Supervisors University of Groningen:
Faculty of Economics & Business Specialization Business Development
dr. ir. Michiel Hillen dr. Hans van der Bij
Nettelbosje 2 9747 AE Groningen
Nederland
Supervisor Philips Lighting:
Philips Lighting Sustainability, Standards & Regulations ir. Anton Brummelhuis
Anton.Brummelhuis@Philips.com Mathildelaan 1
5611 BD Eindhoven
Student:
Sander Laurens Dannenberg s2045613
s.l.dannenberg@gmail.com / s.l.dannenberg@student.rug.nl +31 6 50884178
Schoolholm 22A 9711JH Groningen
Executive Summary
The purpose of Sustainable Portfolio Management is to ensure that, during value creation processes, the sustainable characteristics of the project portfolio are reviewed and programmed to at least meet the legal requirements and sustainability policies & standards. This results in the optimal added value of sustainability per innovation project. Furthermore it enables and motivates corporate, business unit and product business levels to improve the environmental performance of the product portfolio above what is legally required. Sustainable requirements are steering at a minimal environmental footprint over the life cycle of the product and a positive social impact of Philips Lighting developed products. This enhances sales opportunities, minimizes financial and reputation risks and enables added value claims for sustainability (e.g. brand value.) Sustainable Portfolio Management is a step in the end-to-end process to create sustainable lighting products and solutions. Sustainable Portfolio Management deals with the front end of innovation and is the link between the ideation process (the start of innovation) and the start of product development, which will then contain the Green requirements that are input for EcoDesign.
The front end of innovation is by nature more uncertain, but changes in the product requirements tend to have the most sustainable impact. 75–90 % of the product impacts in benefits and costs are defined during the early conception phases (Heising, 2012). Therefore it is sensible to extend the established EcoDesign procedure to the front end of innovation to rightly/effectively influence the ecological impact of products. Sustainable Portfolio Management enriches the existing portfolio planning process by incorporating the Green differentiators, leading to more, new, green products and solutions. Therefore Sustainable Portfolio Management has a significant impact on reaching the sustainability targets of corporate strategy.
The design for Sustainable Portfolio Management is made for Philips Lighting, a progressive company on the area of sustainability. There are two main starting points to come to the Sustainable Portfolio Management Design; literature and practice. For both starting points data is gathered, analyzed and concluded upon in six main knowledge areas; strategy, Corporate Social Responsibility, innovation portfolio management, New Product Development, sustainable development and the new Sustainable Portfolio Management.
The analyses conclude in three main design propositions that have already been successfully applied at Philips Lighting. Firstly CSR elements in strategy must be translated to business unit level by setting relevant targets. Furthermore Sustainable Portfolio Management needs to be connected to sustainable development through indicators enabling portfolio management measurement and decision making. And finally, a Sustainable Portfolio management design needs to be integrated with regular portfolio management practices.
Preface
This document is one of the results of my master Business Development graduation for the University of Groningen. A great opportunity was offered to me by Philips Lighting, it was an opportunity that connected theory, practice and my interests fully.
For my graduation thesis I wanted to combine business development with sustainability, in line with the recent megatrend on sustainability. At Philips Lighting a project on green business development was recently initiated, in which the work stream green portfolio management was extensive enough to do my graduation research on. Philips Lighting proved to be the most relevant location, also in terms of academic relevance; As a worldwide organization, with years of experience and leading positions in relevant markets. During my research, Philips Lighting was awarded by the Dow Jones Sustainability Index as the sustainability leader in its sector and adjacent sectors! This was achieved through hard work in whole of Philips, and I hope that my research also contributes to a further position in, and competitive advantage with, sustainability.
Green portfolio management, after my literature review identified as Sustainable Portfolio Management proved to be a very relevant area of research, which is only merely touched by current academic literature. This was tremendously motivating, yet also provided difficulties. The business opportunity research that I performed had to be structured from the ground up and when drawing conclusions in the area of research, the literature was difficult to substantiate my conclusions with.
Looking back on the time with Philips Lighting, I look back on a great time, in which I got to know Eindhoven since I stayed there for half a year. I was very welcome and felt myself at home on the corporate headquarters of Philips Lighting in Eindhoven. Everybody was very helpful, and despite very busy schedules people were able to think with me on the subject. Next to my graduation I initiated projects to improve the sustainability intranet, EcoPassport, green (building) business requirements and much more.
I want to thank all people who have invested time in me to finish this graduation project, which became larger than only this thesis. From the University of Groningen I want to thank Michiel Hillen and Hans van der Bij for guiding me to find the right structure for this research. From Philips Lighting I want to thank my supervisor Anton Brummelhuis and the Lighting corporate sustainability department for dedicating so much time to optimally guide my research, and giving the opportunity to both optimize the research for theory and practice.
If this report brings up any questions, please do not hesitate to contact me; s.l.dannenberg@gmail.com
or +31 6 50884178
Table of Content
Executive Summary ... 3
Preface 4 Chapter 1: Introduction ... 7
§ 1.1 Design assignment ... 8
§1.1.1 Royal Philips Electronics N.V. ... 8
§1.1.2 Philips Lighting ... 8
§1.1.3 Design assignment: Sustainable Portfolio Management ... 9
§ 1.2 Literature gap ...10
§ 1.3 Structure of the research and thesis...10
Chapter 2: Theoretical background...11
§ 2.1 Innovation Portfolio Management ...11
§2.1.1 Innovation portfolio success ...11
§2.1.2 Roles and responsibilities in the innovation portfolio management process ...12
§2.1.3 The process ...13
§2.1.4 Methods, tools and techniques ...14
§ 2.2 Strategy ...15
§ 2.3 Corporate Social Responsibility ...15
§ 2.4 New Product Development ...17
§ 2.5 Sustainable development ...18
§ 2.6 Conclusion on theoretical gap ...19
§2.6.1 Guidelines for the design of Sustainable Portfolio management ...20
Chapter 3: Research Methods ...22
§ 3.1 Research objective ...22 § 3.2 Research strategy ...22 § 3.3 Starting points ...23 § 3.4 Research planning ...23 § 3.5 Research model ...23 § 3.6 Data sources ...25 §3.6.1 Scientific literature ...25
§3.6.2 Philips Lighting business documentation ...25
§3.6.3 Interviews ...26
Chapter 4: Design Requirements ...28
§ 4.2 Proposed design tools ...33
§ 4.3 Interview analysis ...33
§4.3.1 The interviewees ...34
§4.3.2 (Re)contextualizing data ...38
Chapter 5: Sustainable Portfolio Management ...39
§ 5.1 Method selection ...39
§ 5.2 Roles and responsibilities ...40
§ 5.3 Milestones ...41
...41
§ 5.4 Specifications as indicators ...42
Chapter 6: Conclusions and Discussion ...43
§ 6.1 Managerial implications...43
§6.1.1 Targets: Target setting on BG level ...43
§6.1.2 Indicators: Green Ambition ...43
§ 6.2 Theoretical implications ...44
§ 6.3 Limitations and future research ...45
References 46 Attachment 1: Philips Lighting Corporate documents...48
Part 1.1 Relevant documents collected ...48
Attachment 2: The interview ...49
Part 1.1 The interview ...49
Chapter 1:
Introduction
The world is changing; we know that mankind makes a too big demand on the environment and on the community. We need to decrease our demand on nature and the community to secure that future generations are able to meet their own needs. One of the issues that needs to change is the way we develop our products, different interests need to be represented. The interest of a company is, until now, perceived to be that it must sustain itself in its environment. The way to do this is by securing resources, or in other words, making a profit. The last years a debate started about further responsibilities of companies involving sustainability; Corporate Social Responsibility, where besides making a profit (private value), the company contributes to the environment and social environment (public value). In practice finding the balance between private and public value is often referred to as ‘the triple bottom line’: Profit (economic), Planet (environment) and People (contributions to community).
To ensure organizational survival, since the 1970’s, there are developments in literature and practice concerning organizational strategy and portfolio planning. Organizations focus more on their core competences, and innovation must comply with the path rendered by organizational strategy. One method to do this is by portfolio management. Portfolio management is a dynamic decision process, whereby a business’s list of active new products is constantly reviewed. In the portfolio management process, all new projects are evaluated, selected and prioritized. The process encompasses a range of decision making processes within a business, including reviews of the total portfolio of all projects, and go/kill decisions if the projects comply with the organization’s strategy (Cooper, Edgett and Kleinschmidt, 2001). The drivers in the portfolio decision process are financial and strategic. Until now the goal of portfolio tools is to ensure organizational feasibility, allocate scarce resources and to maintain future competitive positions. These are mainly factors that relate to the company’s own survival and do not concern environmental and community interest which are represented in the Corporate Social Responsibility context.
Where Corporate Social Responsibility in the 1990s mainly considered covering negative externalities and marketing, modern variants are addressing all aspects of an organization. Corporate Social Responsibility must then also be represented in new product development. This is where the tool of portfolio management comes into play. What will it look like when Corporate Social Responsibility is represented in a company’s portfolio management process?
A company in the midst of these changes is Philips Lighting, part of Royal Philips N.V. The organization is progressive in the steps of combining Corporate Social Responsibility with portfolio management, and more knowledge needs to be developed on the subject. With the study at Philips Lighting it can be verified that both in practice and within literature there is a gap in translating high level sustainability oriented strategies into product level development, exactly where portfolio management tools perform their work.
This study extends current knowledge areas using academic literature and Philips Lighting as sources to generate a specific design for Philips Lighting. The specific design is in turn extended to more general design rules, to be used by other organizations and further research.
§ 1.1 Design assignment
Philips Lighting is a worldwide company, with sustainability embedded in the organization. In two attributes of the organization sustainability is most embedded; in strategy and in the development stage of New Product Development. To disseminate knowledge and mastery of sustainability throughout the organization, the Green Business Development program has been initiated in March 2012. First a general description of Philips Lighting is given, then the Green Business Development program is described. Part of the program is the objective for this research; Sustainable Portfolio Management.
§1.1.1 Royal Philips Electronics N.V.
The foundations for Philips were laid in 1891 when Philips & Co. was founded in Eindhoven, the Netherlands, by Gerard and Anton Philips. The roots of this organization lie in lighting, as the company begun by manufacturing carbon-filament lamps in the beginning of the 20th century, it quickly became one of the largest producers in Europe. The industrial revolution also drove the beginning of the Philips core competence of innovation; the first research laboratories started bringing the innovations to the market such as radio technology and x-ray. That is when Philips started its diversification through breakthrough R&D innovation. Over the century, the list of inventions and patents has grown tremendously. Breakthrough innovations that influenced the world include the compact audio cassette, the compact disk and DVD technology. In the late 20th century, Philips started to work together with other organizations to keep up the pace of continuous innovations that enrich people’s everyday lives.
Moving forward into the 21st century, change and growth further shaped Philips N.V. The organization had become more than only a consumer electronics producer. To focus its activities, Philips introduced the ‘Vision 2010’ strategic plan to simplify the organizational structure. Per January first, 2008 Philips divided the organization into three main sectors; Healthcare, Lighting and Consumer Electronics. The shared mission between these sectors is to become the leading brand in health and wellbeing by improving people’s lives through meaningful innovation. The vision between the sectors is to strive for to make the world healthier and more sustainable through innovation. The goal is to ‘improve the lives of 3 billion people a year by 2025. Currently Philips employs 122008 people (April 2012) and has revenue of $22.6 billion which makes Philips one of the largest global diversified industrial companies. Philips is globally present as it is operating in 100 countries. In 2012 Philips will spend $1.6 billion on Research and Development.
§1.1.2 Philips Lighting
Philips Lighting corporate headquarters is located in Eindhoven, the Netherlands. Philips Lighting is a leading provider of solutions and applications in lighting for consumer and professional markets, led by CEO Eric Rondolat. To indicate the wide range of applications; lighting can be used for indoor environments such as homes, shops, offices, schools, factories, hospitals, and outdoor environments such as sports arenas, road righting and automotive lighting. Also, lighting can be used for water purification, signage and horticulture. To address all these needs, Philips Lighting is divided in Business Groups and Markets (country clusters). To facilitate the businesses and markets there are corporate level functional departments such as marketing, HRM, sustainability and R&D.
The Businesses are organized in five key Business Groups (BGs); BG Light Sources and Electronics, BG Professional Lighting Solutions, BG Consumer Luminaires, BG Automotive and BG Lumileds. These Business Groups are subsequently divided into numerous application segments to address the markets (e.g. Office, home, lighting solutions). The BGs are independent from each other and provide segmentation in lighting application areas, and adapt product portfolios to local needs, Philips Lighting the global market is divided into
the market regions Europe, Middle East and Asia, North America, Latin America and Asia/Pacific. The regions are subdivided into markets consisting one or several countries.
The world’s energy usage is for 20 % consumed by lighting, which represents a large part of the money that is spent on energy. Also energy costs are rising fast across the globe due to high oil prices, so there is a growing demand for more energy efficient solutions. Next to the higher costs of energy there is an increased awareness and legislation concerning climate change and CO2 emissions. These trends increase the need for innovation in energy efficient lighting solutions. It is deemed essential for Philips Lighting to follow this ‘sustainability trend’ in its growing markets for functional lighting, atmosphere creating and safety-enhancing lighting solutions that have become part of community and individual well-being.
§1.1.3 Design assignment: Sustainable Portfolio Management
Sustainability is a business focus shared by many large corporations, and one way to express this focus is through the product or service portfolio. Philips Lighting is one of these corporations with an inherent sustainability business focus. Already more than a decade ago design was adapted and enriched with sustainable design guidelines.
Over time, an increasing number of products and companies claim that they are ‘more’ sustainable while no specific information is given why. In the US, strict federal regulations appeared on the usage of ‘green marketing claims’. Examples of green marketing claims are green labels, claims that a product is more efficient and fair trade. Only when these green claims have proper substantiation they can be expressed, otherwise companies are risking major lawsuits by the US government. It is also expected that these legal requirements will become more stringent in Europe.
Sustainability, according to Philips Lighting, is not only meeting but also exceeding these legal requirements. To secure a valid for the coming years an integrated approach is needed to make more sustainable products and according sustainability marketing claims. This integrated approach is called ‘Sustainable Business Development’. The Sustainable Business Development program is expected to contribute to Green Sales Growth (part of revenue that is labeled as green), enabling green market communication and increasing brand value and its indicators such as Net Promoter Score.
Sustainable Business Development is a continuous process of… (Confidential)
The Sustainable Business Development Program was initiated in March of 2012 by the corporate sustainability department of Philips Lighting. During the initial exploratory meetings it became apparent that the program is meant to develop and disseminate sustainability knowledge throughout the organization. Philips Lighting is currently super sector leader in sustainability according to the Dow Jones Sustainability Index, and the program will tremendously contribute to the extension of the leading position in sustainability. There is a sense of awareness that if the program not performed now, opportunities are missed and legal requirements will become harder to comply with on the long term. Responsible contact persons from each BG already have been identified; there is willingness from all parts of the organization to develop and disseminate the program’s knowledge throughout the organization.
The researcher was asked by the Sustainability department to make a design for a Sustainable Portfolio Management process. The portfolio management processes of four Business Groups, each different, should be enriched with sustainability in a way that would support the proposed Sustainable Business Development cycle. After the initial analysis it was concluded that the enrichment of portfolio management must;
Be generic enough to fit various Business Group processes,
Define a portfolio management process enrichment with sustainability while not defining a total new portfolio management process,
Define what the results of such a process would be (roadmaps),
Encourage innovation projects to set relevant sustainability specifications for product design, Encourage Business Groups to set portfolio targets on sustainability.
§ 1.2 Literature gap
Based upon the design requested by Philips Lighting, the researcher conducted a literature review (underlined the relevant knowledge areas identified). The knowledge needed to design a Sustainable Portfolio Management method is about fitting sustainability with regular management, along business levels. Innovation portfolio management is about fitting the innovation portfolio of products in New Product Development (NPD), to the strategy of the company. And sustainability covers aspects from high-level international Corporate Social Responsibility (CSR) targets and the ways in which Business Units interpret them, until they are sustainable development requirements.
Innovation portfolio management connects strategy with NPD, and Sustainable Portfolio Management should connect CSR with sustainable development. In literature very few references have been made towards portfolio management connected with sustainability on corporate or product level. There is however one recent example by Dangelico and Pujari (2010) where the first implications are made. This example connects very well and is therefore used to define the literature gap;
“Future studies may also look at green product programs in companies rather than focusing on individual projects. A deeper understanding of green portfolio management will further enhance our understanding of how companies are investing in green product technology platforms to bring new green products to market ... providing a more integrative approach towards environmental sustainability.”
When presenting the literature gap to Philips Lighting, positive reactions arose, the literature gap had a great connection to the ‘missing’ process.
§ 1.3 Structure of the research and thesis
Having proved the practical and academic relevance of Sustainable Portfolio Management, the research can be substantiated further. The research is structured first to generate the needed input from literature and practice. The input from literature is described in chapter 2. Chapter 3 covers the further research design and methodology to properly discover the input that can be generated from practice. The input from practice is described in chapter 4. The outcomes of chapter 2 and 4 are combined in chapter 5; where the Sustainable Portfolio Management method design for Philips Lighting is proposed. In the conclusion and discussion, chapter 6, the managerial implications, design propositions, research limitations and implications for future research are given. Some parts of the research have been removed due to confidentiality.
Chapter 2:
Theoretical background
The terms used in the introduction are broad concepts; innovation portfolio management, strategy, CSR, NPD and sustainable development. Therefore these concepts are elaborated in a literature review resulting in the theoretical background for the rest of this research. Also, the connection between these concepts is determined in the literature review conclusion at the end of this chapter. Five knowledge areas are described first in isolation, and afterwards in connection to show clearly in what domain this research is conducted. The theory provides guidelines on for the design of the Sustainable Portfolio Management process, and provides the substantiated knowledge and input to find the requirements from practice.
§ 2.1 Innovation Portfolio Management
Of the fields to be researched, innovation portfolio management is the most extensively described. Innovation portfolio management differs from product portfolio management in the specific portfolio that they manage. In the product portfolio, launched products currently have a certain market share, maturity and revenue. In the innovation portfolio, potential projects and products need time, risk and investments.
The application of portfolio management will produce a ‘roadmap’ or ‘program’, employees overseeing this process are referred to in this research as ‘program managers’. The roadmap sets a variety of targets (e.g. product functions needed by year x, addressed markets) for the years to come.
To give insight into the innovation portfolio management process, the methods are described here. Reasons to have an innovation portfolio management process in the organization can be among:
The choices made now for the innovation portfolio will determine how the business portfolio looks in 2 to 5 years in the future.
Strategic choices are made for the innovation portfolio. A route (roadmap) is outlined that senior management uses to operationalize the business strategy; product types, markets, technologies and the relative focus are selected to pursue.
Choices for the innovation portfolio determine the resource allocation for R&D, marketing, engineering and operations, which need to be used for optimal performance. For example, if too many products are allowed into the portfolio, the scare resources must be divided too much which hinders development and even products might be funded that have insignificant benefits for the company. The cancellation of these projects makes resources available for other products which may yield more benefit for the company.
A balance must be chosen in resources and number of projects. If too many projects are selected, limited resources are available and projects may be delayed and of lesser quality (innovation pipeline gridlock). The wrong or too few projects will result in the business not being able to win the market. (Cooper, 1997).
Innovation portfolio management consists of strategic, higher level decisions (e.g. roadmap for the coming years) and tactical or more operational decisions, e.g. allocate resources or kill projects (Cooper et al., 2005).
§2.1.1 Innovation portfolio success
The goal of portfolio management is, through resource allocation to maximize the value of the portfolio. Cooper (2001) refers to this as ‘getting the most bang for the buck’. This refers to revenue, market share and margins. Innovation portfolio management considers the improvement of the innovation portfolio performance. Heising (2012) reviewed literature and identified four main constructs optimizing portfolio
found by Cooper and Edgett (1997). Meskendahl (2010) proposes that the ‘use of synergies’, or the reduction of complexity regarding technologies, marketing, knowledge and resources by combining this from different projects is also a construct. This construct is stated here to indicate that portfolio success can be measured in various ways by businesses, so a definition of innovation portfolio success should be defined dependent on the type of business.
The impact of the portfolio on the organization’s performance can be measured as economic success. Economic success, or value, can be divided into success in the market and commercial success. Market success refers to measurements such as market share or sales volume. The projects in the innovation portfolio have not been launched to the market yet, and therefore do not contribute directly to the performance of the business. The future economic success of projects is stated by the innovation project managers in business cases that become more elaborate when the project is nearing the launch to market. Commercial success makes use of the more general financial measures such as break-even, Return On Investment (ROI), Net Present Value (NPV) and profit. In innovation portfolio management lower use of resources by a project can also be a form of economic success.
For the business strategy objectives that are set, the extent to which the innovation portfolio is or will be aligned with these goals is called the strategic fit. To substantiate the example; a company may choose in its strategy that 20% of business development must be in emerging markets by 2014.
Portfolio balance concerns continuity and balance among varying dimensions. Risk, time, degree of newness (of the innovation for the organization) and potential market are examples of dimensions that are compared. The dimensions are balanced to ensure a constant flow and utilization of resources. A good example is that the resource use a long term project that only contributes to the profit in two years, is counterbalanced by a short term project that now contributes to profit but is at the end of its life cycle.
Preparation or readiness for the future is a long term innovation portfolio success dimension. The long term benefits and opportunities for the business in the future have to be available. This dimension is proposed by Heising (2012) in his reasoning towards the integration of the ideation in portfolio management, to measure if competencies and sufficient new technologies are generated and developed within the portfolio and how this will position the company towards competitors.
§2.1.2 Roles and responsibilities in the innovation portfolio management process
Purposeful innovation portfolio management is a complex and delicate act. Decisions should not be biased. Portfolio management practices therefore benefit from integrated decision making from different levels, to come to the integration of single projects with a network of projects at the firm level (Perk, 2007). Four main groups enable the innovation portfolio management process (Levine, 2005), these groups can be found below.
Senior management
Executive and senior management are in this level. Executive management sets the strategy for the whole company, senior management make the first translation of this strategy for their sector, resulting in high-level roadmaps with resource allocation. Senior and executive management designate the representatives of the council that governs the innovation portfolio management process. These top level managers have a broad view how competition, world economies, politics and social trends (mega trends) affect organizational effectiveness.
The governance council of the innovation portfolio management process Members of this council will have varying roles, to the end of managing the innovation portfolio management process. They manage the selection of projects for the portfolio and review innovation projects for possible termination. The members of this council will come from the business unit itself and are supported by the project management office. The governance council proposes the resource allocation, budgets and roadmaps on Business Unit level. After negotiations with senior management these are intentions are fixed for the coming year. The governance council is also referred to as the program board in this research.
The project management office
The project management office monitors the approved innovation projects on their status. They can provide consolidated feedback to the governance council about the projects and support the project team in optimal execution of projects. The project management office will be allocated to the project management level, where the innovation project team is located because they will not be making decisions of portfolio composition.
Innovation project team
This is the executing team. While developing the innovation they will provide deliverables at the set milestones in the innovation process, whereupon the portfolio management decision making can be based. The project team is responsible for planning and execution of the project itself.
For this research, three groups, or levels for decision making identified. The reduction of the four to three groups is done according to the identified research playing field. The innovation project team and the project management office are both allocated to the product management level. Project management is more in connection with innovation portfolio management.
§2.1.3 The process
Innovation portfolio management is a periodical cycle if it is a formalized process in the company. On the fixed moments in the yearly cycle the current portfolio is reviewed, and the future portfolio is planned for. Often it is a yearly cycle, activities are performed within specific months. The main goal of innovation portfolio management is the allocation of resources to innovation projects that are most likely to succeed in the organizations definition of success. To build up the innovation portfolio, all individual projects must be examined, so it involves comparing projects with each other, yet there also must be an outside view towards trends, technology and market opportunities (Patterson, 2005).
These decisions are made during, and based on meetings between different business levels. The meetings or occurrences important for innovation portfolio management are elaborated. Starting at highest level, the Executive management and the senior management negotiate the least often, between one and two times a year the company strategy is reviewed and high level budgets are allocated.
Innovation Portfolio Management is a periodical occasion. Negotiations between the innovation portfolio management governance council and the senior management occur generally two times a year. Once for the portfolio review and proposal of new ideas, and once for the annual budget setting.
There are more negotiations are between the portfolio management governance council and the executing level, to which the innovation project team and the project management office have been allocated. These meetings are quarterly. Often governance council members are also involved in milestone review meetings which are for few or individual projects and irregular.
§2.1.4 Methods, tools and techniques
As indicated, different dimensions can be used to measure innovation portfolio success. As the innovation process is an inherently uncertain process, these dimensions are often represented by estimated values. These values, found in business cases, are compared using portfolio management methods, upon which decision making can be formed. Cooper and Kleinschmidt (2001) researched the different methods and their results. Financial methods are the most predominantly used. There are many different methods to review the innovation portfolio, but this is a representation of commonly used methods;
Financial methods
o Profitability and return metrics that end up in a purely financial calculation will determine the composition and balance of the portfolio. These are methods such as Expected Commercial Value (ECV), Return on Investment, payback period, productivity index, EBIT.
Strategic methods
o Business strategy fit methods: strategic buckets, product roadmaps, technology roadmaps, market
roadmaps, business roadmaps, target spending levels;
o Bubble diagrams or portfolio maps: In these well-known methods projects are mapped in bar chart,
bubble diagram or pie chart X and Y axis map. The X and Y axes can stand for growth in the market, market share and the size of the bubbles for expected revenue or resource needs. The (visualized) results can be used for balancing the portfolio. For example to see if there are enough projects in both growth and mature markets.
o Scoring models: Projects are rated according to an identical questionnaire. The results of the
questionnaire add up to the total project score that determines the project attractiveness. o It system methods: e.g. SAP, Prisma, Clarity. Businesses store much information in centralized
information systems. The information stored and entered in these systems can be automatically compared.
Other methods
o Intuition and experience: When
there is not an official innovation portfolio management process defined at the company, employees base their decisions on intuition and experience. It is to be emphasized that this method yields the worst results. (Cooper, Edgett and Kleinschmidt, 2001).
Figure 1 Example of a matrix which compares products on the growth opportunities of their market, market share and revenue. For innovation portfolio management often risk, potential reward, and risk are compared (Day, 1977).
Researches find that a mix of all these methods yields the best results. So there must be no over-reliance on one method.
§ 2.2 Strategy
Strategy is an action plan designed to achieve a specific goal. Strategy started as military tactics. An early notion of strategy that dates back to 500 BC can be found in the book ‘The Art of War’, written by Chinese military general Sun Tzu. Tzu recommends being aware of, and to act on ones strengths and weaknesses of the organization itself and its adversaries. The early notions of military strategy evolved further towards business strategy, where Adam Smith pleaded for specialization in his book ‘The Wealth of Nations’. Specialization can be used to make an efficient organization of work to boost productivity in manufacturing. These historical developments continued in the 20th century, with scientific approaches for strategic management such as ‘Management by Objectives’ by Peter Drucker. In the late 20th century strategic management mainly dealt with size, growth and portfolio theory. These theories focused on large market shares and their benefits, which sparked an interest in growth strategies. Later small market share focus, niche markets were also recognized as beneficial. To achieve profitable results a company needs to carefully consider the markets that it involves itself in and how the company positions itself. This is viewed as the competitive strategy that is chosen. The competitive strategy is necessary to survive in the competitive environment. Nowadays a vast arrange of companies are involved in established markets, with the markets becoming ever more global. Each company has to keep and develop their position in these markets. A formulated strategy for a company is long term planning (2 to 5 years). Business strategy involves many factors, for this study the connection with portfolio management and CSR is sought.
§ 2.3 Corporate Social Responsibility
Corporate Social Responsibility (CSR) is a subject that built a vast basis of concepts, definitions and literature the last years. The release of ‘Our Common Future’ Brundtland report (World Commission on Environment and Development, 1987). A call was issued to promote economic development that would guarantee “the security, wellbeing, and the very survival of the planet” (Sneddon et al., 2006). In the report the Brundtland Commission described the concept of sustainable development as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs”. Even though the discussion on environmental and social development started well before the report was published, this definition marked the starting point in the discussion about ‘sustainable’ development and governance. Through the years many authors have debated the viability of simultaneously incorporating social, environmental and economic concerns into management thinking and practice (Cruz and Boehe, 2008). Even in the previous small part of text, ‘development that meets the needs of the present without compromising the ability of future generations to meet their needs’ has been referred to as ‘CSR’, ‘sustainable’, ‘sustainable development’ and ‘environmental and social development.’ Terms being used in practice also comprise ‘green’ and ‘sustainability’. That there are various terms for more or less the same concept is found questionable by some authors. Sneddon et al. (2006) reject this questionability by putting the multiple interpretations and practices associated with sustainable development up to discussion, and concluding that embracing the pluralism and normative perspectives is the way out. The discussion on the exact terminology only hinders effective interpretations of the concepts. For this research, the terms ‘Corporate
Social Responsibility’, ‘sustainable development’, ‘green’ and ‘sustainable’ will be used. These four terms represent different levels, CSR is on the corporate or strategy level, ‘Sustainable development’ on the portfolio and new product development level and sustainable or green indicate product level. All these concepts indicate that a balance is
being or has been found, or attempting to do so, between the sustaining of profit, environment and community. The other terms will thus be subordinate to the concept of Corporate Social Responsibility.
Through time, the professional and the academic world defined the three widely accepted principles of Corporate Social Responsibility, or Sustainable development; Environmental integrity, social equity and economic prosperity (Bansal, 2012). These principles are in practice and literature also referred to as ‘the triple bottom line; People, Planet and Profit’. The three principles are internally consistent; companies must balance these principles, just like projects in the innovation portfolio. A company cannot take either of the three too seriously or the others will be compromised.
The environmental integrity principle stands for taking care that human activities do not erode the earth’s resources. The ecosystems that this planet sustains are fragile and have a limited regenerative capacity. The environmental integrity is challenged by our excessive consumption and population. Many examples exist of how the human race violate the ecosystems; toxic spills, oil spills, greenhouse gases, water depletion are just a few examples of occurrences that can bring the ecosystems out of balance. If ecosystems change irreversibly, resources for humans such as fresh air and water will be compromised, and give way to natural and human disasters.
The social equity principle stands for pursuing equal access to resources and opportunities by all members of society. Included in this definition are base needs such as water, food, shelter, political freedom, and more detailed such as no sex, age or race discrimination.
The economic prosperity principle can be perceived from two angles. Bansal (2012) states that economic prosperity “involves the creation and distribution of goods that will raise the standard of living around the world.” It is tied intrinsically to the principles of social equity and environmental integrity. In this research however, to also simplify matters, economic prosperity is interpreted as the financial health of the focal company. Economic prosperity for the community, such as purchasing power, is therefore connected to the social equity principle.
Despite many publications, authors still suggest that the CSR area of research is still in an embryonic state, and no theoretical frameworks, measurement and empirical methods have been proposed. However, it has become apparent that ‘CSR is where a firm goes beyond compliance and engages in actions that appear to further some social good, beyond the interests of the firm and that which is required by law’ (McWilliams et al., 2006). This provides a definition, yet does not provide any insight how a firm could engage in CSR, and
what constructs it consists of. In the beginning of CSR literature development, CSR was not performed as
being sustainable, but to prevent negative impacts from e.g. externalities or scandals. Currently, CSR is viewed as a company-wide orientation which is ‘a set of cross-functional processes and activities directed at continuously identifying and integrating environmental and societal needs in business processes’ (Deshpandé and Farley, 1998). The main issue about CSR is that it is difficult to determine its value for the company. CSR activities that prevented from negative press to happen can of course not be measured, as is it very difficult to distinguish the added value of ‘sustainably produced’ products.
The value of CSR can be proved in various ways. If the role of CSR for companies is assumed useful, the question remains if CSR really contributes towards company results, and thus helping in sustaining the company’s viability. Research found that there is no direct relationship between CSR and profitability, but yields indirect positive results such as a more positive attitude of customers towards the company (McWilliams and Siegel, 2000). Peloza and Shang (2011) also find the relationship between CSR and financial performance to be indirect. They state examples such as increased loyalty, willingness to pay premium prices (more direct) and decreased attributions of blame in the face of a crisis. These factors in turn would enhance a company’s enhanced financial performance. Yet, these findings are still not consistent because of the broad
definition and interpretation of CSR. For example, the relationship between CSR and firm value have been valued as stock returns, market prices, or via accounting measures such as return on investment, assets or equity. However this variety of measuring the effects of CSR also show that it may have different types of effects on firm value. Peloza and Shang (2011) solve this issue by approaching CSR as a mediating variable on firm financial performance, instead CSR will be perceived as activities alongside the traditional product attributes and benefits, that can enhance the overall value proposition. The term value is then perceived from the perspective of the stakeholder. The value is created through the products or services that a company has on the market.
§ 2.4 New Product Development
For this study New Product Development (NPD) is firstly elaborated before reviewing sustainable development. Sustainable development often connects to stages and milestones of this process. NPD is a separate process than innovation portfolio management. In NPD, a stage-milestone process is followed from idea to market. The stages and gates guide the product through development. The stages are a series of activities, the gates involve certain deliverables that the project receives a go/no go or revise decision upon. Central in the NPD process are time and uncertainty. Various NPD processes exist, the fundamental bases of almost all of the new product development models are derived from the Booz et al. (1982) model, see Table 1.
New product strategy Identify the strategic business requirements that the new product should satisfy
Idea generation Search for product ideas to meet strategic objectives
Screening and evaluation A quick analysis of ideas made against criteria that reflect the objectives of the organization
Business analysis A detailed analysis of the attractiveness of an idea in business terms Development Translation of the idea into an actual product for the market
Testing The commercial experiments necessary to verify earlier business judgments
Commercialization The when, where, to whom and how decisions of the launch
Table 1 New Product Development Model. (Source: Booz et al.,1982)
Derived from the model of Booz et al. (1982), the most widely used NPD model is the Stage Gate® Model by Cooper (2001). There are numerous similarities between the stages of this model and the steps of the
model by Booz et al. as can be seen in figure 2.
Figure 2 Gate® Model, Cooper (2001)
In this research much literature by Cooper is used, since it is widely accepted. A drawback from the studies by Cooper is that they often do not fully (rigorously) comprehend the subject at hand, so to say, the studies follow a more pragmatic approach. However, both in the areas of NPD and portfolio management, there was not a wide variety of other literature that the researcher can rely on.
§ 2.5 Sustainable development
Sustainable development is in this thesis connected to the product management level. Sustainable development is often referred to as EcoDesign. EcoDesign is a method for taking the environmental, economic and to a certain extent social aspects into account during product development, implies that the social aspects are in a sub role for EcoDesign. Yet for this research the term sustainable development and EcoDesign are used interchangeably. EcoDesign is considered as one way to translate the business sustainability ambitions of a company into practice (Karlsson and Luttrop, 2006). Despite the difficulties involved with Sustainable development factors, businesses around the world have recognized that they need to respond to the challenge, and so aligned their business strategy, marketing, purchasing and product development according to a win-win logic of being ‘green and competitive’. This reasoning has produced more practical researches such as the one by Dangelico and Pujari (2010), where a toolbox for sustainable product development is proposed.
During EcoDesign an economically viable way is sought to reduce the negative environmental impact of a product during its complete lifecycle. A common approach for EcoDesign is the Life Cycle Analysis, or LCA, which quantifies the environmental impact of the product including manufacturing, packaging, transportation, usage and discard phase (Plouffe et al. 2011). An example of this is that using mercury in a fluorescent tube; it will make the tube more energy efficient, yet mercury is very harmful for man and environment if released into the atmosphere. Other well-known approaches less systematic than the LCA and design for recovery, design for dismantling and cradle-to-cradle.
Several theoretical benefits of EcoDesign are identified by Plouffe et al. (2011). Firstly cost-reductions can be identified, for example when recycled material is used. A Glass factory used to discard broken glass from the
production line. When they fed the broken glass back to the melting pot very large energy savings could be realized as glass melts at a lower temperature than sand. Secondly there is the theoretical benefit of increased revenues through greater satisfaction of customers. EcoDesigned products could give entrance to markets where private and public companies are selecting their suppliers on sustainability performance as well. Thirdly, non-economic benefits could be realized, through improved image and relationships with various stakeholders such as environmental communities and financial groups. Johansson (2001) confirmed the positive non-economic benefits through a systematic study.
In general EcoDesign considers design criteria such as a low requirement of natural resources while using abundant resources and not scarce. In the usage phase the product is environmentally sound, and the product reaches it end of the life cycle it can be recycled or incinerated with minimal burden to the environment (Christian et al. 2002).
EcoDesign can be a confusing term because it is used in various contexts. The European Commission or instance proves directions towards EcoDesign; product groups, for instance coffee machines cannot use more than a certain amount of stand-by power or else they will not be certified with a CE-logo what makes them forbidden to sell on the European market. The European Commission EcoDesign requirement is one of many legal requirements that set a minimal standard for products. These external requirements, however not always obligatory, can also be stated by non-governmental organizations (NGO’s) like WWF and the American LEED building Commission. When the requirements are set while there is no direct hazard, they are set to challenge companies but not to overburden them financially or administratively.
§ 2.6 Conclusion on theoretical gap
Between the concepts previously described, several important linkages can be made. Derived from the linkages and literature, several guidelines for the Sustainable Portfolio Management design can be established. The link between strategy and portfolio management is already extensively documented in literature (Killen et al., 2012). Literature finds the (product) portfolio to be the ‘manifestation of strategy’ (Meskendahl, 2010). Also strategy and portfolio management are both tools oriented on the long term, generally 2 to 5 years. When the literature is analyzed with more detail, a mutual relationship is suggested, for strategy can be used to define the desired product portfolio, and the current product portfolio can be assessed to provide input for future strategy. Literature that is about the relationship between portfolio management and business strategy takes portfolio success as the main variable. For example the study by Meskendahl (2010) follows this approach. According to Meskendahl (2010), firms only realize 63% of their strategies potential value, and 66% of corporate strategy is never implemented. It is more difficult to make strategy work than to make strategy. The product portfolio can be used as a powerful tool to implement strategy. The link between project portfolio success and corporate success has been proven (Meskendahl, 2010; Heising, 2012).
Strategy and Corporate Social Responsibility are connected through their long term orientation. Corporate Social Responsibility has several strategic implications. It is referred to as an integral element of corporate and business level differentiation strategy. It is also a form of reputation building or maintenance (McWilliams and Siegel, 2001).
Innovation Portfolio Management and New Product Development (NPD) are connected through the need for management of NPD projects. Innovation Portfolio Management is the dynamic decision making process which updates and revises a business’s portfolio of active new projects. The projects are evaluated, selected and prioritized, terminated and resources are allocated based upon data or deliverables (indicators) that the
NPD projects provide. Resource selection and allocation happens on the levels of the portfolio, and individual projects (Perk, 2007).
Sustainable development connects with NPD in the sense that Sustainable development can set specifications for projects under development, while Sustainable development needs to adapt itself to the kind of NPD project and its needs. The requirements from Sustainable development will be in the gates of the (enriched) NPD process. The connection between both is found positive, because it Sustainable development could only be applied when having added value, as is described in the review.
Through the literature review it can also be concluded that strategy and CSR, and NPD and sustainable development are already established and overlapping. The ‘translation’ of strategy towards portfolio management, and the subsequent use of portfolio management to manage the NPD project portfolio is also already integrated and deemed essential in literature. However the translation from corporate level CSR to sustainability criteria for portfolio management can be indicated as a missing link in both literature and practice; this will form the business opportunity, as displayed in Figure 3. The concepts have also been allocated to business levels, further details on the business levels can be found in chapter 4.
Figure 4 represents the concepts, business levels and their connections, it represents the ‘playing field’ of this research. The rest of the research will be placed in this field to show relevance and connections between the of the performed activities. It also shows that Sustainable Portfolio Management is identified as ‘the missing link’.
§2.6.1 Guidelines for the design of Sustainable Portfolio management
To guide the analysis and development of the Sustainable Portfolio Management design, guidelines from literature are set up. These guidelines will be enriched by further input from practice.
Cooper and Kleinschmidt (2001) find in their research that “picking the right set of development projects is critical for new product success.” They suggest that a mix of portfolio management methods, with a focus on strategic methods. The companies with the best performing project portfolios are using a mix of portfolio management methods, not solely financial methods. Strategic methods are one of the differentiators improving the selected portfolio performance. Sustainable Portfolio Management must then also have the properties of an strategic portfolio management method.
CSR is a strategic tool for a company, and it has been proven to create value for stakeholders. Through CSR and sustainable development, targets can be established where decision making can be established upon. The targets, based upon the CSR elements in the company strategy and sustainable development, are implemented in portfolio management, this can be considered a strategic tool, and is therefore expected to have a positive effect on the effectiveness of portfolio management, and subsequently portfolio performance.
Figure 3 Identifying the already linked concepts, and the missing link.
With sustainability at the center of thinking in the portfolio management method to be developed, the implications of the private and public equity must be in balance. So the design should not fully concern the environmental and social equity, private equity should be considered since this is essential to stay relevant in the market.
For portfolio management input from different groups of employees is needed, therefore roles and responsibilities should also be defined.
It is concluded that roadmaps set targets and connect with strategy. These targets must be linked to product level indicators, which connect to product specifications. Targets and indicators will enable the portfolio review that must be performed.
Chapter 3:
Research Methods
With the relevance, theoretical background and the first guidelines established for the research, the case study at Philips Lighting can be deployed. In this chapter the method to do so is described. Verschuren and Doorewaard (2000) and Aken et al. (2007) provide the structure for this chapter. First the research objective is specified and the strategy how the research will be performed, as well as in what time span. There is a main research question, substantiated by the starting points that will be needed to answer it. The methods to get data from the starting points can be found in the data sources section.
§ 3.1 Research objective
The research objectives are the goals that have to be completed in the course of this research. The research objectives also have to be aligned with the business opportunity design this research has.
Verschuren and Doorewaard (2000) state there are two types of research; theory oriented and practical oriented. Van Aken et al. (2007) have a similar approach, differentiating between design-focused and theory based business problem solving. To reach the objectives of this study a combination between the base in practice and theory is needed. This is due to the nature of this research, where Aken et al. (2007) focus on business problem solving, where literature is used to solve a business problem, this research has the two objectives proving the value of both the theoretical context and business context for raising new business opportunities through business process improvements.
In the beginning of a business problem solving research there are interviews to get to the definition of the problem, following Aken et al. (2007). For this research a literature research plus informal interviews are put as the base for the business opportunity research. This business opportunity, also referred to as the design assignment in this research, can be found in chapter 1 where there is the reasoning towards the missing link ‘Sustainable Portfolio Management’. The research to further substantiate the business opportunity therefore needs to be methodologically sound; the research design to achieve this is given in chapter 2.
The unit of analysis must be consciously chosen, for it is seen as the most effective way to gather information. Van Aken (2007) finds that the problem should exhibit itself, or become realized through the analysis of the chosen research objects. For this research, one of the objects is a business processes or organizational system and the employees working in it. In the case that the whole process is taken as the object of analysis there is no need to compare different cases as there are no different cases of the unit of analysis. Concluding for this research, there is only one case.
Qualitative research is conducted and the subjects of analysis are literature, employees of Philips Lighting and its current business processes concerning portfolio management, strategy and NPD.
§ 3.2 Research strategy
The research strategy is the ‘collective mutually dependent decisions on the form of execution of the research (Verschuren and Doorewaard, 2002).
According to the typology of Verschuren en Doorewaard (1995), this research is a practical research. The case study has a holistic rather than a reductionistic approach. The study starts from a design assignment (business opportunity) perspective. To prove the business opportunity, two streams of input will be used; input from grounded theory, and input from practice. The input from practice has two formal sources; interviews and business documentation. Informal communication in conversations and e-mails help give the
researcher a more comprehensive overview of the project. Furthermore, methods of data collection that are deemed necessary further on in the research process should be added (Eisenhardt, 1989).
§ 3.3 Starting points
With the design assignment now identified, the definitions and concepts provided, the following main research question becomes relevant if the knowledge areas of Corporate Social Responsibility and innovation portfolio management are intersected and the design assignment for Philips Lighting taken into account:
How could Sustainable Portfolio Management add value for innovation portfolio management through translation from Corporate Social Responsibility to sustainable development for
Philips Lighting?
The outcome of the research question is meant to provide a design for the Sustainable Portfolio Management process design for Philips Lighting and various new insights and extensions to existing knowledge instead of generating a completely new and unfounded one (see Figure 3). The analysis of the current state in literature regarding innovation portfolio management, CSR and sustainable development is performed in Chapter 1. Using the analysis of the current state in literature and practice, the important components to use for Sustainable Portfolio Management can be generically identified. It is important to consider the connections with the other concepts, as depicted in Figure 3. When the constructs for Sustainable Portfolio Management are identified, it will be determined how a Sustainable Portfolio Management method can be implemented. Finally, to provide a reason for companies and literature to adopt and further develop Sustainable Portfolio Management the effects of the proposed design need to be determined.
1. Determine targets and indicators to enable Sustainable Portfolio Management.
2. Establish the links between existing strategy, sustainable development, portfolio management processes and Sustainable Portfolio Management.
3. Determining the positive effects of Sustainable Portfolio Management on innovation portfolio value.
§ 3.4 Research planning
The research of this thesis will take place in a time frame of six months. After the agreement of the project plan, during the six months, the literature study and the case study are executed simultaneously to have a constant check if either stream of research is correctly coupled to each other.
§ 3.5 Research model
The research model is elaborated on before the research methods are explained; this is done to clarify the steps that are taken in order to achieve the research objective.
Figure 4 the Sustainable Portfolio Management research model
In chapter 1 the design assignment and literature have been established. Three starting points are selected to provide data for the research; literature, business documentation and interviews with field experts from Philips Lighting. The literature review is used to find the corresponding business processes and persons that must be researched. The review, found in chapter 2 already established the theoretical background of the research, which as step 1 provides the established starting point for step 2.
Step 2 in the further research is using the theoretical framework and the review of business documentation to constitute an intermediate proposal of tools that are tested in the interviews, and these tools are proposed in the interviews to test if they would function in the case study. During the interviews, indications for extra tools that are found useful are sought. The results of the interviews are also used together with business documentation to map the current business processes (step 3). The current business processes are also mapped to enable the application of the business improvement plan. When these steps are completed, in step 4, the business process improvement plan is confronted with the mapped current business processes of
Developing Sustainable Portfolio Management
(1) Academic areas of interest creating theoretical background of
Sustainable Portfolio Management Literature Review Philips Lighting Business Documentation Interviews
(3) Case framework of part current business processes.
(4) Business process improvement design for
Philips. (2) Make proposal of
tools and verify them in interviews
(5) Academic contribution Determine design propositions
to generalize improvement design. Academic reflection Determined Design Assignment and Literature Gap
Philips Lighting. This results in the business process improvement design in organizational context. The theoretically based framework and opportunity process design result in the Academic contribution, step 5. The academic contribution consists of three parts; managerial implications, theoretical implications and implications for further research. Throughout the research the terminology and allocated business levels play an important role. They will be used for structuring findings and the chapters.
§ 3.6 Data sources
To be able to come to the conclusion of this research, multiple sources of data will be used. There are three main sources of data, Academic literature, corporate documents and interviews. For the case both primary as secondary data will be gathered. Primary data is generated through the interviews. Secondary data will be in the corporate documents, some of this information will be verified in the interviews. The data sources demand different collection techniques; the methodology is also elaborated on in this section.
§3.6.1 Scientific literature
The first stream of data comes from academic literature. This stream is also the basis of the research and will be collected before the analysis of the subject in organizational context is performed. This is used to prove the literature gap. To ensure the quality of scientific articles used in this research, the selected articles are peer reviewed and collected via sources such as Business Source Premier, Elsevier Direct and Wiley Online library.
§3.6.2 Philips Lighting business documentation
The second stream of data comes from desk research, mainly through the analysis of Philips Lighting organizational documentation. These documents are the result of interactions and communications of individuals and groups throughout the organization. The company documents are therefore more comprehensive than what the researcher may find through only interviews and questionnaires.
According to Forster (1994), company documents are (con)textual paradigms which are an integral part of other systems and structures in organizations. The documents define the understandings of particular problems, appropriate behaviors and ways of getting things done in the organization. Organizational documentation comes in many forms, e.g. company annual operating budget plans, annual reports, statements, corporate mission statements, policies, procedures and process maps. These organizational documents provide a rich source of insight in the organization and its members.
A downside of using company documentation is that it may be fragmentary and subjective, other interpretations of the documents may live amongst different groups in the organization. Political motives may lie at the base of documents. Therefore they should be carefully analyzed and must be regarded as context specific.
The analysis is conducted using the method provided by Forster (1994). To achieve a reliable analysis of company documents, Forster (1994) presents the hermeneutic method. At the core of this method lies interpretation, it is aimed at ‘understanding’ the corporate documents. To be able to validly interpret the company documents, a seven step process is proposed. The seven step process is adapted to six steps for this research. In the original process, step 1 is the ‘understanding of meanings of individual texts’ and step 2 is ‘identifying sub-themes’. These steps have been replaced by first identifying the research sub-themes since these are already available and originate in the business opportunity and literature review. Step 2 is then the collection of relevant individual documents. During the collection, the understanding of the meaning of these texts is has priority, and is achieved through thorough examination and meetings with the owners of the
