New Business Opportunities; a portfolio management approach

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New Business Opportunities; a portfolio management approach

By: Maarten Dragtstra 1062549

Date:

Tuesday, June 22, 2004, The Hague

Supervisors university:

Assistant professor Ir. Henstra, G.

Associate professor Dr. Kiewiet, D.J.

Supervisor DSM:

Dr. Scholtens, B.J.R.

The author is responsible for the content of the thesis. Copyrights rest with the author.

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Preface

The final words I'm writing here are probably the first ones you are reading right now. I hope you will enjoy reading this report as much as I enjoyed writing it. Okay, to be completely honest, there were times quite stressful and it was tough to come up with the final structure this thesis has right now.

I conducted this research at DSM Venturing & Business Development, department New Business Development in the development project ALLINCO. When I started, my knowledge about chemistry came no further than beginners level. I can say at the moment that I have much more knowledge gained and maybe I can even say that I have become proficient in certain areas of chemistry…

What initially started with an investigation to the business opportunities of new product/

application possibilities invented at the ALLINCO-project, evolved to a number of recommendations to the management of ALLINCO on which ones to focus and in which way and even suggestions to optimize the total new product development process of DSM Business Development. However, the road to come to all these recommendations was long and it was sometimes hard to work on the same topic every day. But it was after all a great experience.

Therefore, I would like to thank a number of people, without whom this thesis would never have reached the form in which you are about to see it. First of all, I would like to thank my supervisor at DSM, Boudewijn Scholtens. Boudewijn always reflected my work very precisely and was very good in triggering important moves in my research, especially in the investigation to the business opportunities due to his large experience. I also would like to thank Ton Loontjens, because his explanations of the chemistry involved created the feeling for the matter necessary to conduct this research. Further, I would like to thank all the people at V & BD and the other business groups, willing to be interviewed and providing all the input I needed in my quest. I would like to highlight Mantijn van Leeuwen, because of his personal support that I appreciated very much.

My thanks also go out to my first supervisor at the university, Greald Henstra, and in his role as second supervisor, Derk Jan Kiewiet. I am surprised how quickly they managed to penetrate to the core of the subject and came with critical questions that made sense and offer helpful recommendations.

Finally, I would like to thank my parents to give me the opportunity to make it this far. I was during the writing of this thesis greatly inspired by the enthusiasm and optimism of my father, who unfortunately passed away in the end of my second study year. I would like to thank my family and my girlfriend Jolien for their unconditional support the last years, even during difficult times!

Maarten Dragtstra

The Hague, June 22, 2004

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Executive summary

This research is conducted under the scope of the business development project ALLINCO of DSM Venturing & Business Development. The assignment for this research is to give well-founded recommendations on which new product/ application possibility, which are invented by the principal scientist of ALLINCO, to focus and in which way.

This leads to the central problem in the research; in what way to come up with the requested recommendations.

A diagnosis of the current new product development process at DSM Business Development was conducted after a literature study focusing on the managing of innovation and managing/ structuring new product development processes. Limitations in the new product development process could be traced back to the absence of a portfolio management approach.

To bring more congruency in the so-called up-front homework, as it is an important part of the early phases in new product development processes, a design for measuring value is proposed. Measuring the value of new product/ application possibilities is needed to decrease the information gap (uncertainty) concerning business opportunities. The framework focuses on the investigation of external dimensions, which are regarded to be most important serving the goal to support decision making in the early phases of new product development.

The framework for measuring value proposed is 'tested' in practice, in order to give the requested well-founded recommendations to the new product/ application possibilities of the ALLINCO project. Two product possibilities of the four initially started with, are selected to focus on: NewA, an acid scavenger and/ or chain extender and NewF, a reactive fluor additive. It is for both product/ application possibilities recommended to offer the technology to existing market parties in the acid scavenger and fluor industry, in order to create value for DSM Business Development by out-spinning of these two technologies.

It could be concluded that the framework presented is a suitable way of conducting the up- front homework. It provides a well and complete overview of the business opportunities for new product/ application possibilities. It is market-oriented and forces to reveal market needs. It has the limitation that it is time consuming and it is hard to obtain all the information from the market.

The second design is at the level of managing innovation. It is a suggestion to improve the managing of the new product development process by a portfolio management approach.

This approach can be defined as the dynamic decision process wherein the list of active new products and R&D projects is constantly revised⁴. It is based on a top-down bottom-up approach, which implies strategic buckets with target spending levels to bring more focus in the portfolio of development projects. The projects are relatively ranked within the same bucket. The new product development projects is more flexible and adaptable, which is more suitable to the more radical innovations developed at DSM Business Development.

The design presented has not the intention to be the only or ultimate solution. The greatest power is in the process, not in the system itself. Finally, an implementation framework is brought forward in order to reach the organizational change.

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Content

PREFACE... 2

1. INTRODUCTION... 8

1.1 INTRODUCTION TO THE RESEARCH... 8

1.2PROFILE OF THE COMPANY; VISION AND STRATEGY... 9

2. RESEARCH DESIGN ... 12

2.1INTRODUCTION... 12

2.2CONTEXT... 12

2.3RESEARCH SUBJECT... 13

2.4PROBLEM DEFINITION... 15

2.4.1 Goal ... 15

2.4.2 Discussion... 15

2.4.3 The importance of portfolio management... 18

2.5CONCEPTUAL MODEL... 20

2.6RESEARCH CHARACTERIZATION... 21

2.7FOCUS... 22

2.8DIAGNOSIS OF THE NEW PRODUCT DEVELOPMENT PROCESS AT DSMBD ... 22

2.8.1 Conclusion... 24

2.9RESEARCH QUESTION... 25

2.9.1 Sub Questions ... 25

2.9.2 Definitions of Concepts ... 25

2.9.3 Research Demarcation ... 26

2.9.4 Research approach ... 26

2.9.5 Research Constraints... 26

3. MEASURING VALUE; IN WHAT WAY? ... 27

3.2MARKETING APPROACH... 27

3.3POSITION OF DSMALLINCO(BD)... 29

3.4MEASURING VALUE... 31

3.4.1 Framework for measuring value ... 31

3.4.2 Selecting market segments and customers (2); Market segmentation ... 32

3.4.3 Identifying value elements (3); Market exploration... 33

3.4.4 Market analysis... 35

3.4.5 Customer Analysis ... 36

3.4.6 Competitor Analysis ... 36

3.4.7 Environmental analysis ... 36

3.4.8 Internal Analysis... 37

3.4.9 The 5C SWOT analysis ... 38

3.4.10 Costs ... 38

3.4.11 Information collection (4)... 38

3.4.12 Analyzing of the results (5); conclusion ... 39

3.5MARKET EXPLORATION FORMAT... 40

3.6CONCLUSION... 41

4. MEASURING VALUE IN PRACTICE... 42

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4.1.0INTRODUCTION... 43

4.1.1BENEFIT BASED MARKET SEGMENTATION... 43

4.1.2 Fibers: PET industrial yarns and monofilaments... 44

4.1.3 Polyester engineering plastics ... 44

4.1.4 Polyester based polyurethane systems... 45

4.1.5THE PRINCIPLE AND COMPETITIVE ADVANTAGE... 46

4.2. ACID SCAVENGERS MARKET ... 47

4.2.1 CONTEXT... 47

4.2.1.1 Environmental analysis ... 47

4.2.1.2 Market analysis... 48

4.2.2 COMPETITION... 50

4.2.3 CUSTOMER... 51

4.2.4 COMPANY... 52

4.2.5 COSTS... 52

4.2.6 SWOT AND CONCLUSION... 54

4.3 PET INDUSTRIAL YARNS ... 55

4.3.1 CONTEXT... 55

4.3.4 COMPANY... 59

4.3.5 COSTS... 59

4.3.6SWOT AND CONCLUSIONS... 60

4.4. PET MONOFILAMENTS IN PAPER MACHINE CLOTHING (PMC)... 62

4.4.1 CONTEXT... 62

4.1.2 Market analysis... 63

4.4.4 COMPANY... 66

4.4.5 COSTS... 66

4.4.6 SWOT AND CONCLUSIONS... 67

4.5. PBT/ PET ENGINEERING PLASTICS ... 69

4.5.1 CONTEXT... 69

4.5.1.1. Environmental analysis ... 69

4.5.4 COMPANY... 74

4.5.5 COSTS... 75

4.6. POLYESTER BASED POLYURETHANE SYSTEMS ... 77

4.6.1CONTEXT... 77

4.6.4 COMPANY... 80

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4.6.5 COSTS... 80

4.6.6 SWOT AND CONCLUSIONS... 81

4.7. NEWA: OVERALL CONCLUSIONS AND RECOMMENDATIONS ... 82

4.7.1RECOMMENDATIONS... 83

4.8. FLUOR ADDITIVES... 84

4.8.1INTRODUCTION... 84

4.8.2THE PRINCIPLE AND COMPETITIVE ADVANTAGE... 84

4.8.3BENEFIT BASED SEGMENTATION... 85

4.9. FLUOR ADDITIVES MARKET... 87

4.9.1 CONTEXT... 87

4.9.1.2 Market Analysis for the fluoroadditives market... 89

4.9.4 COMPANY... 94

4.9.5 COSTS... 95

4.10. NEWF IN COATINGS ... 98

4.10.1 CONTEXT... 98

4.10.3 CUSTOMER... 104

4.10.4 COMPANY... 104

4.10.5 COSTS... 105

4.11. NEWF IN PET/PA TEXTILE AND CARPET FIBERS ... 107

4.11.1 CONTEXT... 107

4.11.3 CUSTOMER... 112

4.11.4 COMPANY... 112

4.11.5 COSTS... 113

4.12. NEWF: OVERALL CONCLUSION AND RECOMMENDATIONS... 114

4.12.1 Recommendations ... 115

4.13CONCLUSION ON DESIGN FOR UP-FRONT HOMEWORK... 116

5. PORTFOLIO MANAGEMENT DESIGN ... 117

5.1THE PORTFOLIO MANAGEMENT PROCESS... 117

5.2THE ADAPTABLE, FLEXIBLE STAGE GATE PROCESS... 119

5.3POINTS TO CONSIDER; LIMITATION OF DESIGNS... 120

5.4CHANGE... 121

5.5CONCLUSION... 123

6. OVERALL CONCLUSIONS AND EVALUATION ... 124

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6.1OVERALL CONCLUSIONS... 124

6.2MISSION ACCOMPLISHED? ... 125

6.2.1 Process evaluation... 126

6.2.2 Research approach ... 126

6.2.3 Practical and scientific relevance... 126

Appendix 1 Organization Chart of DSM Venturing & Business Development...Error! Bookmark not defined. Appendix 4 Relative ranking ALLINCO-tree...Error! Bookmark not defined. Appendix 5 Hydrolytic decomposition of a polyester ...Error! Bookmark not defined. Appendix 6 The five forces analysis of Porter for the carbodiimide acid scavenger market... Error! Bookmark not defined. Appendix 7 two routes to NewA...Error! Bookmark not defined. Appendix 8 Five forces analysis for the PET industrial yarn industry ...Error! Bookmark not defined. Appendix 9 Five Forces analysis for the PMC industry ...Error! Bookmark not defined. Appendix 10 the five forces analysis of Porter for the Engineering Plastics industry Error! Bookmark not defined. Appendix 11 The five forces analysis of Porter for the thermoplastic polyurethane industry ... Error! Bookmark not defined. Appendix 12 Preparation of CONFIDENTIAL (1) and unique property of ALLINCO CBC (2).. Error! Bookmark not defined. Appendix 13 Benefit based market segmentation; motivating selection of market segments ... Error! Bookmark not defined. Appendix 14 Five forces analysis of the fluoroadditives market ...Error! Bookmark not defined. Appendix 15 Five forces analysis of the coating industry ...Error! Bookmark not defined. Appendix 16 Five forces analysis for the textile and carpet producers industry ..Error! Bookmark not defined. References ... 129

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1. Introduction

1.1 introduction to the research

Developing successfully new products that successfully survive in the market place is key to sustainable competitive advantage in today's business environment³⁴. This assumption is the underlying belief why this thesis is written.

The research is titled "New Business Opportunities: a portfolio management approach". The title is exactly the theme of the thesis. The assignment focuses on determining the business opportunities of new product/ application possibilities invented at the business development project ALLINCO. This project specializes in performance additives for performance materials and may function as a technology platform. The starting point is the recognition of the problem in what way to come up with the requested well founded recommendations on which product/ application possibility to focus and in which way. The total structure of the thesis is shown in figure 1. Hereafter, DSM 's profile is given, the stage on which the research is situated.

Figure 1 Structure of the thesis; chapters with contents Chapter 2

Research design Conceptual

model Diagnosis

Problem definition

Chapter 3 Design to improve the

information gathering

process (up-front homework)

Chapter 4 Measuring value in practice;

testing of design Recommenda

tions to product possibilities

Chapter 5 Design to improve the

total new product development process by a

portfolio management

approach

Chapter 6

Overall Conclusions

and evaluation

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1.2 Profile of the company; vision and strategy

DSM, formerly Dutch State Mines, is a company over hundred years old. It was founded in 1902 and obtained in 2002 the status “Royal”. DSM has developed itself from a state mine company into a global player in the chemical sector in several segments. In 1989, after the Dutch government sold its 70% share to the public, DSM is officially a completely private company. Since that time, DSM focuses itself on further concentration in leading worldwide positions in high-added value-, strong growth- and stable activities. By now, DSM is in 60%

of its markets in the world top.

Figure 2 DSM head office in Heerlen

In 2000, a strategy was formulated, called Vision 2005: Focus and Value. This strategy is aiming for € 10 billion turnover in the year 2005; last year 2002 turnover was € 6,6 billion, after the selling of the petrochemical activities to the Saudi Arabian SABIC. With the recent acquisition of the Fine Chemical and Vitamin activities of the Suisse Roche an important step towards the formulated goal is made. Other (major) acquisitions are thus to be expected to completely reach the outset goals. 80% of today’s turnover will be accounted for Specialties. Mainly Industrial Chemicals, like melamine and caprolactam, will accomplish the other 20%. With that, DSM takes global leading positions.

Meanwhile, DSM is preparing itself for a major strategic transformation into a specialty- company. In that sight the selling of the petrochemical activities to SABIC and the acquisition of the Fine chemical and Vitamin division of Roche has to be seen.

DSM's activities are grouped into three clusters: Life Science Products, Performance Materials, and Polymers & Industrial Chemicals. Each cluster is further subdivided into business groups, which form the foundation of the organization. DSM also comprises a number of staff and service units, who work on a company-wide level.

Life Science

Life Science Products include materials for the pharmaceutical sector, the food and feed industry, and the agrochemical industry. This cluster includes the business groups:

• DSM Fine Chemicals

• DSM Anti-Infectives

• DSM Food Specialties

• DSM Bakery Ingredients

This cluster accounts for about 28% of DSM's total net turnover.

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Performance Materials

Performance Materials are high-quality materials such as UV-curable coatings for optical fibers, elastomers, engineering plastics, and thermo-set resins used in dry and wet paints and for the production of tanks, pipes and containers. Performance Materials includes the business groups:

• DSM Elastomers

• DSM Engineering Plastics

• DSM Coating Resins

• DSM Composite Resins

The Performance Materials cluster brings in about 23% of the company's total net turnover.

Polymers & Industrial Chemicals

The cluster Polymers & Industrial Chemicals produces a wide range of plastics, melamine, caprolactam and fertilizers. The cluster accounts for about 43% of the total net turnover and comprises:

• DSM Fiber Intermediates

• DSM Melamine

• DSM Agro

Thanks to the increasing of the specialty-clusters Life Science and Performance Materials, activities with high-added value will be emphasized. The selling of the petrochemical activities to the Saudi Arabian SABIC in 2002 is a giant leap facilitating that process.

Venturing & Business Development

DSM Venturing & Business Development is one of 13 Business Groups. V & BD was founded in 2001 as a new group in DSM ’s activities, with the aim of helping DSM as a whole to grow by streamlining new business initiatives from both inside and outside the group. The business group is engaged in two types of activity, venturing and business development. The mission of DSM V & BD is to substantially contribute to the value creating process of DSM through long-term innovative business in the fields of Life Sciences and Performance Materials. DSM V & BD intends to function as an entrepreneur, an active partner that sources promising ideas and start-up businesses. They bring on board all ideas and innovations with real potential-no matter what stage of development they are in. Then it starts the so-called “boosting process”, adding real value to help bringing them to market maturity.

DSM Venturing & Business Development tries to locate business in growth markets with attractive margins that matches the DSM group’s current or future competencies, strengths and strategy.

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Business Development

As a part of Venturing & Business Development, Business Development focuses itself on new product development conducted by the organization itself. New product ideas can be generated from within or external the organization. A feasibility study has to support the determining if the idea becomes a project. By positive results, the idea becomes a project and will be placed under supervision of a business manager. He creates a project team that has the goal to make the project successful. As soon it has been demonstrated that a given project is both technically feasible and commercially viable, the newly formed business becomes a member of the Start-up group, which defines its strategy, arranges funding and provides the necessary business support.

In addition, DSM Venturing & Business Development manages Grown-ups. There are two groups of grown-ups. The first consists of businesses that have successfully completed the start-up phase and are now ready for further growth and expansion. The second category consists of businesses whose position within the DSM organization is being reviewed.

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2. Research Design

2.1 Introduction

In this section the Problem Definition will be given. The most important parts are the Research Goal and the Research Question. The research question and its sub questions has to provide the answers in order to reach the research goal. The total problem definition answers, Why, What, Where, How, How much and When, which have to be answered in order to compose a covering research design¹. Started is with an explanation of the context and the research subject to point out the meaning of the research. Before the problem definition is given, a widening to the central problem followed by the conceptual model for this research is revealed.

2.2 Context

One of DSM’s New Business Development projects is ALLINCO. The project aims at developing performance additives for plastics, and specializes on chain extension and functionalisation of polyesters and polyamides to increase their mechanical properties. There are three main drivers for this project. First, the number of new polymers in the future will be very limited. However, there is a continuous need for improved properties. Second, the existing processes for chain extension are costly and time consuming. Third, the invented way of coupling functional groups in the polymer chain very selectively is not demonstrated before.

ALLINCO^® (chemical name CarbonylBisCaprolactam; CBC) is a new chemical, which has the ability of chain extending PET (Polyethylene Terephtalate) and PA (Polyamide, Nylon was the first PA). In order to reach better mechanical properties of the polymer, a higher molecular weight and therefore a higher Intrinsic Viscosity (IV) is needed. The way to achieve this is to create longer polymer chains. Currently, Postcondensation is the process mainly used. The production size determines the manner of carrying out Postcondensation.

Examples are the use of Tumble Dryers (TD) on batch level production (<10 to 20 kton/y), and Continuous Solid State Postcondensation for large volume PET production (>20 kton/y). With the birth of ALLINCO^® it is possible to eliminate the process of Postcondensation. By dosing CBC during the processing of the polymer, chain extension occurs and longer polymer chains are created. This has economic advantages when existing TD capacity must be replaced or more capacity is needed. TD’s are relatively expensive to buy and operate. CBC is now to be commercialised in the RPET-Strappingⁱ and Industrial Yarn industries.

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Figure 3 Chemical structure of CarbonylBisCaprolactam (CBC) and its function; chain extending of polymer chains

During the development of ALLINCO^®, there was intensive contact with potential customers. As a result of fundamental research, a wealth of new chemical opportunities was envisaged with the technology of ALLINCO^®.

ALLINCO therefore may function as a technology platform. The two important properties for performance materials created by the ALLINCO platform are²: Improvement of structural properties by Chain Coupling and Coupling of special (functional) properties to polymers, which is possible due to its unique chemical selectivity.

2.3 Research Subject

The main product of the technology platform, ALLINCO^®, is being commercialized, first in the RPET-Strapping market. Several other new product/ application possibilities in the ALLINCO project are recognized, varying from possible to (very) promising. This set of 22 new product/ application possibilities is called ‘the ALLINCO-tree’. These new product/

application possibilities (PAP will be used as abbreviation) are based on the knowledge acquired during the development of the main product of the technology platform: CBC. The four most promising PAP’s from the ALLINCO-tree are selected mainly on gut feelings and large experience of chemical engineer, drs. T. Loontjens, and business manager, Dr. B.

Scholtens. The management of ALLINCO commissioned to investigate the business opportunities of these four derivative products and to give well-founded recommendations

O O N

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for the strategy what to do with these products. The research will be reported to Mr.

Scholtensⁱⁱ.

A brief introduction of the product/ application possibilities is given. The PAP’s are in the early (embryonic) stage of development; there is room for modifications if needed.

1. Acid Scavenger (for the time being named NewA)

Polyamides and especially polyesters are sensitive for breaking down in damp circumstances.

That sensitivity is called hydrolytic instability. The amount of acid groups in the polymer’s structure makes it more or less hydrolytically stable. An acid scavenger is an additive that decreases the amount of acid groups and this increases the hydrolytic stability of the polyamide or polyester. NewA increases the hydrolytic stability of end products. The development was started after the signals from customers using CBC that the percentage acid groups remains higher after application of CBC. This percentage was higher in comparison with the use of the competing existing processes; a solution had to be found.

2. Reactive Fluor additive (for the time being named NewF)

NewF is a reactive fluor additive that can be coupled with CBC to polymer chains or networks in order to get very low surface tension and no migration. The aim here is to make use of the surface properties of fluoroadditives at a much lower overall fluor content of the polymeric product. This can be implemented in various products, like coatings and fibers, to obtain an easy cleaning or a self-cleaning surface. Anti Fouling/ self-cleaning properties mean that the surface of a fiber or coating has a very low energy. As a result, it is very hard to attach for foul and water.

3. Dual Cure Coating

Optical glass fibre coatings are often applied in two layers with different functions and characteristics. Usually, the top layer (scratch resistant) is harder than the under layer (impact absorbing). Thanks to this new dual cure coating, it is possible to combine those two layers into one. First, when curing the coating with UV-light a soft, rubbery layer develops. After that, when heating only the surface, for example with a LASER, a glassy top-layer originates.

4. Self Crosslinkable Coating

Powder coatings are currently prepared by mixing the resin, crosslinker, pigments and additives. The crosslinker constructs a 3D-network between the molecules, which gives the coating its strength. Crosslinkers are in total costs, relatively the most expensive part of a coating. With technology that is related to CBC, it is possible to make a self-crosslinkable coating, to avoid the use of the external relatively expensive crosslinker.

The meaning of the research is revealed and is now followed by the problem definition

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2.4 Problem Definition 2.4.1 Goal

According to the above, the following goal applies for this research:

To give well-founded recommendations to the management of ALLINCO on which product/ application possibility (-ies) from the ALLINCO-tree to focus and in which way

2.4.2 Discussion

There exists a lot of uncertainty around the business opportunities of the product/

application possibilities (PAP's). These PAP's are developed inspired by signals from the business and technological environment, but at this point it is not sure which potential customers or markets are interested. There exists also technological uncertainty, because the functionality's of the PAP's are only preliminary demonstrated. Concluding, the value of the PAP's is not clear. The starting point for this research is the central problem: In what way to come to the desired well-founded recommendations? A widening to this problem follows beneath.

Let us start from the beginning. Innovation is a strategic issue for organizations, as the ability to develop new products is key to sustainable competitive advantage in today's business environment³ ⁴. Organizations rely on innovation to ensure they are flexible in the face of business change. The ability to develop and to launch new products that survive in the marketplace is thus crucial⁵. As a result, new product development has become a central dimension in the strategies of many companies⁶. The question rises in companies, in what way to conduct this new product development and how should this process be managed? A distinction is made between managing innovation and managing the new product development process. Managing innovation in this research means that senior management provides the resources in order to let innovation happen. Companies should have the strategic intention and should create the strategic architecture⁷ for innovation to occur.

Managing the new product development process is at the level of managing the project teams that actually transforming business opportunities into tangible products (see figure 4).

Figure 4 A conceptual framework linking innovation management and NPD⁸ Innovation Management

Development of the necessary conditions for innovation to occur

NPD activities:

concept development development of

prototypes design specifications

Engineering business analysis

etc

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Innovation management and managing the new product development process can be seen as tasks. The way tasks are conducted and predefined has its roots in the task uncertainty.

Uncertainty also has been called as 'unpredictability' or 'non-routineness' ⁹. In this research, uncertainty is preferably defined by 'the difference between the amount of information required to perform a task and the amount of information already possessed by the organization' (also called the information gap)⁶ ⁹. To achieve effective outcomes, tasks with high uncertainty must be executed differently from tasks with low uncertainty. In general, tasks with high levels of uncertainty require 'organic' organizational approaches in order to be successful, whereas tasks with low uncertainty require 'mechanistic' organizational approaches to be successful⁶⁹. In this matter, organizational approaches represent the means by which the project is accomplished and include the structure, capabilities and process elements of the product development project organization. Mechanistic approaches are typified by organizational hierarchies employing rules and regulations to guide actions and make decisions, and are characterized by centralized decision-making, formalized procedures, and written communication. In contrast, organic approaches are characterized by fluidity and flexibility in the task execution process, rich and frequent communication, decentralized decision-making, high levels of organizational integration, few formal procedures and higher personnel training and skills⁹. These approaches can be regarded to be the ends of a continuum to manage innovation and the new product development process.

With respect to new product development there are, according to Ansoff, four possible growth-opportunities strategies: market penetration, market development, product development and diversification (see figure 5) ¹⁰.

Figure 5 Growth opportunities matrix (Ansoff, 1957)¹⁰

So, the more radical or breakthroughⁱⁱⁱ (versus incremental) the innovation is, the bigger the information gap is and therefore, in theory, the more organic the organizational approach should be. A strong link with environmental uncertainty, both on market and technological level, can obviously be seen here⁶ ¹¹. In the case that an environment is more stable,

iii Incremental innovation introduces relatively minor changes to the existing product, often applied to existing markets and customers. Radical innovation establishes new sets of core design concepts, and is driven by

Existing Market

Existing product

New Market

New Product

Market penetration

Market development

Product development

Diversification

Low uncertainty

High uncertainty

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predictable and well-understood the information gap is smaller than in environment is more complex, unpredictable and dynamic³. The crux in this matter is how to manage and decrease the information gap in order to allocate resources in an effective way.

Famous examples of more mechanistic approaches towards innovation is the development funnel by Wheelwright and Clarke (see figure 6) ¹² and the formal Stage-Gate process by Cooper¹³, because of the linear and rational approach. As development projects progress, they are assessed at predetermined gateways according to well-defined criteria and decisions are made to terminate or to support them³. These processes are regarded to be suitable when more incremental innovation is conducted, because stage-gate processes require that at each gate decision all the information is available and that all development tasks in the stage are completed. This is when more radical products are developed mostly not the case¹³. Examples of organic approaches towards innovation are innovation through sampling and innovation through deliberate redundancy³. According to the first approach, new products are created when new developments are set in motion without clear goals as to which will be terminated and which allowed continuing. The end result emerges through a blend of component or constituents from several development processes. This requires development projects to be allowed to continue. Innovation through deliberate redundancy stresses the fact that people require the time to think and to explore options, some successful but many unsuccessful. People will be given space to develop superior solutions.

Figure 6 The fomal Stage -Gate process (top)¹³ and the Development funnel: innovative and focused (bottom) ¹²

Stage 1

Stage 2

Stage 3

Stage 4 Preliminary

investigation

Build

business case Development Test & Validate

1 2 3 4

Gate 1 Gate 2 Gate 3 Gate 4 Gate 5

5 Etc.

Idea generation

Screen 1

Screen 2

Detailing of proposed project bounds and required knowledge

Rapid, focused development projects of multiple types

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In today's business environment, companies are judged by their shareholders (stakeholders) and thus strive to cope as efficient as possible with scarce resources, which is the reality in most companies. Especially in a company with a great R&D base, a lot of ideas are generated whether set in motion by market signals or driven merely by technology push. If all projects are allowed to continue, as the examples of organic approaches imply, it would be become a mess of projects and a very time/ money consuming process. On the other hand, innovation is based on creativity and skills of the people conducting new product development.

It is preferred in this research to find a balance between an organic and a mechanistic approach for the more radical new products. This balance has to be found in the 'better' of the two different approaches.

Literature indicates that success or failure of new products is controllable by managers¹⁴ ⁴. Examples of factors that can be (partially) managerially controlled are the development process, the development team, product advantage, proficiency of technical/ marketing / up-front homework activities, new product's strategy. Organizational factors (company) are regarded to be difficult or impossible to change in the short term; in the long term, they are under control¹⁴. Market related factors, such as size/ growth, competitiveness, are regarded to be not controllable⁴. However, market factors are directly related to the product factor and can be controlled by management by selecting the 'ideal' market for their product¹⁴. This makes market segmentation as an essential part in launching new products.

Therefore, in order to cope efficiently with resources, a 'management control system' ^iv based on frequent communication and placing skilled and trained people in the center is preferable.

In new product development processes, the main role of management control systems is to supply information required to reduce uncertainty⁶; to reduce the information gap. In that way, a management control system can support the decision making in managing innovation.

It is important that this is a flexible, adaptable structure. Such structure is more appropriate for product success than rigid, inflexible ones¹⁴, because the new product development process is not a strictly linear process. But what is the driving force behind the decision making?

2.4.3 The importance of portfolio management

The developing of new product/ market combinations has a large impact on organizations.

Mention only the (technical) service that has to be provided and the new distribution channels that have to be developed. So, choices have to be made in what direction(s) the total new product development process has to go. Also, when an organization has created the strategic architecture⁷ in order to let innovation happen and the company has a clear view in which markets it will be or not be in the future, the link with strategy and innovation is exposed. Especially, when new products are seen as the manifestation of the business strategy⁴. Additionally, when it is desired to efficiently cope with resources within a company there has to be thought about what kind of projects are wanted and what kind are not wanted. So, when development projects are seen as a 'tool' to serve a certain goal, portfolio management is vital.

iv The set of criteria, policies and procedures to standardize operations and to make possible measurements of

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A link to the stock market can be made. Stock brokers want to create value. They select very carefully on strategic motivations based on risky information stocks or options with the notion that the total portfolio has to create value in the future. Not only risky stocks or options are bought, but also more defensive bonds. There has to be a certain balance in the portfolio to reach the goal to create value on the long term. Therefore, the portfolio is being revised all the time.

Portfolio management for new products can be defined as the dynamic decision process wherein the list of active new products and R&D projects is constantly revised⁴. In this process, new projects are evaluated, selected and prioritized. Existing projects may be accelerated, killed or reprioritized and resources are allocated and reallocated to the active projects. The portfolio decision process is characterized by risky and changing information, dynamic opportunities, multiple goals and strategic considerations, interdependence among projects and multiple decision makers and locations.

Portfolio techniques are powerful tools in that they allow R&D projects to be analyzed in a systematic matter, providing an opportunity for the optimization of a company's long term growth and profitability¹⁵. Some portfolio techniques are the use of financial models (like NPV^v ), which are criticized because in early phases of development it is very hard to forecast financial implications (revenues, development costs)⁴. Selection and scoring models take more than only financial factors into account. These factors can include technological feasibility, relative competitive advantage and strategic alignment of development projects.

This provides a more comprehensive sight on new product development⁴, but these do not combine the different facets of the total new product development process. Another example of a portfolio approach is the R&D project portfolio matrix¹⁵. This is a communication tool with the purpose of identifying projects or products that provide benefits to customers and competitive advantages. This matrix divides the portfolio of R&D projects on four dimensions: Star (high benefit, high competitive advantage), Snob (low benefit, high competitive advantage), Fad (high benefit, low competitive advantage), Flob (low benefit, low competitive advantage). An advantage of this matrix is that it takes benefit to customers and competitive advantage as a reference, which are regarded to be crucial for new product success. A major disadvantage is that it is just a matrix and it suggests no further actions and brings no focus in the portfolio. It shows only the status-quo. It is thus preferred to come with a comprehensive portfolio management approach, that includes the different facets of the total new product development process.

Some advantages provided by portfoliomanagement¹⁵:

• The relative strengths and weaknesses of each project are surfaced

• Decisions regarding capital investment allocation, resource allocation, project selection, prioritization, and resource allocation are facilitated

• Dynamics of the projects are revealed

• Projects are tied to business level performances

• Systematic analysis of the project is encouraged

• The relative graphical positioning of the projects makes the evaluation process easier to be understood by non-technical managers

v Net Present Value

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• Consensus is emphasized

• Gaps and future development opportunities are high-lighted

There are also pitfalls including portfolio management, which include ¹⁵:

• Technology interdependencies among projects are not so apparent and difficult to asses

• A fairly good understanding of each individual R&D project is needed in order to make the proper evaluation, a task difficult for non-technological managers

• Identification of measurement indicators to ensure proper assessment of the projects is difficult

However, in this research it is preferred to take a portfolio management approach towards the management of the new product development process, because lacking effective portfolio management can have the following consequences⁴:

• Weak portfolio management leads to reluctance to kill projects, which leads to too many projects added to the list and a lack of focus. The immediate result is that resources are thinly spread, projects are queued and the quality of execution suffers. The end result is an increased time to market and higher failure rates.

• Lacking effective portfolio management, there are no rigorous and tough decision points, which in turn leads to poor project selection decisions. Good projects are starved from resources and may never reach their full potential, because too many mediocre projects are allowed in the pipeline.

• Without a rigorous portfolio method, the wrong projects often get selected and for all the wrong reasons. Instead of decisions based on facts and objective criteria, decisions are based on politics, opinionating, and emotion. This is risky decision making.

• Strategic criteria for project selection are missing, so there is no strategic direction to the projects selected. New products are the manifestation of the business strategy, but without a portfolio method, projects are not aligned with the strategy and many strategically unimportant projects find themselves in the pipeline. The end result is a scattergun effort that does not support the business' strategic direction.

2.5 Conceptual model

The conceptual model for this research is shown figure 7. This conceptual model is just one of the possible views to look at managing innovation. It links the theoretical concepts central to and influencing the total new product development process. It does provide a view towards the managing of innovation that recognizes the balance between these concepts.

The covering concepts to the central problem (in what way to come to the desired well- founded recommendations) are revealed and the problem is embedded within this view.

The portfolio management process is the covering dimension. The new product development process is the tool to bring ideas into tangible products and is coordinated by the portfolio management process. The new product development process 'informs' the portfolio management process about forces in the environment. Ranking and selection of projects/ ideas is a measure of the portfolio management process to make sure that the right projects/ ideas are tolerated in the portfolio of development projects. This portfolio on its turn is being revised by the ranking process.

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The information gathering process (up-front-homework) plays a big role in the story, because all management measures and activities are based on the information gathered. This front work is the reference point and actually a management control system to manage the information gap, so it is very crucial that this subject is properly and congruently done.

Figure 7 Conceptual model of the aspects of managing the new product development process

2.6 Research characterization

Two theory trajectories can be recognized: Theory Construction (Exploration, Explanation, Testing) and Theory Application (Diagnosis, Application, Implementation). This research is to define as Theory Application¹⁴, because theory is used to solve a practical problem. The solution of practical problems is custom-made: for each specific problem a specific solution method has to be developed¹⁶. According to De Leeuw, the process follows the whirlpool shown in figure 8. The design cycle of Van Strien¹⁶ includes five steps: Problem, Diagnosis, Design, Implementation and Evaluation. This design cycle is actually an extension of the Theory Application trajectory. The last two steps of the design cycle of Van Strien are outside the scope of this research. With the above having in mind, the research follows the method of Diagnosis, Design and Change¹⁷.

Ranking and Selection of projects/ ideas

Information gathering process (up front homework) Portfolio

management process

New Product Development

Process

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Figure 8 the whirlpool of problem solving¹⁶

2.7 Focus

To bring a focus in the research on the topic new product development it is decided to limit the investigation to the business development process of DSM Business Development, because the Venturing part handles a different process that screens external, innovative companies in order to decide if to invest and/ or take a share in those companies. The process at Venturing is outside the scope of the topic new product development and is in the field of external financial investment decisions, which has its own dynamics.

Following the whirlpool a diagnosis of the actual state of the new product development of DSM Business Development is needed.

2.8 Diagnosis of the new product development process at DSM BD

This diagnosis is conducted within the view of the conceptual model shown in figure 7.

DSM Business Development faces a heavy task. At DSM 's separate business groups business development is also conducted. These business groups focus on incremental innovations ⁱⁱⁱ. DSM Business Development faces the more radical innovations, which fall outside the direct scope of the other business groups. This is thus accompanied with a higher task uncertainty; a bigger information gap.

The formal new product development process at DSM Business Development is shown in figure 9.

Problem signal

Diagnosis

Design Change

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Figure 9 The formal new product development process used at DSM V&BD including the 'gate deliverables'.

The formal structure of the new product development process at DSM BD is based on the Stage Gate process¹³ and the development funnel¹². For coming into a (next) stage, a gate deliverable is judged by an advisory board, which makes use of a scoring tool^vi. The screening note is a quick scan, meant as a first filter for ideas that seem to be promising. This screening note focuses on market attractiveness, technology, competition, time to “first million” turnover and the estimated probability. At gate 1, a tool is recently implemented to score the ideas of which a 5C SWOT analysis is conducted. The most extensive scoring tool, which takes a lot of dimensions into account, is used by the advisory board 2 at gate 2. These scoring tools are shown in appendix 2. The advisory boards exist all of DSM people.

In the start up phase, milestones set in the business plan are the coordinating mechanism of the BD management. There is an option to spin out of ideas/ projects/ start ups, which are promising but do not fit with strategy. The total portfolio management process is not a process common understood/ defined at DSM Venturing & Business Development²¹. In order to select ideas and score projects, project scoring tools have been developed but not generally implemented at decision processes. These decisions are actually taken mainly on basis of gut feeling.

It also occurs that projects are not to define strictly in a stage, because not all tasks are completed at the same time or all the required information, market response or technological

vi In this research, a tool is an object that companies (aim to) implement in their product development activities to improve a certain activity or certain aspects

Screening note

NBC GATE 1 NBD GATE 2 Start-ups GATE 4 Grown-ups

Business Plan 5CSWOT

Advisory Board 1 Advisory Board 2 Board Delegates Meeting

Green Ideas

Internal + External

Gate 0

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analysis, is not yet available when a gate decisions has formerly to be taken. So, i.e. some projects are in fact already a "start-up", but stay formerly in the "new business development"

process, because not all conditions to make it a start-up are fulfilled.

By interviewing relevant people in the BD department (see for interview scheme appendix 3), the following outcomes were obtained:

• In contrast to the start up phase of the department, the Stage Gate process is formerly coordinated but 'real' portfolio management measures lack, which leads to not taking decisive Go/ No Go decisions. Making use of the 'cheese slice method', cutting all the projects on costs instead of eliminating unpromising projects, is the result.

• There is too much discrepancy in the quality of the up-front-homework, the 5C SWOT's. These analyses are done by just one person, which causes subjectivity, and lack of time causes sometimes hastily work. It is not hard defined how and what to report at the different dimensions, the 5 C's (Context, Customer, Competition, Company, Costs).

• If a project progresses, the objectivity of the committed people decreases. This is caused by the fact that the project champions are too long connected at the project and are strongly focused to make the project a success while the reality does not always support this. Also, the people that have much knowledge in the earlier stages sometimes have lack of competencies for the later stages, e.g. in the start up phase. This is mostly a result of their research backgrounds.

• There are two processes; the stage gate process (horizontal) and the vertical ranking process. The second process did not happen the last few years.

• At the moment, in judging the different projects emphasis is on the past; what is promised-what is reached. Too much focus is on the question if the milestones set are reached, instead of “listening to the whole story”. This focus results in more cautious milestones.

• The focus on milestones is a result of the frustration fed by the unfulfilled quest for managing measurements. This is an indication that there is a fundamental problem in actively judging and coaching of the projects.

• There is "fear" to kill a project and to eventually miss an opportunity. On the other side there is fear to start a development project, because of investment reasons.

• There is too much technology push and too little attention for market needs, which is mostly caused by the relative competencies (technologically oriented) of the committed people.

• There is need for more group decisions.

• There is unanimous support of the interviewees towards portfolio management tools.

2.8.1 Conclusion

The Stage Gate process, the used new product development process at DSM BD, is formerly well defined but seems to be too rigid for the actual business development process which focuses on the more radical new products. This results in a big discrepancy between the formal and informal applying. Project scoring tools are developed, but these do not support the relative ranking of projects. This makes prioritization decisions difficult and these are

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forced to be taken on gut feeling. Yet a common focus is lacking at the moment. The following headlines cause the limitations:

1. The absence of a portfolio management approach, in order to get the right balance in the portfolio of development projects to reach a common goal.

2. Relative ranking and selection of new products ideas/ projects is not supported by the actually used management information systems.

3. The information gathering process on which the decision to start developments is based (up-front-homework) is not congruently done.

4. The limited fit of the new product development process with the more radical nature of innovation.

When these outcomes are compared to the consequences of lacking effective portfolio management mentioned in discussion, parallels can be identified. It is desirable to reflect the total portfolio management process and to give recommendations to optimize this process.

2.9 Research Question

The goal for this research is to give well-founded recommendations to the management on which product/ application possibility to focus and in which way. The dimension of the information gathering process has the dominance and is highlighted in the research question.

The following research question originates from the goal:

In what way can the information gathering process at DSM BD be optimized and what suggestions can be made to optimize the portfolio management process of DSM BD?

2.9.1 Sub Questions

For answering the research question, the following sub questions have been drawn up.

1. In what way can the information gathering process be designed?

2. What are the business opportunities of the new product/ application possibilities?

3. What recommendations can be done to the management of ALLINCO regarding the product/ application possibilities?

4. What suggestions can be made to optimize the portfolio management process of DSM BD?

5. In what way can the presented designs be implemented?

2.9.2 Definitions of Concepts

To get a uniform and clear understanding of the concepts used in this research, the following nominal⁶ definitions are given:

Business Development The essence of business is the matching of a product with a customer. Business

development is the renewing of this matching process.

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Business Opportunity In how far a product creates value to the customer and in how far it can play a profitable role in the market

Product/ Application Possibility (PAP) a product/ application that has not yet been fully developed and commercialized, but relatively specifically defined

Information gathering process The management control system in which the (also called up-front homework) information is obtained to decrease the

information gap, in order to support the decision making about starting/ continuing developments

Portfolio management process The approach to regard the set of R&D projects as a portfolio serving a common goal that has to be managed in order to cope effectively with scarce resources

2.9.3 Research Demarcation

The research will be done within the scope of DSM BD. The investigation to the business opportunities of the product/ application possibilities will be done within the scope of the market segments selected in the chemical industry, worldwide. Specified demarcation will be given at the moments when choices on this point have to be made during the investigation of the product/ application possibilities.

2.9.4 Research approach

The research approach in this research are the actor and system approach¹⁸. The actor approach is used in the diagnosis part to obtain data and experience the practical situation.

The system approach is used when analyzing of the data obtained is necessary and to create the distance to objectively come up with designs.

2.9.5 Research Constraints

Two kinds of constraints have to be considered: Product and Process constraints.

Product constraints:

• The reporting of this research has to be as stated in the “Manual Graduation” of the Faculty Management and Organization, University of Groningen

• The report has to meet the methodological requirements of the Faculty Management and Organization, University of Groningen

Process constraints:

• The available time for this research is eight months, begun on June 10, 2003

• The research must be conducted by following the scientific methods of the Faculty Management and Organization, University of Groningen

• The research must be conducted with the facilities and resources from ALLINCO that

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3. Measuring Value; in what way?

3.1 Introduction

this section answers the sub-question: In what way can the information gathering process be designed?

This is an important question, because the information gap should be decreased in order to support the decision making to start developments. Because business opportunity is defined in 2.7.2 as in how far a product creates value for the customer and in how far it can play a profitable role in the market, the management control system that should investigate the business opportunities has to reveal this value. Thus, it is about the measuring of the value the new product/ application possibilities can provide to potential customers active in a certain market and to DSM.

A successful external analysis needs to be focused and fit for purpose. Otherwise, the danger will be that the analysis becomes a process resulting in an excessively descriptive report.

Therefore, it is needed to identify the factors external to a business that can affect strategy¹⁹. In this chapter a design of conducting measuring value is presented. This design can be tuned specifically to each unique business development project at DSM BD. In this research it is tuned to the ALLINCO project, because the up-front homework is actually undertaken in the next chapter.

In general, new product/ application possibilities are in first stage of development. There exists a big information gap; market and technological uncertainty. In order to achieve a funded research, it is needed to segment the market in order to find promising application areas. This market segmentation has to fit the goals, assumptions and strategy of the project¹⁹. Thus, there has to be congruence and coherence in the methods used, which are revealed below.

3.2 Marketing approach

In order to create congruence between the methods used, it is needed to define the marketing approach of ALLINCO (and DSM BD), because this approach is not explicitly outspoken.

In marketing there are two generic perspectives²⁰: the Transaction perspective and the Relationship perspective. Each of these perspectives is the end of a continuum. For a company it is important to realize its position on this continuum, because this position has

Ranking and Selection of projects/ ideas

Information gathering process (up front homework) Portfolio

management process

New Product Development Process

This chapter