Structuring the decision making process for product category additions at company X

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Structuring the decision making

process for product category additions

at company X

`

Roxanne Borra

August 2010

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Structuring the decision making

process for product category additions

at company X

University of Groningen Faculty of Economics and Business

Master Business Administration Specialization: Business Development

August 2010

Roxanne Borra

Van Lippe Biesterfeldstraat 13 3523 VA Utrecht

0031-654981603 r.borra@student.rug.nl Student number: 1752421

Supervisors from the University of Groningen: First: dr. K.R.E. Huizingh

Second: dr. C. Reezigt

Supervisor from company X: Advisor 4

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Preface

During my year as Master Student I was interested in a variety of research topics to investigate, but my overall goal was twofold. On the one hand, I had the aim to investigate a topic that had received only scarce attention in scholarly literature to ensure my thesis would deliver a valuable contribution to a certain research area. On the hand, I was determined to conduct a study that was able to deliver an academic and practical contribution. In other words, the study should be investigating a topic that would also deliver a valuable contribution in solving a management question. By investigating the decision making process for product category additions at company X, I was able to achieve this goal. Nevertheless, this study would not have been able to take place with the information, feedback and support of others.

First, I would like to thank my supervisors dr. K.R.E. Huizing and dr. C. Reezigt. A special thanks to dr. K.R.E. Huizingh for his continuous stream of feedback during this study that helped me to gain new insights that stimulated me to achieve the maximum results. Second, I would like to thank company X for offering me the opportunity to investigate this interesting research opportunity. Finally, a special recognition for my boyfriend, my family and friends for their support and encouragement during this study.

Roxanne Borra

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Abstract

Company X observes a variety of product category additions to advance, but needs to decide which projects to engage in and especially why. Therefore, this study aims to structure the decision making process for product category additions at company X so that solid, multi-criteria decisions can be made.

First, a literature study was conducted to investigate the nature of the decision making process and to set up a provisional list of decision-criteria. A two-level structure was suggested consisting of perspectives (to be considered in each decision) and criteria (specific measures that express an aspect of a perspective).

Second, a multiple case-study was conducted to determine how the decision making process currently develops. This study investigated the number and type of go/no-go decisions, the positions involved, the decision-criteria used and the evaluation practices. The decision making process at company X consists of 5 stages: „discovery‟, „research‟, preparation for implementation‟, „development‟ and „implementation‟. Go/no-go decisions are made after the discovery and research stage. The selection of product category additions occurs during yearly portfolio meetings. Multiple advisors are involved in the go/no-go decisions, but decision making is a Management Team occurrence. All empirically derived criteria could be structured around the perspectives: „strategy‟, „environment‟, „finance‟, „assortment‟ and „process‟. Moreover, company X makes well balanced decisions by considering all distinguished perspectives in each go/no-go decision. Per stage, the number and level of detail on which criteria are considered increases. Nevertheless, it is rather implicit how and which evaluation practices are applied.

After an evaluation of the decision making process, the following recommendations were set forth. To consider changing contextual factors throughout the process, go/no-go decisions should be made after each stage. The project and program progressions, the decisions made, the criteria used and criteria-weights assigned should be documented in Project and Program Data Sheets to ensure the decision making process becomes clear for all involved positions. The Management Team fulfills a decision making role, Program Managers operate on the tactical portfolio level and Business Development and Category Management fulfill a Project Manager role.

To evaluate projects on the project level, the process starts with strategy evaluation to ensure the strategy becomes the guiding principle of the evaluation process. In the

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In the subsequent stages, it is the aim to consider all 6 perspectives and criteria found in the earlier studies. The perspective „unique criteria‟ was included as the sixth perspective to cover criteria only applicable to few cases. The criterion „impact on organization‟ should be considered in all gate meetings to address the project interrelatedness recurrently.

To evaluate the portfolio of product category additions, a yearly meeting should be convened wherein 10 criteria are applied. The deliverable is a table that contains the measurement units of the criteria. The criteria are focused on timing issues and the efficient and effective use of development capacity. Based on this table the Management Team can select the optimal rank order of product category additions to advance.

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1 Research design

This research design contains the research motive, the research objectives and the deliverables. Moreover, the central question, sub research questions and the content and structure are addressed.

1.1 Research motive

The online retailer company X is founded on 4 November 1998 by the media-concern Company Y. Since the start, brand awareness, revenue and assortment have increased significantly. Nowadays company X is the largest online retailer in the area of media-entertainment and has the objective to end in the top 3 of established retailers in the Netherlands. In addition, the organization aims to double revenue within 3 years and to generate Z million revenue in 2012. However, upcoming competition and digitalization has resulted in fierce competition in online and offline markets. Furthermore, the markets of books, games and music show an overall decreasing trend (GFK, 2009A:B). Although company X is still performing above market level, the organization gradually shits attention to new markets in order to secure a steady stream of revenue.

Therefore, company X is examining various growth options, like process improvements, product category expansions and product category additions. Especially product category additions are valuable growth opportunities for achieving the ambitious growth objectives, since new industries can be entered and new customers can be attracted. Moreover, the increased assortment results in complementary sales and in retaining current customers (Hart and Rafiq, 2006). Lastly, product category additions are valuable for starting new collaboration structures and/or new business models (Chatterjee, 2002; Whipple and Russell, 2007).

Since the start, company X has implemented various product category additions successfully. Table 1.1 contains an enumeration of the implemented product category additions.

Table 1.1 Implemented product category additions at company X (1999-2010) Year Product category additions

1999 Project 9

2000 Project 10

2003 Project 11

2004 Project 1

2007 Project 13

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For the nearby future, company X observes a variety of potential product category additions that could be pursued. However, the organization needs to decide which product category additions to engage in and especially why. As a result, company X would like to make decisions for evaluating and selecting product category additions on a more solid base to continue growth and to expand its market position.

1.2 Research objective and deliverables

The overall objective is to structure the decision making process for product category additions in a way that solid, multi-criteria decisions can be made. In other words, the structure should aid the decision makers and participating advisors at company X in evaluating and selecting product category additions. Furthermore, this study provides insights in how the decision making process for product category additions currently develops.

1.3 Problem statement

The central question can be formulated as; „How can company X structure the decision

making process for product category additions in order to make solid, multi-criteria decisions in the future?‟

To provide an answer on the central question, the question is divided into 3 sub-research questions.

1 Which elements should be taken into account when considering a product category addition?

2 How does the decision making process for product category additions currently develops at company X?

3 How can the decision making process for product category additions be structured so that company X considers all relevant elements?

A product category is defined as a “distinct, manageable group of products” (Gruen and Shah, 2000:484) whereas product category additions are defined as a bundle of similar products or services that are added as a new category to an assortment (Hart et al., 2006). Similarity can be determined by the production or distribution methods, marketing instruments or the way consumers use products (Verhage, 2000; Kotler et al., 2006). On the other hand, one can look at the category structure consumers use (Van Herpen, 1997; Hart et al., 2006). Company X mainly applies physical characteristics for the categorization of products or services, since consumers apply different bases for categorization over time and marketing activities alter (Van Herpen, 1997).

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Chapter 2 will elaborate the definition of product category additions in relation to retail assortment and the decision making process.

1.4 Content and structure

Chapter 2 addresses the nature of the decision making process and identifies decision-criteria that can be used in the decision making process for product category additions.

Chapter 3 focuses on the development of the decision making process in earlier considered and/or implemented product category additions. Firstly, internal documentation was examined. Additional information about the decision making process was obtained from the decision makers and advisors participating in the decision making process by conducting semi-structured interviews.

Chapter 4 evaluates the decision making process and outlines how this process can be best structured by incorporating all earlier obtained data from chapter 2 and 3.

Finally, chapter 5 answers the main research question and provides an overview of the recommendations put forward. Moreover, the limitations and suggestions for further research are outlined.

Figure 1.1 illustrates the structure of this report and how each research question is related to this structure.

Figure 1.1: Research model (inspired on Verschuren and Doorewaard, 2007) Scholarly

literature

Decision makers Documentation

company X

Sub question 1 / Chapter 2 Examines the nature of decision making process and identifies decision-criteria

Sub question 2 / Chapter 3 Examines previous product category additions at company X

Sub question 3 / Chapter 4 Evaluates and structures the multi-criteria decision making process at company X

Central question / Chapter 5 Conclusion, recommendations and suggestions for further research

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2 Decision making for product category additions

This chapter addresses the nature of the decision making process for product category additions. Subsequently, perspectives and criteria are identified that function as a provisional outline of decision-criteria that company X can take into account when evaluating a product category addition.

2.1 Nature of the decision making process

A decision is a selected course of action that is chosen among alternative courses of action (Nutt, 1984; 2008). Key factors in decision making studies are the type of decisions, the positions involved, the context and the process itself (Fahey, 1981; Rajagopalan, Rasheed and Datta, 1998) and these factors can be studied on various levels of analysis (Nutt, 2008). All of these elements are addressed in the following subparagraphs.

2.1.1 Level of analysis

Product category additions can be analyzed on the manufacturer, wholesale, retailer or consumer level of analysis (Van Herpen, 1997; Nilsson and Høst, 1987; Hart et al., 2006; Mantrala et al., 2009). Since company X operates as an online retailer, this study is focused on decisions at the retail level. Retail assortment can be defined at two levels, namely at the product category level or at the store level (Hart et al., 2006; Van Herpen, 2006). The first level refers to the variety of products that are carried within a product category and involve the depth and breadth of a product line within a category (Dussart, 1998; Hart et al., 2006; Mantrala et al., 2009). The second level of assortment refers to the total set of items a retailer offers and is concerned with the width of the assortment (Hart el al., 2006). This final level corresponds to the level of analysis examined in this study.

2.1.2 Type of decision

A retailer can make assortment decisions at a strategic, tactical and operational planning level. The decisions in this study can be best defined as strategic, because the composition of the assortment can be regarded as a key issue for a retailer (Brijs, Swinnen, Vanhoof and West, 1999; Mantrala et al., 2009). The decisions involve the industries the organization is in, the market segments the organization attracts and the competition it faces (Swinnen, 1982; in Nilsson et al., 1987; Hart, 1999; Hart et al., 2006). Therefore, these assortment decisions have a far-reaching and complex character (Kessler, 2004; Hart et al., 2006; Jones, 2007). The two other planning levels fall outside the scope of this study.

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Unique about the decisions in this study are the changes that can be achieved in the retailer‟s market position and brand image (Mantrala et al., 2009). Retail assortment is frequently described as a strategic tool for store repositioning over time and has great influence on the store image (Hart et al., 2006). Moreover, the decisions are made in a pure online environment wherein traditional retailer constraints, like shelf space and assortment dimensions, are largely absent (Van Herpen, 1997; Brijs et al., 1999; Mantrala et al., 2009).

2.1.3 Positions in decision making

Strategic decision making can be described as a “complex, multi-organizational phenomenon with many individual decisions in process” (Fahey, 1981:58) and spans several managerial or hierarchical levels (Hollenbeck et al., 1995; Nutt, 2008). Frequently, multiple organizational members provide advice to one or more decision-makers and this structure is referred to as “judge-advisor system” (Sniezek and Buckley, 1995; Kerr and Tindale, 2004). By applying the judge-advisor system, this study can describe the roles and the responsibilities of the positions involved in the decision making process. The judges, i.e. the decision-makers, have the responsibility for making the decision. The advisors formulate judges or recommend alternatives and communicate these to the decision-makers. As a result, the quality of decision making is largely dependent on the information the decision-makers posit and receive from advisors (Brijs et al., 1999) and share among decision-makers (Kerr et al., 2004; Brodbeck et al., 2007).

2.1.4 Contextual factors

The context refers to the antecedents influencing the decision making process and involves environment, organizational and decision-specific factors (Rajagoplan et al., 1993: Elbanna and Child, 2007; Mantrala et al., 2009).

Environment factors are often described by the variables complexity, uncertainty, dynamics and munificence (Rajagoplan et al., 1993; Elbanna et al., 2007) and define the attributes of the environment and the industry the organization is in (McGee et al., 2005; Jones, 2007). Although environment factors are influential on the decision making process, these factors can also be described as largely uncontrollable by the organization (Rajagoplan et al., 1993; McGee et al., 2005). On the one hand, company X is subject to macro-level factors, like economic conditions. On the other hand, company X is operating in a value chain consisting of interdependent channel members wherein decisions made by one channel member can influence the decisions to be made by company X (Nilsson et al., 1987).

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Therefore, decision-criteria that are supportive in defining the environment will be included in paragraph 2.2, but will be defined at a high aggregation level. Product category additions can span a variety of new industries and by defining the criteria at a high aggregation level they can better respond to varying environment factors (Nilsson et al., 1987). Nevertheless, decision-criteria focusing on other levels of the value chain fall outside the scope of this study (e.g. manufacturer decision-criteria), since such an encompassing view would hardly be feasibly for this study. These factors are considered as constant, external factors (Nilsson et al., 1987).

The decision-making process is also subject to a variety of firm specific characteristics that are more controllable by the organization. Key organizational factors influencing the decision making process include power distributions and organizational structure (Rajagoplan et al., 1993; McGee et al., 2005; Elbanna et al., 2007, Korsgaard, Scheiwger, Sapienza, 1995; Driscoll, 1978; Eisenhardt and Zbaracki, 1992). Powerful members are likely involved in problem identification, determine the type and extent of information used and can influence the criteria applied to evaluate projects. The organizational structure can influence the information flow, extent of analysis and the interaction at different organizational levels (Rajagoplan et al., 1993; Sniezek et al., 1995). The judge-advisor system referred to in paragraph 2.1.3 supports in identifying the positions involved in the decision making process and their roles and responsibilities. By applying the variables power distributions and organizational structure, the mutual relation between positions can be elaborated.

Decision-specific factors refer to the complexity, uncertainty and risk involved in the decisions to be made (Rajagoplan et al., 1993). Because the decision making process for product category additions will be examined in this study, these factors cannot be specified in advance, with exception of the type of decision.

2.1.5 Decision making process

Assortment decisions on the product or single product category level of analysis hold the most interest for researchers (Hart et al., 2006). Furthermore, retail assortment planning studies are frequently conducted on the consumer level of analysis (e.g. Kahn and Lehmann, 1991; Kök and Fisher, 2007; Hermann, 2009; Simonson, 1999), focus on the tactical planning level of assortment (e.g. Nilsson et al., 1987) or are largely constrained by traditional retailer constraints. Nevertheless, the decision making process itself is not examined in the majority of the assortment planning studies. Hence, organizational decision making literature and innovation literature is examined (Nutt, 1984; Fahey, 1981; Cooper, 1990; Kessler, 2004) to gain an understanding of the decision making process for product category additions.

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Both literature streams conceptualize decision making as a multi-stage process consisting of various strategic decisions. Figure 2.1 illustrates a typical organizational decision making process. The content of the stages in this process are largely similar to those of a typical innovation process (e.g. van de Ven et al., 1989). Innovation and decision processes both start with idea formulation and end with implementation (Nutt, 1984; Kessler, 2004). The first 3 decisions depicted in figure 2.1 parallel innovation initiation wherein ideas are proposed and defined. The fourth decision parallels innovation selection and involves resource allocation. The final decision can be perceived as innovation implementation and concerns putting ideas into practice (Kessler, 2004; Cooper, 1990; van de Ven et al., 1989).

A multi-stage process would allow company X to evaluate projects multiple times throughout the process and to allocate resources efficiently by eliminating weak ideas early. In addition, each stage can deal with the uncertainties, information and expertise needs required for that particular stage (Pillai et al., 2002; Fahey et al., 1981; Hollenbeck et al., 1995), since each decision can involve unique process characteristics and can be subject to different contextual factors (Cooper, 1992; Rajagoplan et al., 1993; Nutt, 2008; McNally et al., 2009). For instance, the comprehensiveness of the deliverables, the participating positions or the degree of political activity can be different among the decisions. Moreover, by dividing the process in a set of (predetermined) stages, a visible road map is created for the decision makers and advisors for decision making and project execution purposes (Cooper, 1990). Lastly, a similar multi-stage conceptualization is applied by innovation studies examining the evaluation, prioritizing and selection of innovation projects, a subject that is comparable to this study (Pillai, Joshi and Rao, 2002; Eilat, Golany and Shtub, 2008).

An innovation model that underlines to follow a multi-stage process is the stage-gate system of Cooper (1990; 2000; 2006; 2009). To enter a stage, a gate controls the process. A gate is characterized by a set of deliverables that must be brought into the gate. The deliverables will be judged upon a set of criteria and the project must pass all hurdles before the project can continue to the next stage. The output of the gate is a go/no-go or on-hold decision and the approval for an action plan to the next stage.

Figure 2.1: Decision process (Nutt, 1984) Formulation Concept development Detailing Evaluation Implementation

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The inputs and criteria can change from gate to gate due to changing uncertainties and information needs and senior management is required to be involved in the gates (Cooper, 2000; 2006).

The structure of the stage-gate system would provide company X a clear road map of activities. Since the structure specifies the process and the output, project efficiency and effectiveness is vouched for (Sethi and Iqbal, 2008). Moreover, various studies emphasized that the structure is supportive in integrating portfolio management for the selection process of projects (Ali, Kalwani and Kovenock, 1993; Chin, 2004; Cooper, 2001:B; McNally et al., 2009). This would allow company X to evaluate projects on their own merits and relative to other projects to ensure that in terms of priority and planning the most potential project can be selected.

Nevertheless, the stage-gate system has a strong focus on technology development (Cooper, 1990). The activities and criteria suggested are mainly applicable to a manufacturer developing a single product. Furthermore, the stage-gate system does not allow for iteration in the process (Cross and Sivaloganathan, 2005), while a typical strategic decision making process is characterized by iterations (Fahey et al., 1981; Rajagopalan et al., 1993). Finally, Cooper et al. (1997) describe portfolio management as a dynamic decision process concerned with whether new or existing ideas or (product and R&D) projects receive resources. The decision process for product category additions at company X has a somewhat different character. Portfolio management involves the evaluation and selection of only product category additions instead of a variety of projects. Product category additions will expectedly only be compared with the product category additions in the pipeline and the current assortment.

In conclusion, the decision making process for product category additions is considered as a multi-stage process dealing with different contextual factors per decision. Furthermore, ideas can be evaluated at two levels, namely at the project and the portfolio level. Empirical research needs to examine how the decision making process currently develops at company X and if (and how) company X has implemented portfolio management.

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2.2 Decision-criteria

The quality of decision making is largely dependent on the information available (Brijs et al., 1999). By gathering information from a variety of sources, a well-considered decision can be made (Hollenbeck et al., 1995; Bitman and Sharif, 2008). The aim is to discover which decision-criteria can be taken into account and how these criteria are evaluated throughout the decision making process.

2.2.1 Identification

To determine which product category additions can be pursued, it is essential to follow a multi-criteria decision making process (Kaplan and Norton, 1992; Bitman et al., 2008). Multi-criteria decision making is set of techniques or structures that aid decision-makers in considering a balance of viewpoints to evaluate alternatives (Nutt, 1998:A; Hendriksen and Traynor, 1999; Valls Mateu, 2002). Bitman et al. (2008) recommend a two-level structure to ensure the decision process remains manageable and a clear overview can be provided of the considered elements. The authors make a distinction between perspectives and criteria. Perspectives can be defined as a specific angle or viewpoint that guide the construction of a decision making framework. A criterion expresses an aspect of a perspective and enables multi-criteria decision making per perspective (Kaplan and Norton, 2002; Bitman et al., 2008). By applying the suggested structure of Bitman et al., (2002) decision-criteria could be organized in a clear overview.

Decision-criteria were derived by conducting a literature study on the fields of retail marketing (category management and assortment planning) and innovation management (project evaluation prioritizing and selection and portfolio management). In total, 29 studies were found that contained specific perspectives or criteria that could be supportive for evaluating, prioritizing and/or selecting product category additions. In total, 80 perspectives and 328 criteria were included (see Appendix A for an overview) that function as a first outline of decision-criteria. In the following paragraphs these elements will be organized and reduced.

2.2.2 Organizing decision-criteria

The perspectives and criteria were derived from various literature streams and resulted in an extensive list. In order to end up with a manageable list of mutually exclusive and relevant decision-criteria, the list is reduced (Bitman et al., 2008). Moreover, earlier research states that decision-criteria change across the decision stages (Ronkainen, 1985; Cooper, Edgett and Kleinschmidt, 1997; Tzokas, Hultink and Hart, 2004;

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Therefore, it is examined how and when perspectives and criteria can be considered throughout the decision making process. The subsequent paragraphs will elaborate both issues.

2.2.2.1 Reduction and grouping

Frequently, authors conduct statistical analysis to end with a manageable list of relevant decision-criteria (e.g. Cooper et al., 1984; De Brentani et al., 1988; Cooper, 1992; Jiang and Klein, 1999; Saunders et al., 2005; Hart et al., 2003). At company X, only few organizational members are directly involved in the decision making process for product category additions and then statistical analysis (e.g. factor analysis) is not feasible. Hence, we have set up our own selection procedure (Babbie, 2007; Saunders et al., 2005). The first step involved applying the selection-criterion „relevance‟ to assess whether perspectives and criteria were relevant for an online retailer. Subsequently, similar items were grouped. Finally, criteria were structured around the final set of perspectives. Appendix A contains a list of the reviewed perspectives and criteria. The following paragraphs elaborate on the selection process.

After applying the selection-criteria „relevance‟, especially perspectives referring to a single product and traditional retailer constraints were eliminated, like „fit to production systems‟. However, 62 of the 80 perspectives remained. The level of detail among the remaining perspectives differed considerably and numerous perspectives overlapped. Therefore, similar items were grouped, but over 10 perspectives remained. Since various innovation studies already conducted statistical analyses to determine which perspectives are used at evaluation gates (Ronkainen, 1985; Hart et al., 2003; Tzokas et al., 2004; Carbonell-Foulquié et al., 2004; Saunders et al., 2005; Schmidt et al., 2009), these studies were examined to further reduce the number of perspectives.

The perspectives most frequently applied in these studies are: „strategy‟, „environment‟, „finance‟, „product‟, „process‟ and „technology‟. Nevertheless, the perspectives „product‟ and „technology‟ are focused on the product level of innovation and are not applicable to this study. Furthermore, none of the perspectives considered the product category‟s relation to the current assortment, even though this can be considered as an essential issue for the assortment building function at the retail level (Balderston, 1956; Nilsson et al., 1987; Hart et al., 2006). Therefore, the perspective „assortment‟ was included, while the perspectives „technology‟ and „product‟ were deleted. Table 2.1 contains the definition of the selected perspectives.

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Table 2.1: Definition perspectives

Perspectives Operationalization

1 Strategic

perspective The project‟s synergy with the organization‟s objectives (Cooper et al., 2001:A; Kaplan et al, 2001; Eilat et al., 2008) The wider impact the project has on ongoing projects

(Cooper et al., 2001:A) 2 Environment

perspective Criteria describing the organization‟s environment and industry attributes (McGee et al., 2005; Nilsson et al., 1987) 3 Financial

perspective Criteria regarding the project‟s financial feasibility (Kaplan et al., 2001; Kerssens-van Drongelen et al.,1999; Eilat et al., 2008) 4 Assortment

perspective Criteria regarding the assortment building function (Nilsson et al., 1987) 5 Process

perspective Criteria regarding the firm‟s ability to perform the project (McGee et al., 2005; Hart et al., 2003; Tzokas et al.,2004)

Subsequently, similar criteria were grouped and defined on the highest aggregation level in order to respond to varying contextual factors and to end up with a list of relevant and mutually exclusive criteria. Table 2.2 contains an overview of the 26 selected criteria.

Table 2.2: Selected perspectives and criteria

Strategic

perspective Environment perspective Finance perspective Assortment perspective Process perspective

Strategic fit Market potential Margin rate Assortment

dimensions Time to commercial start-up Brand fit Market acceptance Sales potential Assortment

consistency Development risk Strategic

impact Expected competitive situation

Profit objectives Value proposition Management team support and commitment Impact on the

organization Future market opportunities Total investment requirement

Supplier services

and functions Adequate resources and expertise Window of

opportunity Commercial fit Durability of product category Learning for next project

Regulatory impact Distribution

characteristics 2.2.2.2 Organizing perspectives and criteria

To organize the perspective and the criteria over the gates, insights need to be obtained about the perspectives and criteria used, the criteria-weights and the evaluation practices, i.e. how decision makers approach decisions (Nutt, 1998:A; McNally et al., 2009). The most essential issue is that decision makers consider a balance of viewpoints, because no single criterion in table 2.2 can measure the overall performance of a project (Kaplan et al., 2002). Therefore, it is beneficial that in each decision a project is evaluated against all 5 perspectives.

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To ensure the decision making process remains manageable, Kaplan et al. (2002) and Bitman et al. (2008) recommend to only focus on a selected number of measures that are most critical for decision making. By reducing and grouping the number of criteria, this recommendation is partly applied. However, criteria usage and criteria-weights can change across the gates, following the results of various innovation studies (Ronkainen, 1985; Rochford, 1991; Cooper, 1990: Hart et al., 2003; Tzokas et al., 2004; Carbonell-Foulquié et al., 2004; Saunders et al., 2005; McNally et al., 2009; Schmidt et al., 2009). Therefore, the subsequent step is determining which criteria can be used per go/no-go decision and if (or how) criteria-weights changes.

In general, criteria usage and weight can change in the following ways:

1. The number of criteria increases or decreases over the evaluation gates (Schmidt et al., 2009; Carbonnell-Foulquié et al., 2004; Rochford, 1991; Cooper, 1990).

2. An equal number of criteria is maintained, but the criteria-weights change over the evaluation gates (Cooper et al., 1984; Ronkainen, 1985; Hart et al., 2003; Tzoakas et al., 2004; Carbonnell-Foulquié et al., 2004; Saunders et al., 2005;)

3. A combination of the two previous options is applied (Griffin et al., 1996)

Nevertheless, the source of variation is only discussed in few studies (McNally et al., 2009). Some studies claim that criteria are subordinate to the business or project strategy ( Griffin et al.,1996; Jiang et al., 1999). Furthermore, contextual factors can influence the variation of criteria (Nilsson et al., 1987; McNally et al., 2009). McNally et al. (2009) argues that personality factors, like background or dispositional traits, explain the variation of multiple decision-makers applying different evaluation criteria or criteria-weights at evaluation gates.

Moreover, criteria-weights can be assigned in multiple ways. For instance, a decision maker can provide explicit values for all perspectives and criteria or can make global preference judgments for the product category additions under evaluation (Eilat et al., 2008; Chen, Kilgour and Hipel, 2009). Furthermore, criteria-weights can be assigned before the evaluation process starts or once all required information is gathered (Aloysius et al., 2006).

Criteria usage and assigning criteria-weights is also concerned with the evaluation practices applied (Nutt, 1998B, Linton, Walsh and Morabito, 1998). Mintzberg, Raisinghani and Théorêt (1976) found that decision makers can approach decisions in different ways by applying analytical, judgmental and bargaining evaluation tactics to evaluate alternatives or to draw inferences.

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Analysis is based on factual evaluation and combines information by using analytical tools to create new information to draw an inference. Judgmental tactics are used when the evaluation is based on intuition without any reference to benefits or merits. Bargaining tactics have the aim to reach consensus among decision makers before making the decision and decision makers vote or debate to reach consensus. Nutt (1998:B) added subjective evaluation tactics wherein decision makers “make interpretations of information that indicate the view of people or archival data” (Nutt, 1998:B:341). These 4 evaluation tactics are on their turn related to the information sources consulted and the assessment approach (i.e. quantitative, qualitative or subjective). Nevertheless, these evaluation practices fail to explain how unique decisions are made, since they cannot describe “how decision makers act comprehensively, conduct analysis, or engage politically” (Nutt, 2008:431). Since this study is a first attempt in examining the decision making process for product category additions, only the structure and content of the decisions together with the general evaluation practices will be investigated. To describe how decisions makers can best approach the decisions and deal with process issues like political activity, the decision making process should be first conceptualized based on extensive empirical research (Nutt, 2008).

In conclusion, since criteria usage, criteria-weights and evaluation practices can vary across firms or even across projects (Ronkainen, 1985; Cooper et al.; 1997), the criteria usage, the weight assignment and the evaluation practices in the overall decision making process will be examined in empirical research.

2.3 Conclusion

Decisions for product category additions are made on the store level of retailer assortment and can be typified as strategic. Furthermore, various decision-makers and advisors can be involved in the decision making process that comprises of multiple stages. Each stage deals with specific uncertainties and information needs. To determine which decision-criteria can be taken into account in the decision making process, a literature study was conducted. This study generated 80 perspectives and 328 criteria. Being drawn from a variety of fields and aggregation levels, many decision-criteria were inapplicable for this study. By eliminating perspectives and criteria that were irrelevant for an online retailer and grouping similar items, a provisional list of 5 perspectives and 26 criteria is developed. However, various issues remained unanswered or are company specific. Therefore, the empirical research will focus on a) the number and type of decisions; b) the positions involved in the decision making process; c) the roles and responsibilities these positions fulfill; d) the decision-criteria considered e) assigning

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3 The decision making process at company X

To determine how the decision making process regarding product category additions currently develops at company X, empirical research is conducted. Throughout the research process, the following questions were maintained as guide line:

1. How many go/no-go decisions could be distinguished? 2. What type of go/no-go decisions could be distinguished? 3. Which positions were involved in these decisions?

4. What were the roles and/or responsibilities of these positions?

5. Which perspectives and/or criteria played a role in the distinguished decisions? 6. What weight was assigned to these perspectives and criteria?

7. Which evaluation practices were applied?

Since detailed knowledge should be obtained from events occurred in the past, case-study research was conducted (Swanborn, 2003). The unit of analysis were the go/no-go decisions made within a selected case. These decisions have the advantage of having a great influence on the project progress. Therefore, there is a greater chance these decisions are documented. Furthermore, the problems of organizational members to recall the information around these decisions is minimized (Saunders et al., 2005; Cooper et al., 1984). Consequently, chances are increased to obtain the aimed information.

The remainder of this chapter addresses the case selection procedure. Moreover, the data collection process is described. Subsequently, the results of the case-study are outlined. Finally, an overall conclusion is drawn that provides an answer on how the decision making process regarding product category additions currently develops at company X.

3.1 Case-selection

The cases considered and/or implemented at company X were uncovered by screening the computer system for case documentation. In this way, 11 cases were found. Before planning the interviews, all interviewees were asked if they knew additional cases considered by company X and 6 new cases were suggested. In total, 8 cases were selected for this study and the case-selection was based on two pre-requisites. Firstly, concrete go/no-go decisions were made. Secondly, case documentation and at least 2 involved organizational members were available to increase the validity of the results (Baarda et al., 2005). Table 3.1 contains an overview of the total number of cases and the case selection procedure.

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Table 3.1: Product category additions considered and/or implemented

Cases Decision

made? Documentation available? Persons available? Selected?

Project 1 Y Y Y Y Project 2 Y Y Y Y Project 3 Y Y Y Y Project 4 Y Y Y Y Project 5 Y Y Y Y Project 6 Y Y Y Y Project 7 Y Y Y Y Project 8 Y Y Y Y Project 9 Y N N N Project 10 Y N N N Project 11 Y N N N Project 12 Y N N N Project 13 Y Y N N Project 14 N N N N Project 15 N N N N Project 16 N N N N Project 17 N N N N

3.2 Data collection

Case documentation was derived by scanning the computer system of company X and by asking organizational members for documentation that was used as input for the decision making process. Appendix B contains an overview and a brief description of the 40 documents used for this study.

For none of the cases all information could be obtained that was aimed for. Documentation was set up for different purposes than this study (Yin, 2003). In addition, documentation from the Management Team was unavailable. Therefore, semi-structured interviews were conducted to obtain additional information. The interview protocol is based on the questions stated in paragraph 3.1 and is outlined in Appendix C.

The sampling procedure was partly pre-specified from the start of this study, because company X indicated that the Management Team, the Business Development Team and the Category Managers are involved in the decision making process for product category additions. During the data collection process, it was revealed that the Shareholders and various Expert Positions inside company X are also involved in the decision making process.

Expert Positions are functional departments, like Finance, Logistics, IT Development, Marketing, Front End & Services or Customer Services that contribute in the form of expertise for the design and implementation of the processes and systems required.

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The Shareholders could not be interviewed, since company X changed Shareholders during this study. Information about the role of these two groups is obtained during the case documentation study and indirectly by asking the interviewees.

To analyze the collected data, the following procedure was followed. First, a coding list was developed before starting the data collection process (Miles and Huberman, 1994). Second, case documentation was organized per case and interviews were tape recorded and written out in text documents. Irrelevant text elements were deleted and the remaining text was divided in fragments (Baarda et al., 2005). Third, documentation and interviews protocols were analyzed and inconsistencies or missing elements were verified or obtained by conducting follow-up interviews. In total, 8 organizational members were interviewed with an interview duration ranging from 0,5 hour to 1.5 hour per interviewee (see appendix D for an overview).

To vouch for quality, the coding list was reviewed after two interviews were completed. The final list is included in Appendix E. This list makes a distinction between codes referring to a single project and codes that refer to the decision making process of product category additions in general (i.e. not to a specific project). Furthermore, after all interviews were completed, all applied codes and fragments were rechecked once more. In addition, a fellow student with experience in qualitative research, coded 10% of the interview protocols and 4 case documents. Since less than 8% of the material differed, no adjustments were applied to the coded material (Miles et al., 1984).

3.3 Results

The results of the case-study are structured around the paragraphs decision making process, positions in decision making, decision-criteria and evaluation practices.

3.3.1 Decision making process

The examined documentation contained limited information about the number and type of go/no-go decisions made and the actual development of the decision making process was documented rarely. The case documentation of Project 3, project 4, project 6 and project 8 revealed that company X aims to follow a multi-stage process and outlined an intended go/no-go decision after each stage. The remaining cases contained insufficient information to draw any conclusions about the number and type of go/no-go decisions made. Consequently, interviews were conducted to determine the go/no-go decisions made per case and to gain an understanding about the preceding and/or subsequent activities performed.

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Table 3.2 contains an overview of the stages per case (blue cells). The cells containing “x” are stages wherein or where-after go/no-go decisions are made.

Table 3.2: Stages and decisions made per case

Cases Discovery

stage Research stage Preparation for implementation Development stage Implementation stage

Project 1 X Project 2 X X Project 3 X X X Project 4 X X Project 5 X Project 6 X X Project 7* X X Project 8* X X

* Current projects, not implemented yet

The decision making process consists of five stages; „discovery‟, „research‟, „preparation for implementation‟, „development‟ and „implementation‟. Interviewees stated that only 1 to 3 go/no-go decisions are made per case. Decisions can be made within or after a stage and entail a go, no-go or on-hold decision. With the exception of project 3, the final go/no-go decision is made after the research stage. The following paragraphs will elaborate the stage and gate activities performed.

The discovery stage entails scanning the industry and business environment for future opportunities. The subsequent go/no-go decision involves the evaluation of potential product category additions. Since company X currently has numerous potential product category additions in the pipeline and this number is increasing, the main challenge in this gate is “To determine which projects can be pursued concurrently” (Decision maker 1, Decision maker 2). Therefore, this go/no-go decision can be best described as a continuous re-evaluation of potential product category additions.

The subsequent stage is the research stage. In this stage, a business plan, business case and project plan is set up as input for the go/no-go decision. Early versions of business plans already outline strategic and financial objectives together with the scope and the principles of the project. This confirms the pre-research activities performed in the discovery stage. According to the members of the Management Team, the go/no-go decision after this stage is generally the final go/no-go decision made in the overall process. As Decision maker 2 states: “…After this decision, no more go/no-go decisions

can be distinguished in this organization. This would only result in a longer development process, something we cannot afford and results in limited development capacity for

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In the cases project 3 and project 6 it was even decided to make a decision within the research stage to monitor the project progressions. The reason to include these decisions was related to, respectively, the project scope and the urgency for a timely implementation.

The following stages are preparation for implementation, development and implementation. In the preparation for implementation stage, the business and technical specifications are set up. In the development stage, these specifications are translated in systems and processes. The final stage, implementation, involves setting up a marketing plan and the implementation of the systems and processes. Examined documentation identified a go/no-go decision after each of these stages. However, the members of the Management Team and one Business Developer clearly state that no go/no-go decisions are made after the research stage. Although projects still can be cancelled, the decisions made in these stages are rather operational, exert limited influence on the actual progress of the project and are focused on evaluating the project progressions. Only great changes in the contextual factors can result in an on-hold decision or cancellation, because projects in these stages have clear objectives and definitions, investments are made and the implementation is in an advanced stage. For instance, in the case Project 3 an on-hold decision was made in the preparation for implementation stage, because economic conditions were changed and company X would change Shareholders shortly. Therefore, the investments were no longer feasible.

Another issue to address concerns the level decisions are made on. 6 of the 20 examined go/no-go decisions involve project evaluations on single idea and on portfolio level. Interviewees mentioned that in these go/no-go decisions other product category additions were perceived as more valuable and received priority, while a current project was placed on-hold due to limited development capacity or other resources. However, the portfolio decisions made at company X have a different character than described in chapter 2. Annually, the Management Team convenes a meeting wherein the budget and planning for the next year is determined for all potential and current projects. This implies that product category expansions, product category additions and investments in systems, processes or operations, situated in various project stages, are compared next to each other. Hence, single product category additions are discussed by the Management Team throughout the year, but the portfolio planning is determined once per year.

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Company X can implement 1 to 2 product category additions per year, dependent on the project scope, complexity, required resources or expertise and the other types of projects in the pipeline. However, the Management Team has the aim that more potential product category additions are worked out up to the preparation for implementation stage, so that more detailed information is available about potential product category additions and they are able to make portfolio planning decisions on a more solid base.

3.3.2 Positions in decision making

In total, 8 different positions can be involved in the decision making process; the Management Team, the Shareholders, the Business Development Manager, Business Developers, Category Managers, Product Managers, Expert Positions and External Positions. External Positions are decision makers or advisors not employed at company X, like publishers (project 4), record labels (project 8), distributors (project 6) or manufacturers (project 4) that are involved in the decision making process. Table 3.3 contains an overview of the decision makers (DM) and advisors (A) involved per case.

Table 3.3: Positions in the decision making process per case

Cases Stage Positions in decision making

Ma na ge m en t Te am Sha re ho ld er s Bu si ne ss D ev el op m en t Ma na ge r Bu si ne ss D ev el op er C ate g or y Ma na ge r Pr od uc t Ma na ge r Ex p er t Pos iti on s Ex te rn al Pos iti on s Project 1 Research DM - - - A -

Project 2 Discovery DM & A - - - DM & A A - -

Research DM - - - A A - -

Project 3 Discovery DM - - - -

Research DM & A A A A - - - -

Preparation for

implementation DM DM - A - - A -

Project 4 Discovery DM & A - A - A - - DM & A

Research DM - A - - A - DM

Project 5 Research DM A A A - - A -

Project 6 Discovery DM & A A - - - A

Research DM & A A A A - A - -

Project 7 Discovery DM - A - - - - -

Research DM - A A - - - -

Project 8 Discovery DM & A - - - -

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The decision making process is highly centralized. All members of the Management Team stated they are together responsible for the decision making process. The Management Team is responsible for the strategy formulation for product category additions, assigns criteria-weights, makes go/no-go decisions during gate meetings, acts as mediator in cases of conflict and provides process guidance during the implementation stages by attending project progressions meetings. Although the members of the Management Team have a diversity of experience and each member has specific knowledge about their directory field (e.g. Operations), there exists no stratification in their responsibilities. The reason the Management Team provides for this centralized structure is the believe they are most knowledgeable about future market trends. “We could hire

ten strategy consultants from a recognized consultancy agency, but I do not believe they could come up with other or better information than we do” (Decision maker 1).

In 5 cases, members of the Management Team also fulfilled an advisory role in the discovery or research stage. In the discovery stage, the Management Team is responsible that go/no-go decisions are made when discovering an interesting opportunity, but is also continuously involved with screening the business and industry environment for new opportunities. In the cases project 4 and project 8, members of the Management Team were involved in performing stage activities in the research stage. Due to the dependence External Positions for project implementation, the decision making process was more complex. In cases before 2007 their involvement is mainly related to the absence of a Business Development department.

The advisory role is for the greatest part fulfilled by the Business Development department by “validating ideas”, mainly originating from the Management Team. Business Development is responsible for the process and content of the project and is held accountable for a timely implementation within the set specifications. Their role can be best described as a rather traditional project management role (Chin, 2004; Pillai et al., 2008). However, there is differentiation among the individual Business Developers throughout the process. Especially in the cases project 7, project 5 and project 3, the Business Development Manager obtains internal and external data in the research stage. During or after the research stage, a Business Developer takes over her role and becomes responsible for managing the implementation. However, the Business Development Manager remains involved as Project Manager and is responsible for the overall process and content. This role switching is dependent on the project scope and complexity; the less complex, the sooner a Business Developer takes over.

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Category Management fulfills an advisory role that is comparable to the Business Development Manager‟s role, but is involved in less cases. The Category Managers have close relations with important market players and possess valuable market knowledge that can be supportive in the information gathering process. Also the Category Manager assigns project implementation responsibilities to Product Managers during or after the research stage, but remains responsible for the project process and content. The Program Managers mainly become responsible for the assortment building function, together with Procurement and the Business Developers. Since Business Development and Category Management directly report to the Management Team, they have the greatest influence on the decision making process by emphasizing important issues in performed analyses and meetings.

Also the Shareholders fulfill an advisory role. Documentation points out that the ideas for implementing project 5 and project 6 originated from the Shareholders of company X. Both Business Development and the Management Team described the Shareholders as initiators that can come up with ideas for product category additions by following market trends in their investment portfolio. In cases of major investments that can influence their portfolio significantly, some interviewees suggested the Shareholders can fulfill a decision making role. For instance, it was suggested that in the case of project 3 the Shareholders, together with the Management Team, made an on-hold decision to discontinue investments. Nevertheless, the members of the Management Team all state that they are in charge of the decision making process. Since they are the only organizational members that have direct contact with the Shareholders, no verification could be conducted.

The final advisory roles are fulfilled by the Expert Positions from Marketing, Operations, IT, Marketing and Finance and Support. In the research stage, the managers of these departments are involved to stay informed about the project progressions and to ensure their departments can prepare correctly on the activities to be performed in the preparation for implementation stage. After the research stage, specific Expert Positions become actively involved in the development process to perform implementation activities. Remarkable is that Business Development becomes rather dependent on these positions after the research stage, because projects then get a more operational character. As Advisor 1 also states: “During the project implementation stages we

(Business Development) are largely dependent on Expert Positions inside company X for a successful implementation.”

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The role of External Positions was frequently extensively described in project documentation. External Positions can fulfill a decision making or advisory role in different stages of the decision making process, dependent on the type of organization and their expertise. Sine their roles are case specific, these positions will not be further elaborated in this study.

In general, all advisors are largely committed to the decision making process by constantly talking about “we”. Furthermore, advisors state they have great trust in the actions and decisions made by the Management Team. Nevertheless, only limited documentation is available that outlines the actual project progressions or the evaluation process to confirm the openness and information sharing among the different decision makers and advisors.

It is noteworthy that during the time this study was conducted, the organizational structure of company X has changed significantly. Currently, Business Development is part of the Marketing department, but will become a staff department directly reporting to the Managing Director. Furthermore, a Senior Business Developer is recruited for expert knowledge regarding new, possible business models and potential collaboration options with external parties inside and outside the value chain. In addition, a general Category Manager is recruited who will be actively involved with the current and future category management activities. Finally, company X has changed Shareholders and they might fulfill their position differently. In chapter 4 these organizational changes will be taken into account as far as possible.

3.3.3 Decision-criteria

To outline the perspective and criteria used at company X, the results are structured around the paragraphs „reduction and grouping‟ and „organization‟.

3.3.3.1.Reduction & grouping

In total, 428 empirically decision-criteria were obtained. Since the perspectives were already determined in chapter 2, all criteria were structured around the go/no-go decisions and divided over the perspectives: „strategy‟, „environment‟, „finance‟, „assortment‟ and „process‟. All criteria could be structured around these perspectives and no perspectives were missing. Therefore, this two-level structure is considered as appropriate for the remainder of this report and no new perspectives will be included.

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In addition, it was determined whether the empirically derived criteria corresponded to the criteria outlined in chapter 2 (table 2.2 and Appendix A). It can be concluded that a criterion can 1) directly overlap with a criterion from chapter 2; 2) is related to a criterion from chapter 2, but is not included as criterion in the short or long list or 3) is a new criterion that cannot be related to any criterion from chapter 2. From the 428 criteria, 384 criteria were similar or related to the criteria from chapter 2. From this latter group, the criterion „supplier services and functions‟ was replaced by „potential collaboration partners‟, since company X screens for multiple partners inside the value chain to initiate collaboration activities. Potential collaboration partners can be distributors, suppliers or manufacturers and by re-formulating this criterion, all these partners are covered. Appendix F structures all empirically derived criteria around the criteria from chapter 2.

44 empirically derived criteria could not be related to any criterion from chapter 2. To reduce their number, similar items were grouped and 10 criteria remained. The reason these criteria were not included can be related to the fact that most examined literature was focused on category management or product innovation. Considerations like „potential business models‟ or „integration with current systems‟ are less applicable to these streams of research. Appendix G contains an overview of this grouping process.

The left columns in table 3.4 on the following page outline an overview of the perspectives and criteria used for evaluating product category additions at company X. The blue colored criteria are the new, empirically derived criteria. With the exception of 1 criterion, company X considers all 26 criteria derived in chapter 2. Consequently, the criteria from chapter 2 can be considered as a reliable representation for evaluating product category additions. The following paragraph will elaborate on the organization of criteria.

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Table 3.4: Frequency table decision-criteria per case

Criteria literature study SCE SO BE PB DR TO DIYP DM T.CR T.CA

S trate g y Strategic fit 2 1 1 1 2 2 2 11 7 Brand fit 1 1 1 2 1 4 1 11 7 Strategic impact 2 2 4 2 Impact on organization 1 2 2 5 3

Value creation Shareholders 1 1 1 3 3

Sub total 4 2 4 3 4 7 3 7 34 - E n vir onme n t Market potential 3 3 7 2 8 5 3 8 39 8

Future market opportunities 4 1 1 7 13 4

Market acceptance 1 2 6 5 5 3 22 6

Expected competitive situation 2 11 2 7 7 1 6 36 7

Window of opportunity 2 3 3 3 2 5 18 6

Regulatory impact 1 1 1

Business model competitors 1 2 3 2

Culture characteristics 2 2 1 Sub total 10 7 29 5 26 22 6 29 134 - Fina n ce Margin rate 1 1 3 4 1 3 1 4 18 8 Sales potential 1 3 6 2 2 5 2 4 25 8 Profit objectives 3 2 3 1 9 4

Total investment required 1 6 1 3 3 2 6 22 7

Commercial fit 2 1 2 1 2 8 5

Operational costs 6 5 2 6 1 20 5

Possible business models 2 2 4 2

Sub total 3 4 26 14 12 22 6 19 106 - A ss or tm en t Assortment dimensions 4 1 6 3 6 20 5 Assortment consistency 3 3 2 2 6 2 1 19 7 Value proposition 1 1 2 1 2 4 1 1 13 8 Durability 2 3 1 6 3 Distribution characteristics 2 3 1 6 1 13 5

Potential collaboration partners 3 4 5 6 8 1 2 29 7

Collaboration options partners 1 2 1 2 2 8 5

Fiscal and legal assortment aspects 2 1 3 6 3

Sub total 7 13 11 12 18 35 4 14 114 -

Pro

ce

ss

Time to commercial start-up 1 1 1 1 4 4

Development risk 2 1 2 1 6 4

Management support and commitment 0 0

Adequate resources and functional expertise 1 1 1 3 3

Learning for next project 1 1 2 2

Integration current systems 1 3 2 2 2 3 1 14 7

Project complexity 1 1 1 1 1 1 1 7 7

Legal system and brand aspects 4 4 1

Sub total 4 3 9 5 7 6 1 5 40 - Total criteria 28 29 79 39 67 92 20 74 428 -

Total criteria-weight 8 3 11 5 5 10 5 9 56 - * Project 1 (SCE), Project 2 (SO), Project 3 (BE), Project 5 (PB), Project 4 (DR), Project 6 (TO), Project 7,

Structuring the decision making process for product category additions at company X

Structuring the decision making

process for product category additions

at company X

Roxanne Borra

August 2010

Structuring the decision making

process for product category additions

at company X

Preface

Abstract

Table of contents

1 Research design

1.1 Research motive

1.2 Research objective and deliverables

1.3 Problem statement

1.4 Content and structure

2 Decision making for product category additions

2.1 Nature of the decision making process

2.2 Decision-criteria

2.3 Conclusion

3 The decision making process at company X

3.1 Case-selection

3.2 Data collection

3.3 Results