original Design Manufacturer External development of a product

OEM Original Equipment Manufacturer External purchase end-product to sell as ‘own’ product

PCS Portfolio Characterization System The Lighting portfolio management tool

PD Product Division (per 01-2008; ‘cluster’) Philips is divided into 4 product divisions

PRIP Product Realisation & Introduction The product development process

Process

PSG Purchase Supply Group

R&D Research & Development

SPMM Senior Product Marketing Manager

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Chapter 1: Introduction

As the title of this report already gave away, the purpose of the assignment is to create a breakthrough improvement in the innovation portfolio management practices of the BU Luminaires Indoor. This introduction aims at narrowing down this ‘vague’ purpose. The following subjects will be introduced; the Philips organisation, the BU Luminaires Indoor and related departments, and an introduction of the key terms used in this report. A short introduction of innovation portfolio management is given as basis for the next chapter. In this next chapter, the assignment description and research design will be introduced.

§1.1: Introduction of Royal Philips N.V.

In 1892, the fundaments of Royal Philips N.V. (hereafter: Philips) were laid when Gerard Philips started a manufacturing company producing light bulbs in Eindhoven, financed by his father Frederik Philips. After struggling in the first years, Gerard soon realized that he needed to employ personnel, of which one of the first was a technologist. Philips soon became known as a true technology leader in the lamp-industry in the early 20th_century.

Nowadays, Philips is Europe’s largest – and one of the world’s largest – electronics producers, leaded by CEO Gerard Kleisterlee. Philips is headquartered in Amsterdam. Targeted ‘segments’ are healthcare, lifestyle, and technology. The global brand promise is ‘sense and simplicity’. Philips is active in more than 60 market segments with products as TV’s, audio equipment, household machines, shaving machines, coffee machines, lamps, lighting solutions, LED-technology, and several medical systems (e.g. X-ray scanners, MR-scanners and defibrillators). 80000 Patents illustrate the innovative nature of the company for which it is known around the world.

Philips is divided into 4 product divisions; Lighting, Domestic Appliances & Personal care (DAP), Consumer Electronics, and Medical Systems. Per January 1st_{, DAP and Consumer Electronics are}

merged into 1 sector; Consumer Lifestyle. Figure 1.1 shows the key figures at year-end 2006.

The product division Lighting is divided into 7 business groups (BG’s). These are, in decreasing order of total sales; Lamps, Luminaires, Automotive, Special Lighting Applications, Lighting Electronics, Lumileds, and the BU SSL. The total sales of the BG Luminaires in 2006 were 930 Million Euro’s (17% of the product division Lighting), of which 703 Million Euro’s were established in Europe. All the relevant organisation charts can be found in appendix A.

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§1.2: Introduction of the BU Luminaires Indoor

The product marketing division of the BG Luminaires is divided into three business units (BU’s); Indoor, Outdoor and SSL (LED-technology). Several products of each of these business units are shown in figure 1.2. The assignment is carried out for the BU Luminaires Europe Product Marketing Indoor (hereafter: BU Luminaires Indoor). The principal of the assignment is the senior product marketing manager of the BU Luminaires Indoor.

The BU Luminaires indoor currently consists out of 6 (what will become 9) European product marketing managers (EPMM) and 6 factory product managers (FPM), which are reporting to the senior product marketing manager (SPMM). Three product groups are identified; architectural, functional and industrial. Total sales in 2006 equalled 376 Million Euros.

The responsibility of product marketing is managing the current product portfolio and inspiring, preparing and managing new product innovations. The EPMM’s have an initiating role in product innovation and are the commercial project leaders in new product development projects. The FPM’s are responsible for life cycle management of products after completion of their development phase. Please see the function profiles in appendix A for details on both functions.

FIGURE 1.2: Examples of Luminaires indoor and outdoor.

The BU Luminaires Indoor operates solely in a business-to-business market. Figure 1.3 depicts the target groups and marketing clusters. An important distinction is made between project- and trade business. The main difference is that in the trade business the buyer is unknown, while in the project business the buyer is known. The project business aims at selling complete tailor-made lighting solutions. One product range therefore can have up to 1 million variations. ‘Easy to…’ is the main value driver of the trade business, which is mainly aimed at wholesalers, installers, and Do-It-Yourself stores. Innovation, design and performance are main value drivers for the project business, where complete lighting solutions are sought rather than single products.

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CONFIDENTIAL

FIGURE 1.3: Positioning grid of the BU Luminaires Indoor (source: Rijswijk, 2007).

§1.3: Introduction of related departments

The functional departments involved in the innovation process – and thereby in the scope of this assignment – will be briefly introduced in these paragraphs. The departments are segment marketing, R&D, LiDAC, and Country Sales Units.

Segment marketing is divided into indoor and outdoor. The indoor segments are shops, offices, industry, healthcare, and hotels. Segments cut across product groups. The portfolio of the office segment, for instance, consists out of products from architectural, functional, and industrial indoor, but also outdoor products. A segment marketing manager is responsible for driving his/her segment towards profitable growth, while contributing to the overall Luminaires strategy ad business plan process (source: de Winter, 2001). An important input from segment marketing to product marketing is the segment-driven insights. Propositions for concepts and new products are collectively developed with product marketing. A relatively new function in Philips Lighting is global strategic segment marketing, which aims at creating Lighting-wide solutions. Their strategic plans have a typically longer time horizon (3 years and further). The aim is at identifying attractive (sub) segments and needs-opportunities (source: Update shape marketing re-design, 2007).

R&D consists out of Innovation Centres and Factory Development. The two innovation centres

(IC’s) are Winterswijk and Miribel. At these sites, the core competencies for product development are located. Pre-development and concept development of new products is done in the IC’s. Factory Development is responsible for industrialisation and portfolio maintenance.

LiDAC is the abbreviation of Lighting Design and Application Centre. LiDAC has four activities; projects (40%), innovation (20%), marketing (20%), and training (20%). Each country has a LiDAC. The LiDAC at the headquarters in Eindhoven supports countries with complex projects and serves as an innovative partner for product marketing. Design and application concepts serve as important input for new product development.

CSU stands for Country Sales Unit. Each larger country or group of smaller countries has a CSU.

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§1.4: Further introduction of key terms

Seven terms that will be often used in this report are briefly defined in this introduction. Note that a list of abbreviations can be found in the beginning of this report.

PRIP stands for Product Realisation and Introduction Process. It is the stage-gate model of the BG Luminaires. Gates are named milestones and stages are called phases. PRIP is one of the five sub-processes of the ITM-process. Chapter 4 will go into further detail on the PRIP-process.

ITM process stands for Innovation To Market process. It is the complete process – including PRIP – in which innovations are evolving into products. Chapter 4 will go into further detail.

Projects are product development projects that are between milestone 0 (=MS0: project start) and

milestone 2 (product launch). A project can be active, on hold or stopped.

Potential projects are ‘not-started’ product development projects before MS0. This can be rough product ideas or developed propositions. A proposition is a marketing proposal for a new product, including customer insights, marketing requirement specifications and unique selling points.

Prioritisation aims at sorting projects on urgency and attractiveness. It precedes project

programming, at which resources are allocated to the projects with the highest urgency and attractiveness.

Roadmapping is a technique that focuses on forecasting and planning technology, market and

product developments. Product roadmapping is preceding programming decisions and also includes ‘whished’ products.

Programming is the activity in which resources are allocated to (potential) projects and where

commitments are given to a certain project planning and target launch dates. Usually it involves multiple projects at one decision moment.

§1.5: Introduction to Innovation Portfolio Management

A portfolio is a collective term for a group of equal entities. Management of a portfolio is done in many contexts; new product development, product sales, business strategy & planning, information technology, investment, and even real estate. Due to its wide applicability, the term ‘portfolio management’ causes a lot of confusion. In both literature and the business world, a sharp definition of the context is often lacking. Figure 1.4 shows the context and scope of the subject of this report; innovation portfolio management. The blue diamonds are the ‘milestones’ (abbreviated as MS) in the product development process, at which a decision is made whether a project is allowed to enter a succeeding phase. Three portfolios are recognised; the pre-MS0, the project, and the product portfolio. The innovation portfolio includes the pre-MS0 and the project portfolio. The point MS0 is chosen as separation point of the two portfolios since MS0 (milestone 0) is the ‘project start’ milestone. As figure 1.4 shows, the product portfolio is not in scope of this assignment.

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Cooper, Edgett & Kleinschmidt (2001) best define innovation portfolio management, as what they call ‘new product portfolio management’;

“New product portfolio management is a dynamic decision process wherein the list of active new products and R&D

projects is constantly revised. In this process, new projects are evaluated, selected and prioritised. Existing projects may be accelerated, killed, or deprioritised and resources are allocated and reallocated to 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 ultimate goal of innovation portfolio management is to increase innovation performance and thereby contribute to profitable growth. Patterson (2005) calls this ‘growth for the enterprise’ (in profits & revenue) and ‘increase competitive position of the firm’. Cooper et al. (2001) call this “generating the most bang for the buck”.

Figure 1.5 shows how each portfolio will contribute in sales and margin in time. Innovation portfolio management aims at optimally shaping the blue and orange fields to assure that both ‘portfolios’ are optimally contributing to profitable growth in the future. The time horizon, shown in figure 1.5 shows that the organisation in 10 years is fully dependent upon the sales of the pre-MS0 portfolio, which currently includes only rough new product ideas.

Profitable Growth!

FIGURE 1.5: The 3 portfolios and their contribution in turnover and margin over time. Innovation portfolio management aims at shaping the blue and orange fields to maximise profitable growth. The objectives of innovation portfolio management, next to maximising profitable growth, are;

• Maximization of portfolio value; creating a maximum value portfolio, not necessarily on forecasted financial value;

• Strategic alignment of the portfolio; the portfolio of projects reflect the business strategy;

• Portfolio Balance; in for example long-term/short-term, high-risk/low-risk, market focus, technology focus, and project types;

• Portfolio Resourcing; full commitment of resources to the most attractive (future) projects.

‘Innovation portfolio management practices’ is a term that will be used in this report for all activities in

innovation portfolio management. These activities are grouped in ‘preparation’ (data generation, documentation & analysis) and ‘decision-making’ (roadmapping, prioritisation & programming).

Time (+/- 10 year horizon)

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Chapter 2: Research design

This chapter will present the research design along the research typology model of Verschuren & Doorewaard (1999). The model, displayed in figure 2.1, splits a research design into conceptual design and research technical design. The structure provided by this model will be used in this chapter, answering the questions ‘why’, ‘what’, ‘where’, ‘how’, ‘when’ and ‘how much’.

1. Research Design

2. Conceptual Design 3. Research Technical Design

Research Objective Research Questions Research Model Research Strategy Research Planning

Demarcation Data Sources

FIGURE 2.1: Research typology (adapted from: Verschuren & Doorewaard, 1999).

§2.1: Conceptual design

§2.1.1: Research objective

Setting a research objective starts with the construction of a problem statement, which will be presented below. Continuing on this problem statement, the business value of the proposed improvement direction should first be determined. A business case for improvements in innovation portfolio management is created to estimate the potential value of this assignment. The goal statement is derived from this problem statement and the business case.

Problem statement

The problem statement is based on several semi-structured interviews and 2 maturity assessments. The maturity assessments have been completed by the senior product marketing manager (SPMM), the chief marketing officer and the two innovation centre managers. The key organisational issues related to innovation portfolio management are;

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These problems can be captured in the following problem statement;

“The practices in innovation portfolio management at the BU Luminaires Indoor are currently between

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Business case

The problem statement clearly calls for improvements in innovation portfolio management practices. The question is whether this is the solution to the current problems. To assess the potential value of improvements in innovation portfolio management, this business case is built on empirical studies. These empirical studies focus on the link of innovation portfolio management practices and innovation performance. In general, the empirical studies prove that both are positively linked. Best performers in innovation portfolio management are therefore expected to have above-average business results. The most often cited and most acknowledged experts in these types of studies are Cooper, Edgett and Kleinschmidt (1985-present). These authors made the distinction between best, average, and worst performing organisations, based on innovation performance. The authors studied the differences between the groups in innovation practices. Figure 2.2 shows an example of the results from these studies. What can be seen here is that best performers outperform all other organisations significantly on all six key portfolio metrics. Improvements in innovation portfolio management practices – which lead to better scores on the key portfolio metrics – are therefore expected to result in increased innovation performance.

FIGURE 2.2: Portfolio metric results found in empirical studies. Characterisation best/average/ worst performer based on innovation performance. (Adapted from: Cooper et al. 2001).

Cooper et al. (2001) conclude that portfolio management is about doing the right projects, at the right time,

with the right resources. Strategic alignment, balance, and optimal value are the main goals of portfolio management.

The authors found in their empirical studies that no portfolio management typically leads to; • Many low value projects;

• Higher project failure rates; • An increased time to market;

• No strategic focus: a “scatter-gun effort”;

• Lower quality of execution due to resource spreading; • Poor projects are not killed but take on a life of their own.

The Centre for Business Practices (2003) developed a business case for portfolio management, based on research and consultancy experience, in which she states that;

• Innovation portfolio management can tackle 5 of the top-10 factors leading to project failure; unrealistic expectations, unclear requirements, lack of resources, no governance, and a weak project team. The complete list of top-10 factors is incorporated in appendix B; • Innovation portfolio management proved to result in; up to 60% of reduction in lead-time,

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Finally, the Aberdeen Group (2006) presented very positive benefits of effectively managing the innovation portfolio;

• The quality of innovation portfolio management practices is a big determinant of product development performance (achieving targets);

• Best practice companies (in portfolio management) are 4 times more likely than all other companies to achieve 75% or higher margins on new products;

• Innovation portfolio management clearly leads to a competitive advantage.

The three sources above prove the tight link between innovation portfolio management and business results. The absolute value of improvements in innovation portfolio management (in Euros or Dollars) is hard to determine and is not empirically proven. The following aspects should assist in estimating the absolute value of improvements;

• The prevented investments in minor, low value projects; • Better utilisation of scarce resources;

• Decreased costs of rework due to better preparation of projects;

• Earlier/higher sales and customer satisfaction due to increase of launch successes; • Increased strategic focus on growth areas with high margin potential.

Research objective

The business case clearly stated that improvements in innovation portfolio management are expected to address most of the problems stated in the problem statement. Moreover, the business case proves that making improvements in innovation portfolio management practices can drastically increase innovation performance. Therefore, the research objective is;

“Develop a breakthrough improvement plan that will bring the BU Luminaires Indoor from a immature performer to a mature performer in innovation portfolio management practices.”

§2.1.2: Research questions

Main research question

The problem statement revealed that the current innovation portfolio management practices are between weak and average or immature. The business case proved the urgency and value of improving to a mature level. This main research question covers the research objective;

“How can the breakthrough improvement be made that will bring the BU Luminaires Indoor from an immature performer to a mature performer in innovation portfolio management practices?”

Sub research questions

The word ‘immature’ in the main research question is based on several semi-structured interviews and 2 maturity assessments. In order to determine the direction of improvements, a literature framework should be created to identify an ‘ideal state’. The accompanying research question is;

1. In what way should innovation portfolio management ideally be organised and executed and to what results is this expected to lead?

First, an analysis of the performance of current innovation processes should be made. Hereafter, the scope can be lowered to focus on innovation portfolio management practices, for which maturity assessments are used. The following sub-research questions need to be answered;

2. What are the key issues and their root-causes in the innovation processes of the BU Luminaires Indoor?

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The root-causes and maturity assessment should be compared with the ‘ideal’ state to assess where the gaps are between the current and the ideal state. These gaps are each an improvement opportunity, which are most likely not all equally urgent. Therefore, the most urgent improvement opportunities are selected. The feasibility of implementation of the improvement steps to exploit these improvement opportunities should also play a role in selection. The accompanying sub-research questions are;

4. What are the most urgent improvement opportunities in current innovation portfolio management practices?

5. Which combination of urgent improvement opportunities can collectively make the breakthrough improvement, but will also be feasible considering the current organisation? These identified improvement opportunities will have to be incorporated into a breakthrough improvement plan. This breakthrough improvement plan should bring the BU Luminaires Indoor from an immature performer in innovation portfolio management practices to a mature performer. Besides the breakthrough improvement, further improvements should also be identified to further optimise innovation performance. The accompanying sub-research questions are;

6. How can the identified improvement opportunities be exploited and thereby collectively make the breakthrough improvement in innovation portfolio management practices?

7. Which other improvements can be made to further optimise innovation portfolio management?

§2.1.3: Research model

The research model is depicted in figure 2.3. The yellow circles represent the sources of data, which are corporate documents, the organisation, employees, and scientific literature. The breakthrough improvement plan – which is the main deliverable of this assignment – is derived from comparing the current organisation with the ideal state. The differences (gaps) between the current and ideal state are the improvement opportunities. The current state is described by first comparing the intended with the actual way of working. This comparison is input to the root-cause analysis. The other input for the root-cause analysis is the issues and problems in innovation performance, innovation processes, and innovation portfolio management practices. By deeply analysing these issues and problems, the root-causes are identified, which serve as input for the description of the current state.

The comparison of the current and ideal state reveals the improvement opportunities. It is very likely that the improvement plan cannot contain all the improvement opportunities. A selection of the key improvement steps that is also feasible for implementation should be made. Important improvement opportunities out of scope and those not identified as key improvement opportunities are further discussed after the breakthrough improvement plan.

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Chapter 5 Chapter 6

Business Case

Description of the ‘current state’ of innovation performance and innovation

portfolio management

Breakthrough

Improvement plan

Further improvements

Description of the ‘ideal state’ of innovation portfolio management practices and

outcomes

Analysis deviations Root-cause analysis Description intended way of working* Description actual way of working* Identification issues / problems* Chapter 4 Immature Æ mature performance in innovation portfolio management Drastic increase in business results; ‘profitable growth’ Drastic increase in innovation performance

Figure 2.3: Research model (* = in innovation processes, including innovation portfolio management).

Scientific literature

Philips expertise

Gap analysis between ‘ideal state’ and ‘current state’

Identification of most urgent and feasible improvement opportunities

Employees (Interviews) Organisation (Desk research) Corporate documents Employees (Assessments) Chapter 3 §2.1.4: Demarcation

The assignment is carried out for the Business Unit Luminaires Europe Product Marketing Indoor, which is therefore in the main scope of this assignment. The scope therefore will not include the Business Units Outdoor and SSL. All departments involved at creating an optimal innovation portfolio are automatically in scope of the assignment. This includes Segment Marketing, R&D, LiDAC, Purchase Supply Group, Country Sales Units, and Marketing Communications.

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§2.2: Research technical design

§2.2.1: Data sources

The data used in this assignment is collected from multiple sources, as can be seen the research model in figure 2.3. The four data sources are; employees, the organisation, corporate documents, and scientific literature. Each data source is addressed with different data collection techniques, of which each will be discussed below.

Employees

The employees are by far the most important data source for this assignment. Yin (2003) strongly recommends using multiple data-sources to create data triangulation. Therefore, multiple sources of data were chosen to collect data from employees in order to increase data reliability.

Interviews are the most important data collection method of this assignment. Interviews focus on acquiring primary and mostly qualitative data. Primary data is data that not actually exists but is generated through the research process (Lancaster, 2005). This type of data is extremely important for this assignment, since secondary data in the form of charters, descriptions of the way of working or other corporate documents on this subject of research is scarce in the Business Group Luminaires. Emans (2002) recognises 2 forms of interviewing. First, structured interviewing is based on a pre-defined list of questions that is handled in the pre-defined order. Unstructured interviewing does not have pre-defined questions and no predefined order. Emans also acknowledges a mix of the two forms, called semi-structured interviewing. This technique predefines topics and requires that the interviewer creates and asks successive questions during the interview. In this research, the choice for semi-structured interviews is made for two reasons. First, because structured interviews are impossible since there are too many unknowns. The interviewee and the topic are not sufficiently known to be able to pre-define questions. Secondly, the successive questions enable the interviewer to focus on one specific topic, which thereby has much more potential for generating valuable information. 54 Semi-structured interviews with mainly Philips employees are the most important source of data. Interviewees were, among others;

• Senior product marketing managers; • European product marketing managers; • Factory product managers;

• Senior managers / executives;

• Innovation centre managers (Miribel & Winterswijk); • Factory development managers (Miribel & Winterswijk); • Country product managers (Ivry & Eindhoven);

• BG Luminaires groups; LiDAC, MarCom and Segment Marketing;

• Other business groups of Philips Lighting; Lamps, BU SLL, and Lighting Electronics • PD Lighting; Global strategic segment marketing and strategy & business planning; • Other divisions in Philips; Corporate strategy, DAP and CE;

Informal unstructured interviews form an important addition to these interviews. Especially the contacts with European product marketing managers and senior managers are important sources, which are addressed with informal unstructured interviews.

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complete maturity 3 assessments (2 maturity assessments for R&D employees). These maturity assessments aim at evaluating the maturity of innovation portfolio management practices. The maturity assessments are further detailed in the next chapter. Two employees were chosen from marketing and two from R&D. Two additional senior product managers were asked to complete the assessments with the focus on their Business Unit. Although out of scope of the assignment, this was done to enable comparison between business units. Due to insufficient response, these were not incorporated in the assignment.

Organisation

As can be seen in figure 2.3, the organisation is mainly studied by desk research. ‘The organisation’ hereby is defined as the actual way of working of the stakeholders in innovation portfolio management. It could therefore also be called organisational behaviour. Desk research was chosen as main data collection method. Observation of the use of the organisational data documentation tools (organisational documentation tools and digital teamrooms), meeting documents, strategic plans, and the relevant intranet sites aims at creating a general overview of the current way of working. The observations thereby form a good preparation for more in-depth interviews.

Corporate documents

Company documents were subtracted from the Philips intranet, collected from Philips employees, downloaded from local electronic databases and teamrooms or received in the conventional paper format. Especially documents containing process charters, templates, manuals for corporate tools, and presentations were carefully studied. Especially presentations (powerpoint files) form an important input as corporate documents, since this is the preferred format to communicate initiatives for process changes and improvement projects.

Scientific literature

Scientific literature will be used in two occasions. First, a literature framework will be created, in which the scientific literature related to innovation portfolio management is presented. The work of dr. R.G. Cooper – the absolute guru in the field – will inevitably be influential in this literature framework. The second occasion at which scientific literature is used is by creating the improvement plan. The literature framework will serve as basis, while the improvement plan will use more in-depth literature reviews to arrive at the improvement proposals.

Electronic databases as ElsevierDirect, Business Source Premier, and Synergy Blackwell Current will be used to find and collect articles in academic journals. As source of other research, the PDMA toolbooks and handbooks are important. Also published books of experts in the field are important. Care is taken with these books since the scientific level in general is not as high as in articles of academic journals.

Other forms of literature are benchmark and workgroup reports (e.g. Aberdeen Benchmark, 2006, EIRMA working group report, 2002), and white papers from consultants and software developers (e.g. white papers Cooper, Edgett, and Kleinschmidt at stage-gate.com).

§2.2.2: Research strategy

Verschuren & Doorewaard define research strategy as the collective mutually dependent decisions on the form of execution of the research (2002). Several research typologies will be discussed. De Leeuw (2000) recognises ‘problem-focused research’. This assignment starts with a problem, which is the sub-optimal innovation performance of the BU Luminaires Indoor. The analysis is focused on creating an in-depth understanding of the problem to develop an improvement plan and solve the problem. This research can be classified as problem-focused research.

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Doorewaard, 1999). This research is a single-case study, unavoidable by the predefined scope of the assignment. External validity is not fully assured in this research design since it is not the main objective of this assignment. External validity will be discussed in the reflection.

Jonker and Pennink (2000) identify scientific research and adapted research. Because of the problem-focused character of this research, the adapted research approach is chosen as research strategy. Adapted research starts with a problem, thereby generates research questions to gain an in-depth understanding of the problems. From this in-depth understanding, answers to the questions are generated by using methodology and theory.

A final choice that has to be made is between induction and deduction. Gill & Johnson (2002) discriminate between the two by looking at the role of theory. Where deduction starts with theory formulation and thereafter tests this in ‘reality’, induction starts with ‘reality’ and thereafter aims to create explanation and theories. Although external validity – and thereby also the construction of explanation and theories - will be sub-optimal due to the single-case study design of this research, induction will be the research method for this assignment. The so-called ideographic methods will be emphasised to create an explanation by understanding the problem-situation. Ethnography, which focuses on fieldwork to discover patterns of human activity and gain socially shared knowledge of the problems will be important in gaining an understanding of the current organisational issues.

§2.2.3: Research planning

The assignment for Philips Lighting was planned to last 5 months. However, due to the widened scope of the assignment, the decision was taken to extend the assignment by 1 month. One month has been planned to rewrite the improvement plan for Philips into this graduation thesis.

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Chapter 3: Literature framework

Addressed sub-question;

• “In what way should innovation portfolio management ideally be organised and executed and to what results

is this expected to lead?”

A literature framework is created here to establish an ‘ideal’ state of innovation portfolio management. This ideal state is mainly based on scientific literature, with support of white papers and research reports. Unavoidably, the work of dr. R.G. Cooper will be influential in this chapter. Robert G. Cooper is an absolute guru in the field of innovation management. Cooper is father of the stage-gate™ model, which is now applied in the majority of companies all over the world. With co-authors Scott J. Edgett and Elko J. Kleinschmidt he also is the most influential author in the field of portfolio management. Unavoidably, the foundation of this chapter and the improvement plan in the next chapter will substantially rely on the work of these three authors.

The view and proposals of an ‘ideal’ state of Philips expert teams will also be presented in this chapter. These should be incorporated in the design of the improvement plan and therefore in the framework drafted in this chapter. Obviously, these proposals are also based on scientific literature.

§3.1: Ideal state according to literature

This paragraph will start with describing the goals of innovation portfolio management and continue by describing the ideal process, the decision-making process, the ideal tools, methods & techniques, and the prerequisites for innovation portfolio management.

Goals of innovation portfolio management

Patterson (2005) recognises revenue & profit increases and improvement of the competitive position as ultimate goals of innovation portfolio management, while Cooper et al. (2001) call this ‘the most bang for the buck’. Translated into one term, the ultimate goal of innovation portfolio management is maximizing profitable growth by improving innovation performance. A short introduction to portfolio management was already given in the introduction of this report. To recap, the main goals of innovation portfolio management according to Cooper et al. (2001); optimising the innovation portfolio on value, strategic alignment, balance and resourcing.

Customer value is a key term in the new product development world. The shift from technology-driven to marketing-technology-driven product development in the 1990’s made the term customer value gain more and more attention. Mello, Mackey, Lasser, and Tait (2006) incorporated customer value in portfolio management. Their ‘Value Innovation Portfolio Approach’ focuses on hitting the sweet spot in innovation; high customer value, high strategic value & low investment intensity. Goal of this approach is to reach a product portfolio that; delights customers, aligns new products with the strategic goals of the company and optimises investment intensity. The authors focus on hitting the ‘sweet spot of innovation’, which aims at finding the projects with optimal customer value, optimal strategic value, and the right investment intensity. Interestingly, the interest here is shifted from the balance and financial value to the company towards customer value. In addition to Cooper et al., this adds a more customer oriented, perhaps even more up-to-date, view on portfolio management.

An innovation portfolio management process

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employees, and developing new manufacturing abilities. Output of the portfolio planning process is a technology roadmap and a product roadmap, representing both the portfolio of funded projects and the projects underway. The portfolio management process includes 3 sub-processes;

• Portfolio assessment: Assure that the portfolio is likely to achieve business objectives, is strategically aligned and optimally uses the available resources;

• Portfolio review: Tracking performance of individual projects and tracking portfolio influence; • Resource management: Collective management of all related functions assuring current projects

are resourced and future projects can be planned.

FIGURE 3.1: Portfolio management framework and related processes (Patterson, 2005).

Cooper, Edgett & Kleinschmidt (2005) created a portfolio management system quite similar to the framework of Patterson (see figure 3.2). The same goal is shared; assuring that the business strategy is translated into successful new products. Two levels of decision-making are identified; the strategic level and the tactical level. As in the framework of Patterson, the output of the strategic level is a product roadmap. Cooper et al. add strategic buckets, which pre-allocate resources to business units, strategic clusters, project types, and etcetera. At the tactical level, Cooper et al. make the same distinction as Patterson; the portfolio review and the individual project review. The portfolio review of Cooper et al. functions as the portfolio assessment of Patterson. At the tactical level the allocation to the development projects for specific new products is made, obviously following the directions and buckets set at the strategic level. The link between project management and portfolio management is made at the tactical level.

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FIGURE 3.2: The portfolio management system with its key components (Cooper et al., 2005).

FIGURE 3.3: Integrated framework for project portfolio selection (Archer & Ghazemzadeh, 1999).

Decision-making

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can make an expectation of their project value for the business and compare this to other projects. This way, project teams can even make their own go/kill decisions. The ultimate goal of the decision-making process is involving all layers in the organization with optimisation of the portfolio of projects. Four layers are identified;

• Executive level; Setting the level strategic splits in resource allocation / defining high-level roadmaps

• Senior Management level; Setting lower-level strategic splits in resource allocation / reviewing & approving individual projects / project prioritisation / risk management / actual resource allocation

• Project team; Deciding on project planning / assuring sufficient maturity of projects in advance of gate & milestone reviews / proposing go & no-go decisions

• Supportive functions; decision-making, but especially preparation can be delegated to supportive functions in the organization, at least to a certain extent. Several recommended supportive functions by literature are;

o Project Portfolio Management Governance Council (Levine, 2005); functioning as supportive council for senior managers & CEO’s, advising on of making of key decisions affecting the portfolio;

o Project Management Office (Levine, 2005); responsible for gaining oversight of all running projects, working closely together with the governance council.

o Strategic Project Office (Pennypacker & Sepate, 2005); aimed at improving project management practices. In many cases ownership of the portfolio management process is placed at this strategic project office;

o Portfolio process manager (Cooper, 2001); responsible for actually executing the designed portfolio management process. Often this responsibility is placed at the new product process manager.

Carefully embedding the decision-making process into the existing strategic rounds and milestone decisions is very important. Cooper (2006) defines two approaches to implementing a portfolio management process; approach 1 ‘the gates dominate’ and approach 2 ‘the portfolio review dominates’ (see appendix C for the visual representation of the approaches). Both approaches assume that an effective stage-gate™ (phase-milestone) process is in place at the organisation. In approach 1, the gates remain very important. A portfolio impact review is added to the existing project review at gates/milestones. The impact of the pass/kill decision on the portfolio is reviewed and the project is reprioritised based on data updates. Based on this, resources can be allocated or the project is put on hold. The portfolio review meetings are held typically twice a year. All gate decisions and their impact on the total portfolio is reviewed. Approach 1 is more suited for larger companies with longer lead-times. At approach 2 the gates remain important but will serve more as a check. The portfolio review selects the best projects and assures that these are fully resourced. Senior management takes 2-3 days every quarter to review the entire portfolio. Due to a typically shorter lead-time, this is a leaner and more efficient process better fitted to smaller and high-tech organisations. As a conclusion it can be said that approach 1 aims at a more helicopter view of the portfolio, while the portfolio review in approach 2 is functioning as a gate/milestone.

Tools, methods and techniques

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Hundreds of tools and techniques for innovation portfolio management exist. Tools and techniques range from decision support tools to sophisticated mathematical optimisation techniques. No author claims to have developed the all-encompassing solution and it is generally acknowledged that every organization must create its own process and accompanying tools and methods (e.g. Ghazemsadeh & Archer, 1999, Cooper, 2001). Tools and techniques can be classified in groups, which are each listed below, accompanied with several examples;

• General methods: Scoring models, checklists, radar graphs, efficient frontier techniques, analytic hierarchy process, and the Project Analysis & Selection System;

• Financial methods: Bang-for-Buck, ECV (Expected Commercial Value), productivity index, options pricing, dynamic rank-ordered List, point model, and the cash-curve; • Balancing methods: bubble diagrams (most often), but also; bar graphs, pie charts;

• Strategic methods: product roadmaps, technology roadmaps, market roadmaps, business roadmaps, strategic buckets, target spending levels, StratPlan;

• Specific software tools: examples are Monte Carlo Simulation, Expert Choice 11.5, U3 NewProd 3000, Imaginatik Idea Central.

• General software packages: examples are SAP xRPM, Sopheon Accolade, CA Clarity for NPD, Deltrek WelcomPortfolio, Planisware OPX2 for NPD, and Enrich EPS.

Cooper, Edgett & Kleinschmidt are – especially considering tools and techniques – the leading authors in the field. Based on their research in hundreds of companies worldwide, the authors created overview of all tools and techniques and the performance results achieved with it. Figure 3.4 shows the results of these studies. Two more figures coming from these studies can be found in appendix C. Main conclusion from the studies is that the most-often used methods – financial methods – are rated as the poorest performing tool on all four of the six portfolio metrics. A second conclusion is that a combination of approaches is required for optimal performance. Other findings were that the top 20% of best performing companies (on business results) relied much more on their strategic methods in making project choices than worst performers. Best performers also used more methods than worst performers (2.43 versus 1.83 methods) to optimise the innovation portfolio to take the advantages of each approach.

FIGURE 3.4: Evaluation of portfolio management methods on six key metrics (Cooper et al., 2006).

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Prerequisites for innovation portfolio management

Since innovation portfolio management is a process that cuts through all layers of the organisation, a solid foundation is required for success. Innovation portfolio management requires to be tightly linked to other organisation processes and requires structure and sufficient maturity of organisational processes to succeed. The main prerequisites are briefly detailed below;

• A well-defined new product strategy: to assess strategic alignment and balance in a portfolio. Clear targets (e.g. sales), roadmaps and strategic buckets are required for a portfolio review;

• An effective and disciplined new product development process: Innovation portfolio management requires high-level and accurate data from the new product development process (PRIP). A clear link between gate reviews and portfolio reviews should be established to assure that single-project decisions are linked to the impact on the portfolio.

• Focus on the ‘front-end’ of the development process; Especially discipline in the early stages (pre-MS0) is required to optimally ‘feed’ the PRIP process and make the right investments leading to profitable growth. Cooper et. al. proved in their NewProd studies that this front-end of the development process is of crucial importance of both project and product success;

• Adequate and transparent resource management: Innovation portfolio management is about optimally allocating scarce resources to potential and running new product development projects. Therefore it is crucial to have an overview of the requested and availability of these resources as input for innovation portfolio reviews and programming.

• Clear ownership of process and tools: Without clear ownership, responsibility for updating and revising the portfolio management process and supporting tools, confusion is unavoidable (Watson, 2005). Patterson (2005) argues for a central portfolio management team, which delegates the essential tasks and activities.

§3.2: A framework according to Philips experts

As the previous paragraph already discussed, there is no common process and no process content (tools) suitable for all organisations. Philips has attempted – at both corporate and Lighting level – to develop a process and a tool. These initiatives are not of any influence in the way of working of the BU Luminaires Indoor, except the mandatory portfolio management tool PCS (see chapter 4 for an analysis of PCS). The initiatives are briefly discussed below, since these findings and insights should preferably be incorporated in the breakthrough improvement plan.

Innovation portfolio management is a subject that also in Philips gains more and more attention. Three teams aim(ed) at making improvements in the current practices in innovation portfolio management. First, The Best in Finance team, who created a portfolio management framework and a maturity grid as part of the improvement project called ‘decision support’. The Best in Finance team was officially disbanded at July 1st_{2007. Second, the developers of the Portfolio}

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A proposed framework

The Best in Finance team indicated that at the end of 2004 portfolio management in Philips was performed on a ‘low level’ (source: Kuiper & Gros, 2005). The portfolios were unaligned with business strategy and unbalanced. Moreover, techniques as scenario analysis and sensitivity analysis were scarcely applied. Therefore, the Best in Finance team strived to create a harmonized framework for entire Philips, with modifications per product division (PD). The team created a portfolio management framework that was presented to key stakeholders in every product division (e.g. CTO’s, CMO’s and CEO’s). It till now is not implemented. This ‘ideal’ framework is presented below because it represents the ideal state according to Philips experts.

The Best in Finance team created a framework based on best practices, literature and benchmarks. The team tested and revised the framework after cross-functional and cross-PD workshops. The framework aims to finally plot projects in one bubble graph; chance of success versus attractiveness to

Philips. Bubble sizes are preferably NPV and the resources required. The attractiveness to Philips is the

outcome of the sum of market attractiveness and strategic fit. The chance of success is the sum of commercial chance of success and technical chance of success.

Figure 3.5 shows the portfolio management framework as designed by the Best in Finance team and incorporated by the New Business Development group. All 9 steps are quite clear and straightforward. As a result of the defining steps 1-4, the execution of the process still is provided sufficient space to customize to product division or business group. A key characteristic of the framework is that it requires preparation from multiple functions as in project teams, senior managers, finance managers and business analysts. In two Management Team (MT) workshops, the proposed portfolio is judged and following decisions are made. The MT has the responsibility to check the portfolio with Philips and PD mission/vision/strategy, marketing strategy, technology strategy, product plans, and the current pipeline.

CONFIDENTIAL

FIGURE 3.5: The BiF Portfolio Management Framework (Source: BiF Master Presentation, 2005).

§3.3: Conclusion

The conclusion will provide an answer to the sub-research question “In what way should innovation

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Drafting an ideal state as a literature framework is a good exercise to envision a target state at which improvements can aim. However, it should at all times be kept in mind that the ideal state is different for every organisation. Moreover, the ideal state might never be fully achievable for any organisation. Something every commercial organisation has in common is that the ideal state should deliver upon the ultimate goal; optimising profitable growth for the organisation. The ideal state drafted in this chapter is widely applicable. The ideal state is drafted to set a direction for improvements without going into detail on the actual improvements. This is done in chapter 5. Figure 3.6 depicts the ideal state of innovation portfolio management, based on the findings presented in this chapter. What can be seen here is that the focus in innovation portfolio management should be on the ‘front-end’ of the innovation process. At this stage, the choices between potential projects should be made. These choices should be made with senior management involvement, but also should be characterised by project team involvement. The focus in this decision-making process – of which the final decisions are made in an innovation portfolio review – should be on the entire portfolio on all four objectives (optimising value, strategic alignment, balance and resourcing). The tools, methods and techniques supporting this decision-process should not overly rely on financial methods. A combination with at least strategic methods, scoring models and bubble diagrams should be made.

Innovation portfolio management should aim at creating an innovation funnel instead of an innovation tunnel. High-potential ideas and propositions should be detected early in the process to assure that scarce resources are fully allocated to develop only the high-potentials. The result is fewer product launches with more turnover. For the product development process (MS0-MS2), this will mean less projects, decreased complexity and finally increased reliability. Due to strategic focus at the most attractive market segments, the not addressed customer needs, and exploiting the most interesting competencies and technologies, the margins on new products can be increased. Concluding, the main output of every innovation portfolio management process is optimised innovation performance and, as a logical result, improved business results.

“Which portfolio of projects maximizing ROI, is optimally strategic aligned, is achieving our preferred balances and is fully resourced?”

ID-screen 2nd screen

MS0

MS1 MS2 MS3

Reliable and efficient innovation process

High margins due to strategic focus on most attractive segments Fewer, but bigger product launches IDEAL STATE: An innovation funnel + structured innovation

portfolio reviews + focus on the ´front-end’

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Chapter 4: The innovation processes of the BU Luminaires Indoor

Addressed sub-questions;

• “What are the key issues and their root-causes in the innovation processes of the BU Luminaires Indoor?” • “What is the current maturity of innovation portfolio management practices of the BU Luminaires Indoor?” • “What are the most urgent improvement opportunities in current innovation portfolio management practices?” • “Which combination of urgent improvement opportunities can collectively make the breakthrough

improvement, but will also be feasible considering the current organisation?”

The main goal of this chapter is to discover the improvement opportunities that will collectively make the breakthrough improvement in the maturity of the innovation portfolio management practices of the BU Luminaires Indoor. Therefore, the innovation process will be analysed on both process execution and process output. A comparison between the intended way of working and the actual way of working is first made to analyse organisational behaviour in and with processes. Deviations are analysed to discover why the organisation does not work with the predefined processes. The description of the current way of working and the identified root-causes of the discovered issues will be compared to the ‘ideal’ state, which has been described according to scientific literature and Philips experts on innovation portfolio management (see previous chapter). The gaps between this ideal and current state are labelled ‘improvement opportunities’. The most urgent improvement opportunities are selected to incorporate in the breakthrough improvement plan, after which an estimation of feasibility of implementation is made.

§4.1: The ITM processes

The innovation processes are all captured in the Innovation-To-Market process, which is depicted in figure 4.1. This ITM-process was developed by the BU Luminaires Outdoor and rolled out in the BG Luminaires around 2000. Five sub-processes can be distinguished; business planning, innovation planning, resource planning, knowledge generation, and product realisation & introduction (PRIP). Each process will be discussed, while focussing on ‘innovation portfolio management practices’ as idea management, product roadmapping, and programming.

FIGURE 4.1: The ITM processes of the BG Luminaires.

Shaping for profitable growth

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