Master thesis
Examining Composition Characteristics for
Innovation Portfolio Management: A
Systematic Literature Review of Alliance
Portfolio Management.
University of Groningen Faculty of Economics and Business MSc. BA Strategic Innovation ManagementSupervisor: J.D. van der Bij Co-assessor: K.R.E. Huizingh
By Hannah Kistemaker S2753073
Wordcount: 13.124 (excl. appendix) 21-06-2020
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Table of Content
Abstract 1
1. Introduction 2
2. Theoretical Background 4
2.1 Innovation Portfolio Composition Characteristics 4
3. Methodology 6
3.1 Formulation of the research question 6
3.2 Searching for studies 6
3.3 Selection and evaluation of the studies 7
3.4 Analysis and synthesis 8
4. Descriptive Statistics 10
5. Findings 14
5.1. Strategic fit of the portfolio 14
5.2. Creating a balanced portfolio 15
5.3. The impact of alliance portfolio size 15
5.4. Interdependencies: positive and negative effect 17
5.5. Diversity in many different forms 19
6. Discussion & Conclusion 27
6.1 Theoretical implications and recommendations 28
6.2 Managerial implications and recommendations 29
6.3 Limitations 30
7. References 31
8. Appendix 36
Abstract
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1. Introduction
Nowadays, newly commercialized products contribute for less than a third to the total sales of average performing firms, whereas the best performing firms realize about half of their sales from new products (McNally et al, 2012). Above all, many projects do not even reach the launch or delivery stage (Killen et al., 2008). As innovation is understood as the main driver of economic growth in developed nations, maximizing the outcomes from innovation initiatives is more important than ever (Killen et al., 2008). Innovation portfolio management is used to manage the firms’ innovation initiatives. Over twenty years ago Cooper et al. (1999) already pointed out that the prioritization of a new product or R&D project, in the form of portfolio management, is vital to successful business performance. Innovation portfolio management is a complex process and it goes beyond managing single projects (Behrens, 2016). Portfolio management operationalizes the strategy and can be explained as the dynamic decision-making process in which projects are evaluated and selected, and resources are allocated to them (Cooper et al. 1999). To make well thought out decisions, managers need to assess innovation projects against the backdrop of the entire innovation portfolio and the resources available for managing it (Behrens, 2016). Even the best-performing firms still do not succeed in portfolio management, as nearly half of initial new product development (NPD) ideas occur informally or without a specific goal (McNally et al, 2012). Although it is clear portfolio management is an important activity, research suggests that it may be one of the weakest areas in the company’s new product development process (Szwejczewski et al., 2006).
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in other portfolio management domains might find additional composition characteristics to enrich the innovation portfolio management literature.
Not only is portfolio management a popular topic in the innovation literature, also in other disciplines is portfolio management extensively researched. This literature review will therefore systematically research portfolio management in other management disciplines to identify valuable insights for innovation portfolio management. The objective is to identify additional portfolio composition characteristics which contribute to an effective portfolio. Composition characteristics are used to describe the important attributes or dimensions from the portfolio which, all combined, lead to the most effective portfolio composition. The research question is:
“What portfolio composition characteristics, found in other disciplines of portfolio management, can enrich the innovation portfolio management literature?”
To answer the research question in a more focused way, I have chosen to study the alliance portfolio management literature. I will discuss the alliance portfolio management literature by analyzing 28 papers that cover composition characteristics of an effective alliance portfolio.
This research answers to a call for more research into the information and factors that are truly important during the IPM decision process (Meifort, 2016). In addition to the dimensions (i.e. value maximization, strategic alignment, balance and resource fit) proposed by Cooper and his colleagues, this research has identified three composition characteristics from the alliance portfolio management literature. Firstly, to realize an effective portfolio, the size of the portfolio can influence the effectiveness of portfolio management. Increasing the size of the portfolio, in terms of initiatives, causes complexity and makes it harder to obtain additional benefits from the portfolio. Secondly, interdependencies between initiatives can cause both conflicts and redundancy, as well as synergies and complementarities. Therefore, this phenomenon can affect the total value of the portfolio positively and negatively. Thirdly, moderate levels of diversity can offer a firm new (technological) knowledge and promote new initiatives by recombination. Specifically, this paper contributes to the IPM literature by three propositions for new composition characteristics. Thereby, future research avenues will be addressed.
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2. Theoretical Background
This section will provide the reader with the necessary background on innovation portfolio management by discussed the history of IPM and the current composition characteristics. Innovation portfolio management is a versatile topic. IPM is defined as the dynamic decision process, whereby a business’s list of active new product (R&D) projects are constantly updated and revised. This process consists of evaluating, selecting and prioritizing new projects; accelerate, kill or prioritize running projects; and reallocation of running projects (Cooper et al., 1999). For these decisions’ innovation initiatives will be compared based on a firm’s criteria. Successful firms are known for their well-defined and structured portfolio management in which all decisions are a result of a systematic approach (Cooper et al., 1997; Barczak et al., 2009).
Research on portfolio management started in the 1960s and 1970s. The early selection methods were based on quantitative methods, deriving from finance and operations research theories (Camillus, 1982). Theoretically these methods were well justified, however they have significant practical shortcomings when it comes to project portfolio management due to uncertainties around these decisions (Kester et al. 2011). The business case of innovation projects consists of predictions of the future, whereas quantitative models process the information as facts. This lack of accurate data makes these methods unreliable (Blau et al., 2004) and this may demonstrate why solely using financial methods is detrimental to business performance (Cooper et al., 1999; Killen et al., 2008). Quantitative models were followed by probabilistic financial methods, such as real options (Janney and Dess, 2004; McGrath,1997). Although many models exist to evaluate an innovation portfolio, the nature of innovation projects is very specific due to internal and external circumstances. Therefore, the past two decades research about innovation portfolio management has significantly grown and has taken a broader perspective. Besides optimization of the portfolio, the innovation portfolio management stream focused on the link between corporate and portfolio strategy, decision-making and the organizational aspect of portfolio management (Meifort, 2016). IPM is concerned with having the best projects in a firm’s portfolio at any given point in time (McDonough III & Spital, 2003), where corporate strategy is brought into action. Optimization of the portfolio based on financial and strategic aspects makes it possible to reach the portfolio’s objectives: successful innovations and profitable new sales.
2.1 Innovation Portfolio Composition Characteristics
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make use of financial measures such as the net present value or scoring models which incorporates strategic, leverage and other considerations beyond just financial measures (Cooper et al., 2001). These non-financial measures can be environmental value, ecological value, long-term business benefits and stakeholder influence (Martinsuo & Killen, 2014). To create a balanced portfolio, managers evaluate the portfolio on multiple concerns. The goal is to achieve a desired balance on parameters such as completion date, risk, markets and project innovativeness (Cooper et al., 2001). Thirdly, projects should be assessed according their fit with the corporate strategy. There must be an alignment between the innovation initiatives in terms of the projects, areas, markets etc. and the firm’s strategic priorities (Cooper et al., 2001). The fourth goal of selecting the right number of projects is often seen as one of the balance parameters. As the number of projects needs to be balanced with the number of resources available. Picking the right number of projects is important to ensure projects reach the market on time (Cooper et al., 2001). Companies make use of different methods, tools and figures to assess the portfolio along these four dimensions. Portfolio managers use all dimensions to make NPPM decisions, although their weight or emphasis given to each varies across firms (Cooper et al., 1999; McNally et al., 2012). It is important for managers to see the benefits of using the four composition characteristics and the risks of overemphasizing on one dimension. As stated earlier, evaluating only financial returns, is linked with poorer performance and is seen as the bare minimum (McNally et al., 2012). Meanwhile, although balance shows a positive relation to firm performance, managers saw this objective as least important (McNally et al., 2012). Strategic fit creates less space for promising initiatives that are not stated in the strategy, and strategic alignment of the portfolio can therefore have a negative impact on the firm performance (McNally et al., 2012). This research will focus on additional composition characteristics, but other portfolio management research fields can also confirm these four characteristics. Figure 2.1 shows the current portfolio composition characteristics as they are known in the IPM literature. This research aims to extend the current knowledge within innovation portfolio management by consulting the alliance portfolio management literature.
Figure 2.1. Composition Characteristics for Effective Innovation Portfolio Management
Value Maximization —To allocate resources so as to maximize the value of the portfolio (Cooper et al., 2000). Balance - To achieve a desired balance of projects in terms of a
number of parameters (Cooper et al., 2000). Strategic Alignment - To ensure that the final portfolio of projects reflects the business’s strategy (Cooper et al., 2000). Resource Fit - To selecting the right number of projects and kill projects that exceed its resource limits (Cooper et al., 2002).
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3. Methodology
In order to conduct an overview of the different portfolio management streams and its relating criteria for successful portfolio composition, this thesis uses a systematic literature review approach. A systematic literature review is a methodology that describes existing studies, selects and evaluates contributions, analyzes and synthesizes data, and reports the evidence in such a way to reasonably draw clear conclusions about what is and what is not known (Briner & Denyer, 2012). In this thesis I will follow five key steps as described by (Briner & Denyer, 2012): (1) formulation of the research question, (2) locating the studies, (3) selection and evaluation of the studies, (4) analyzing and synthesizing information, and (5) reporting the best evidence.
3.1 Formulation of the research question
A research question is needed to give direction to the systematic literature review. According to Counsell (1997) this question defines which studies will be included, what the strategy will be to identify the relevant primary studies, and which date needs to be extracted from the studies. The research question is stated in the introduction section.
3.2 Searching for studies
A systematic literature review begins with the identification of keywords, search terms and its relating search strings (Tranfield et al., 2003). This systematic literature review only covers English articles, as this is the language widely used within scientific studies, the databases are English and the search terms will be in the English language. In order to get the most information possible, the search is not limited to a certain time period. There are also no limitations regarding the type of research (i.e. qualitative or quantitative, or both) and the context of the research. To search for relevant articles, the Ebsco database is used. Articles of which the full paper was not accessible on Ebsco, were obtained via Google Scholar. The Ebsco database is used because of its advanced search options and this database ensures access to reliable and peer reviewed content. I have only selected articles that are peer-reviewed and published in academic journals.
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articles mentioning portfolio management were searched to find potential new streams. This search resulted in 67043 articles with portfolio management in the title or the abstract. Two different approaches were used in order to identify additional research streams. Firstly, a benefit of the Ebsco database is that it gives an overview of the different subjects of the articles found. Therefore, this made it easy to identify the different subjects of the articles and determine the different portfolio management streams. Portfolio management subjects according to Ebsco are: financial management, research, alliance, decision making, finance, investment, economics, evaluation, decision making, patent and project management. Secondly, the titles of the articles were screened in order to find relevant portfolio management streams. Both methods did not show a substantiated amount of research on other portfolio management streams. Based on these results this research will continue with the following three portfolio management streams: alliance portfolio management, investment portfolio management and patent portfolio management. Therefore, the search terms that are used to further examine the different streams are “Alliance portfolio management”, “Investment portfolio management” and “Patent portfolio management”.
3.3 Selection and evaluation of the studies
Inclusion and exclusion criteria are used to provide transparency of how each article is assessed on their contribution to the research question. Criteria used for this research are:
- Inclusion criteria: Studies that cover the topics of portfolio management in the field of: investment, alliance and patent were selected if they cover the criteria for successful portfolio composition. This can be in the form of empirical research, case studies, meta-analysis and literature reviews.
- Exclusion criteria: Studies that focus on individual cases without a perspective of the complete portfolio are excluded. Also, studies that focus on general management practices or evaluation tools are not selected.
The registration and classification of this study was done by Microsoft Excel. During the systematic literature review 3.627 articles were selected, of which 582 on alliance portfolio management, 2614 on investment portfolio management and 431 covered patent portfolio management (see Table 1). The article selection was conducted in April 2020.
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Table 3.1. shows the search results for each research stream. Regarding alliance portfolio management 26 articles were found describing characteristics of successful alliance portfolio composition. These articles comprise our final data set and will be used for this research paper. With regard to investment portfolio management no useful articles were found. Articles describing investment portfolio management mostly focus on mathematical methods to calculate and compare portfolios considering the highest return based on risk predictions. Since the focus of investment portfolio management is not on the characteristics for successful portfolio composition, this research stream is eliminated from this research. Concerning patent portfolio management, Conegundus de Jesus & Salerno (2018) stated in their literature review that the literature about patent management is not a well-developed topic. Their literature review discussed useful topics of new product portfolio management to be used in patent portfolio management. This insight combined with the judgement of our initial pool of articles, where also no articles which comprised characteristics of successful patent portfolio composition were found, led to decision to also drop this research stream. We extended the 26 articles from alliance portfolio management with 2 additional articles by reviewing the total (582) set of articles once more. However, those articles are also peer reviewed articles and cover the field of portfolio characteristics for alliance portfolio management.
Table 3.1. Search results in numbers
Keyword Initial selection Final selection
Alliance Portfolio Management (total of: 582 articles) 50 articles 28 Investment Portfolio Management (total of: 2614 articles) 36 articles 0 Patent Portfolio Management (total of: 431 articles) 29 articles 0
3.4 Analysis and synthesis
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was read and table was filled in to ensure that all the necessary information was collected. These characteristics are needed to synthesize, integrate and extract information and results of different studies on the research topic. This table is used and filled in for each article. The appendix shows the characteristics of the 28 articles.
Table 3.2. Characteristics of articles
Title Title of the article
Authors Authors
Year Year of publication of the study
Composition characteristic Composition characteristic that might be applicable to IPM composition Motivation Motivation for the researchers to research this topic
Timing period Timing period of the research Research method Research method used in the article
Discipline Discipline field of the research (e.g. operations, management) Management theory Management theory used as viewpoint for the topic
Region Region where the research took place
Segment Type of companies the research was executed with
Relevant research objective The research objective(s) relevant to the research question of this research Relevant variables Variables used in the article to measure the hypothesis relevant research Relevant findings Findings relevant to the objective of this research
Limitations Limitations that are relevant to this research
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matrices to identify patterns of information. This made it possible to report the findings in the fifth chapter.
As figures support the understanding of text, first descriptive statistics were made to organize the results. These are presented in the following chapter. Thereafter, in order to discuss the results and construct the findings, the additional characteristics for successful portfolio composition are discussed and linked to the innovation portfolio management literature. This is done by describing how these characteristics fit in the current literature on innovation portfolio management and identifying possible research gaps.
4. Descriptive Statistics
The articles have been analyzed using the characteristics as presented in the previous chapter. The complete table of all analyzed articles can be found in the appendix. This chapter discusses the descriptive statistics of the systematic literature review.
Figure 4.1. Year of Publication on the study
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Figure 4.2. Research Method used
Figure 4.2. provides an overview of the research methods the articles in the dataset have used. Most of the articles are quantitative studies.
Figure 4.3. Cross table of Publication Date, Method & Composition Characteristic
PUBLICATION YEAR
TOTAL QUANT. QUAL. BOTH COMPOSITION CHARACTERISTIC
2005 1 1 Interdependencies; Strategic fit
2007 1 1 Strategic fit
2010 3 2 1 AP Size; Diversity (multi); Diversity
(exploration vs. exploitation); Interdependencies;
2011 2 1 1 Diversity; Interdependencies
2012 3 2 1 AP Size; Diversity (technological); Diversity
(resource); Diversity; Interdependencies;
2013 4 4 AP Size; Diversity (knowledge, functional,
governance); Diversity (technological); Diversity (multi)
2014 1 1 Diversity (partner type)
2016 2 1 1 Diversity (partners/industries); Diversity
2017 9 9 AP Size; Balance; Diversity (technological);
Diversity (functional); Diversity
(technological); Diversity (multi); Diversity & Interdependencies; Interdependencies;
Interdependencies;
2018 2 2 Diversity (partner type & relevancy);
Interdependencies 22
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2
Research Methods
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Qualitative methods are less popular in general and have not gained more popularity over time. The past decade quantitative research methods have increased. I found that 4 articles that made use of a qualitative research method provide insights in multiple composition characteristics. Whereas this is less common in quantitative studies, which mostly provide empirical evidence for one composition characteristic.
Figure 4.4. Discipline field of the articles
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Figure 4.5. Management Theories used perspective on APM
The total of the management theories is greater than the total number of articles analyzed as some researchers have used multiple lenses. The Resource-Based View is the most often used viewpoint for the alliance management literature. As the RBV states that resources are valuable to an organization and provide a competitive advantage, it is logically related to alliance literature as this is a way to get access to new resources. This also accounts for the KBV.
Figure 5.6. Composition Characteristics of an Alliance Portfolio
Within the alliance portfolio literature, I have identified the following composition characteristics. Diversity is the most discussed topic, followed by interdependencies. Diversity is expressed on different parameters which are shown in the following figure.
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Figure 6.6. Composition Characteristic Diversity: Types of Diversity
These seven types of diversity have been covered within the alliance portfolio management literature. The composition characteristics and the diversity types will be specified in the following chapter.
5. Findings
Drawing from the results, I have identified five composition characteristics in the alliance portfolio literature. These are: strategic fit, balance, portfolio size, interdependencies and diversity. Regarding the literature found in this study, some composition characteristics have a stronger substantiation than others. Nevertheless, this chapter will discuss all the results of the literature study on alliance portfolio management composition characteristics and, thereby, the link with innovation portfolio management literature is addressed. Cooper et al.’s (1997, 1999, 2000, 2004a, 2004b, 2004c) widely adopted studies state that strategic alignment and balance contribute to the composition of a portfolio that is able to successfully fulfill its objectives. Both these characteristics have also been recognized in the alliance portfolio literature. Yet, portfolio size, interdependencies and diversity are found to be new composition characteristics. This chapter will describe the five characteristics found in the APM literature and a link with the IPM literature will be made. This connection between APM and IPM will be complemented by presenting propositions and future research avenues.
5.1. Strategic fit of the portfolio
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The topic of strategic alignment is covered in detail within the innovation portfolio management literature. The importance of strategic alignment has been investigated in several contexts and previous studies have shown the importance of aligning strategy and innovation portfolio decisions (Meifort, 2016; Santiago & Soares, 2018). This might not always be easy, as companies will need to break down their strategy into objectives in order to see the contribution of the innovation initiatives (Chiang & Nunez, 2013). Thereby, as stated before, companies need to keep in mind that aligning all innovative initiatives with the current strategy can hamper the development of truly innovative ideas (McNally et al., 2012). The topic of strategic alignment is widely covered in the IPM literature (Meifort, 2016) after the introduction of Cooper and his colleagues (1997a, 1997b). Therefore, it is not possible to enrich the innovation portfolio management literature on composition characteristics by using alliance management literature on the topic of strategic fit.
5.2. Creating a balanced portfolio
In general, companies need to balance between revenue enhancing and cost reduction strategies (Wassmer, et al., 2017). Therefore, Wassmer et al. (2017) applied this view on alliance portfolio management and researched if this balance (i.e. revenue enhancing vs. cost reduction) is also beneficial within an alliance portfolio. By studying the global airline industry, the authors found that indeed a balance between product-market extending and efficiency-improving alliance partner resources has a positive influence on firm performance.
Contrary to the IPM literature, balance is not extensively covered within the APM literature. Only one article discusses balance and found that a balance of two types of alliance objectives is beneficial to firm performance. As balance is one of the dimensions introduced by Cooper and his colleagues, the literature on balance within IPM is exhaustive. Balance has shown itself to be an important dimension (Cooper et al., 1997; McNally et al., 2012). More than just on the objectives of alliances, the IPM literature discusses the balance on for example high- and low-risk projects, incremental versus radical innovations and short-term versus long-term (Cooper et al., 1997; Killen et al., 2006). For this reason, the IPM literature is more matured on the topic of balance than APM and I have not found any additional insights for the innovation portfolio management literature.
5.3. The impact of alliance portfolio size
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difficulties in combining internal and external knowledge. A conceptual research, by Faems et al. (2012), also describes an inverted U-shaped relationship between alliance portfolio size and firm performance. An increased portfolio size creates interdependencies, where alliances are likely to positively influence each other due to complementarities. However, from a certain point the size of the alliance portfolio and its interdependencies show negative effects on the innovation performance due to constraints. Young high-tech firms might benefit more from the increase in size, due to their flexibility and resource needs (Wagner & Zidorn, 2017). Nevertheless, Wagner & Zidorn (2017) also point out that this positive effect has its limits. Of the studies presented here two studies are conceptual papers and only one paper is empirical. This paper has focused solely on multinational pharmaceuticals. This makes it impossible to provide a conclusive finding about the relation between portfolio size and firm performance. Thereby, the significance of portfolio size cannot be seen in isolation, where other aspects of the portfolio outweigh the effects of the size of the portfolio (Wassmer, 2010). However, studies have shown that there is a relation, positively and negatively (Wassmer, 2010). Therefore, it’s an interesting avenue for research and dive deeper into the relationship between the size of the innovation portfolio and the firm performance.
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There is a strong indication in both the alliance and the innovation portfolio management literature, that portfolio size has an impact on performance. Therefore, I state the following proposition:
P1: Portfolio size fit influences the innovation portfolio (positive/negative) and is an important additional composition characteristic.
Future research IPM portfolio size
The size of the innovation portfolio can impact firm performance and therefore research on: (1) the optimal number of innovation initiatives is essential, and (2) the factors influencing or overruling the impact of size is needed. First of all, looking at the literature of innovation portfolio management, to my knowledge no research has been published that discusses the relationship between performance and the number of innovation initiatives in the way this is done by Bos et al. (2017). Their empirical research tested the alliance portfolio size and its relation with net profit margin. This led them to conclude about the number of projects that will lead to the best performance, and above what number of alliances additional alliances in the portfolio will have detrimental effects. Based on this study, the innovation portfolio management research could focus on a similar experiment to get more insights in the optimal portfolio size, where the portfolio value is greater than the sum of the projects. Secondly, factors influencing or overruling the impact of size can be researched by a research set-up that also measures the impact of the other composition characteristics.
5.4. Interdependencies: positive and negative effect
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alliances. The value of a portfolio can be negatively influenced when substitutability of alliances occurs. This redundancy influences the portfolio in a way that the sum of the alliances is bigger than the actual value of the alliance portfolio (Hoehn-Weiss et al. 2017). Especially technical discontinuity can influence the value of resources which might create the demand for new resources, make some obsolete, challenge resources or create a need to reinforce them (Asgari et al. 2017). Reconfiguration can be needed to (1) enter into complementarity alliances to higher the value of the total sum; (2) terminate alliances and substitute them for new, valuable alliances (Asgari et al. 2017). The alliance portfolio literature describes the crucial role of interdependencies in the actual value of the portfolio. Actively engaging in alliances that positively influence other alliances will higher the value of the alliance portfolio. On the condition that, the portfolio doesn’t show high levels of redundancy or conflicts between alliances arise.
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In my opinion interdependencies is significantly different from the four concepts introduced by Cooper. Nevertheless, it can be an important determinant and influences the value of the portfolio.
P2. Interdependencies influence the innovation portfolio (positive/negative) and is an important additional composition characteristic.
Future research interdependencies
Concluding on the arguments above, more research is needed on: (1) how companies can reach synergies and avoid conflicts; and (2) how interdependencies interact with the other composition characteristics as strategic alignment and balance. Managing relationships between projects clearly increases the success rate of projects (Rungi, 2010). Future research could first map the types of interdependencies (e.g. time, resource conflicts, knowledge diffusion across projects) and how management can deal effectively with these. Effectively managing interdependency can also increase the resource need (Rungi, 2010), and therefore research should investigate how companies can deal with interdependencies without the costs outweighing the benefits. Interdependencies are hard to observe and quantitative approaches might be difficult to apply fully (Rungi, 2010). An in-depth case study research could lead to better understanding of this phenomenon and help to develop firm capabilities on how to link interdependencies with strategy (Killen et al., 2008).
5.5. Diversity in many different forms
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will give some clearance and show why in some situations diversity has shown a positive relationship and in other situations a negative relationship.
Technological or knowledge diversity
Technological or knowledge diversity, discusses the type of resources of a partner and the level of diversity from the focal firm. Technological or knowledge diversity has been addressed multiple times and researchers have proposed different relationships with firm performance. The concept of technological and knowledge diversity has been used intertwined and is even measured in the same way, therefore, I have decided to take both constructs as one. Broad technological knowledge positively influences new innovations by mixing and matching components (Andrevski et al., 2016), the breadth of recombinant innovation (Subramanian et al. 2017) and avoids the danger of being locked in (Van de Vrande, 2013). Nevertheless, these benefits might not be endless and have a tipping point (Collins & Riley, 2013; Van de Vrande, 2013; Wuyts & Dutta, 2012). When the level of technological diversity gets too high, it creates difficulties in coordination, it hampers combination of the information (Collins & Riley, 2013) and creates monitoring complexities (Van de Vrande, 2013). Meanwhile, against their expectations, Wuyts & Dutta (2012) found a U-shaped relationship between technological diversity and innovative performance. Meaning that either low or high diversity leads to superior product innovation. The authors state that a strong focus or a broad view might both be more beneficial than medium diversity. However, they did not incorporate costs of alliances, which might have led to the unexpected U-shape relation. As results of the studies presented above are contradicting, it is impossible to conclude if technological and knowledge diversity to great extent has negative implications on the firms’ performance. The results do tell us that some level of diversity positively influences performance.
Industry/sector diversity
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type of diversity (Jiang et al., 2010). Although, Cui & O’Connor (2012) reported a positive relationship, they also stated that diversity can be detrimental to innovation when the costs and difficulties of managing diverse partners overcome its benefits. The difficulties industry diversity brings, can be overcome by having equity-alliances (Andrevski et al., 2016). Concluding, industry diversity is very useful for firms and more diversity can have a positive effect. Nonetheless, firms need to be able to deal with the increased complexities to reap the benefits.
Firm diversity
Firm diversity is researched as the diversity between the firms in terms of characteristics such as size, profits or assets. Diverse firms in the alliance portfolio supports learning innovation skills (van Beers & Zand, 2013). Jiang et al. (2010) found a strong J-shaped relationship between a diverse alliance portfolio in terms of type of organization. This means that costs for managing these different relationships do not outweigh the benefits from firm diversity. Firms that have access to a broad diversity of partners increase their breadth of search, learning capabilities, and resource access thereby reducing the threat of core rigidities (Jiang et al. 2010). Yet, this research is not clear on what aspect of the firm (e.g. size) causes this positive effect.
Governance diversity
To explain the effect of governance diversity (equity vs. non-equity), I make use of two papers with opposing results. The meta-analysis of Lee et al. (2017) shows a positive relationship between governance diversity and firm performance. On the other hand, the study of Jiang et al. (2010), shows a negative relationship between governance diversity and innovation performance. Although, firms learn to manage the different governance structures, this effect is not outweighed by the disadvantages (Jiang et al., 2010). This study is performed in the automobile industry and the authors ascribe the negative effect to managing and organizational difficulties. Lee et al. (2017) explain the negative effects of governance diversity by using the transaction-cost economics theory, which focuses on the costs of contracting a governance. However, the positive effects due to diverse resources and knowledge, outweighs the disadvantages in their case (Lee et al., 2017). The contradicting results do not provide an answer on how governance diversity relates to performance and under what conditions the effect is positive or negative.
Functional diversity
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supply chain, creates higher innovative performance. In addition, Jiang et al. (2010) researched five different types of diversity and found functional diversity to be one of the two positively related diversity types. Functional diversity has proven to have a positive relationship with firm performance, because it supports in the creation of both explorative and exploitative innovations (Jiang et al., 2010). Functional diversity enables a firm to combine and leverage complementary and supplementary resources and capabilities (Jiang et al., 2010). However, according to other authors, this functional diversity-performance relationship is not so black and white. Functional diversity has shown a positive relationship with the sales of radically new products per employee; yet, it doesn’t influence the creation of incremental innovations (Van Beers & Zand, 2013). Which contradicts the research of Jiang et al. (2010) that states that both explorative and exploitative innovations are triggered. Above this, van Beers & Zand (2013) have found that the functional diversity-radical innovations effect is stronger in industries of high-technology and knowledge-intensity, due to their higher degree of product complexity, market volatility, and riskiness/uncertainty of innovation projects in these sectors. Besides the nature of the industry, Wagner & Zidorn (2017) found that also firm age influences the effects of functional diversity. Explained by possible resource scarcity and therefore higher chance on synergy effects, younger firms benefit more from APD in terms of innovation output than older firms (Wagner & Zidorn, 2017). An additional explanation is that younger firms have a better flexibility and better responding to challenges (Wagner & Zidorn, 2017). To summarize, functional diversity has a positive influence on performance, however, the industry (i.e. high-technology and knowledge intensity) and age of the firm (i.e. young firms) influence the benefits of functional diversity. Thereby, functional diversity positively influences radical innovation, but not incremental innovation. Lastly, Cui & O’Connor (2012) show that a combination of different types of diversity might also influence the outcomes. When a portfolio consists of alliances from different industries, functional diversity is not desirable as it is better to focus on a narrow range of activities for less complexity and a more effective knowledge flow.
Partner type diversity
23 Exploration vs. exploitation diversity
Developing relations that bring access to new information stimulate innovation (Duyster & Lokshin, 2011). The objective of a firm to engage in an alliance can either be to explore new innovative capabilities or exploit their current innovative skills. The question arises, which type of innovation objective leads to the best performance? Either an intensive exploitation alliance portfolio or a broad exploration alliance portfolio lead to innovation, where the first one is more effective for firms with an objective to innovate and the second to imitate (Duyster & Lokshin, 2011). Younger firms tend to benefit more for a higher ratio of exploitation alliances, while older firms benefit more from a higher ratio of exploration alliances (Yamakawa et al., 2010).
The literature covering diversity has shown why and when diversity is an advantage, at what point diversity is no longer a benefit and how diversity is detrimental to the firm. Diversity brings a company new knowledge on a broad spectrum, which enables firms to mix and match, recombine, create synergies and have a broad view for new possible innovations. When firms deal with more and more diversity in their portfolio, they also might develop the capacity of opportunity development and are better able to adapt in dealing with diversity. However, the benefits are not endless and complexities of management make it harder to capture value. The cost and difficulties of a high level of diversity can be detrimental to innovation. Although, all firms need to be aware of a lock in or a stagnation of commercialized innovations. Diverse alliances can give firms access to a diverse set of (technological) knowledge. Firms need to pay attention to the tipping level, from this point the complexities arise and management will be more difficult, with a possible negative effect on innovation. Finally, it is important to state that there is no “one size fits all” and that each firm is different in the amount of diversity the company can effectively deal with until the negative effects outweigh the benefits.
Diversity in innovation portfolio management
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independent (i.e. technology and novelty) and dependent (i.e. risk and reward). Similar to my classification of firm specific types of diversity (independent of the alliance) and relation specific types of diversity (depending on the alliance agreements).
Both concepts (i.e. diversity and balance) encourage companies to have a broader focus in order to overcome risks. On the other hand, I think there is a fundamental difference. Balance seems mainly focused on creating a balance between for example project size, timing of projects and short-term vs long term projects (Cooper et al., 2002; Killen et al., 2008). In this way the innovation portfolio does not consist of initiatives on only one end of the spectrum. This is meant for companies to spread the risk and their resources. Diversity is mainly focused on the chances a diverse portfolio offers to increases the innovation performance. In other words, the concept of diversity promotes how the value of the portfolio can be greater than the sum. The concept of balance shows how to overcome risks so the value of the portfolio is not lower than the sum. The reason for this different approach may be due to the nature of the portfolio. Innovation portfolios are characterized by high risks and uncertainty, it is thus important to have built in mechanisms that reduces these risks. In the case of alliance portfolios, the composition of the portfolio may be more focused on how to benefit most from the alliances. Nonetheless, the innovation portfolio literature can benefit from the insights of the research on alliance portfolios, and vice versa. As the innovation management literature is now mostly focused on reducing risk, it could be beneficial to dive into the additional benefits of diversifying on certain parameters. Diversity is likely to be crucial during the early development stages (Könnölä et al., 2007). It is important for companies to have both a large number and variety of high-quality ideas (Cooper et al., 2001), and strictly select and prioritize promising ideas and concepts in order to create a well-balanced portfolio (Martinsuo & Poskela, 2011). The innovation portfolio management should generate many ideas, but also select and prioritize the most promising ideas for further development (Kock et al., 2015). Therefore, I composed the following proposition:
P3: Innovation portfolio management should focus on having a portfolio of diversified initiatives (initiatives in the ideation stages) and a balanced set of projects (projects in the development and commercialization stage).
Future research on diversity
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innovation. Secondly, industry diversity can also be translated to the innovation portfolio into diversity in markets or industries. The third diversity type, firm diversity, discusses that different types of firms (e.g. size) is beneficial. For the innovation portfolio, project diversity in size or expected sales can also be a diversity parameter. Fourth, research can also investigate the influences from functional (i.e. different departments) diversity. This might be beneficial as innovations can happen throughout the whole company. The sixth type of diversity in alliance literature is partner type diversity, which indicates that different partner types (e.g. universities, suppliers, customers) can be allied with in order to higher the innovation performance up to a certain point. Within the innovation portfolio projects the diversity in distances to the market and the effect on innovation performance might be researched. Exploration vs. exploitation diversity is already similar to balance, where a balance is sought between level of newness or radical vs. incremental. Lastly, project governance diversity within the innovation portfolio might not be beneficial to firm performance. Process formalization is beneficial (Salomo et al., 2008) and it might therefore be counterproductive to have different governance structures. Future research can use the diversity types discussed in this paragraph, but could also point out to other types of diversity the innovation portfolio can benefit from. Thereby, Cui & O’Connor (2012) showed that a combination of diversity types influences each other. Future research could investigate if different diversity types in the innovation portfolio strengthen each other or work against each other.
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Figure 5.1. Composition Characteristics for Effective Innovation Portfolio Management
Value Maximization —To allocate resources so as to maximize the value of the portfolio (Cooper et al., 2000). Balance - To achieve a desired balance of projects in terms
of a number of parameters (Cooper et al., 2000). Strategic Alignment - To ensure that the final portfolio of projects reflects the business’s strategy (Cooper et al., 2000).
Resource Fit - To selecting the right number of projects and kill projects that exceed its resource limits (Cooper et
al., 2002).
Portfolio Size Fit - To compose a portfolio by the optimal number of innovation initiatives.
Interdependencies - To create synergies and avoid conflicts between projects.
Diversity - To ensure a diverse set of initiatives for the innovation portfolio.
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6. Discussion & Conclusion
Although innovation portfolio management has matured in the past two decades, firms still struggle with reaping the benefits from their innovation portfolio (Szwejczewski et al., 2006; Killen et al., 2008; McNally et al, 2012). This systematic literature review researched the alliance portfolio management literature in order to find useful insights for innovation portfolio management. This chapter will cover an overview of the implications of the results for innovation portfolio management for both theory and practice. Also, recommendations for future research will be discussed. Thereafter, the limitations will be addressed.
Currently the portfolio management uses four composition characteristics: value maximization, strategic alignment, balance and resource fit. This research aimed to identify additional composition characteristics by examining the alliance portfolio management literature. Firstly, this research was able to find confirmation for the strategic alignment and balance characteristic, as they were also researched in the alliance portfolio literature. More interesting, this study points the attention to three new potential characteristics for composing the innovation portfolio: portfolio size, interdependencies and diversity, which will be discussed below.
As the portfolio size increases the firm has more projects which positively influences the performance of the firm, thereby the company builds on its knowledge base. When the number of initiatives within the portfolio increases, the complexity of management rises. This has an unfavorable impact on the benefits the portfolio can offer. It is thus important to compose a portfolio bearing in mind the optimal size the firm can benefit from the portfolio. Interdependencies is the second composition characteristic identified as a valuable addition. Initiatives within a portfolio are related to one another, as they can complement each other, are solving the same (customer) problem, yet can also make a claim on the same resources. Therefore, it is important to compose a portfolio of innovation initiatives where conflicts are avoided and synergies are reached. The third characteristic is diversity and this concept is researched into great detail, resulting in somewhat contrary findings. Nonetheless, the general perspective is that diversity has benefits in terms of recombining knowledge. These advantages are not unlimited and from a certain degree of diversity, firms are no longer able to reap the benefits of diversity.
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pay attention to the added value from the complete portfolio, generate new ideas based on the current portfolio state and manage interdependencies between initiatives in order to higher the innovation performance.
6.1 Theoretical implications and recommendations
This paper offers three theoretical contributions. First, this paper is an answer to the call for more clarity on what information is truly important to form an effective portfolio by making well substantiated decisions (Meifort, 2016). This research identified three additional composition characteristics that can be used for decision-making on the innovation portfolio. In combination with the dimensions of value maximization, strategic fit, balance and resource fit, the composition of the portfolio can be improved by looking at the portfolio size, interdependencies and diversity. New initiatives can be assessed along these seven characteristics and based upon the combination of this information, projects can be selected, terminated or postponed. However, additional research is needed to assess the viability of these composition characteristics in the empirical world. For each characteristic recommendation for future research will be addressed.
Regarding the size of the portfolio the benefits of an increasing portfolio are known, as well as the risks. However, empirical research on the number of initiatives an effective innovation portfolio should consist of, is still lacking. Future research could focus on the limits of a portfolio in terms of number of projects for different firm sizes. For this the research setup as performed by Bos, Faems and Noseleit (2017) can be used to find the optimal number of projects to have additional benefits, the number of projects that have neither a positive or negative effect and the number of projects that negatively impacts the performance due to managerial complexities. Therewithal, research can provide insights in the relation of size with the other composition characteristics and how the management can deal with managerial complexities so the tipping point can be postponed.
As for interdependencies, the current research within innovation portfolio management shows that managing interdependencies (Elonen & Artto, 2003) and using it for the generation of new innovation initiatives (Tromboni & Nascimento, 2013) is a still underdeveloped practice. To improve portfolio management, in-depth case studies can study how companies can manage interdependencies to create synergies and avoid conflicts.
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insights. As seen in alliance portfolio management literature, the diversity dimensions can also influence each other. Future research could show if these effects are also present within the innovation portfolio.
A second contribution can be found in the use of the portfolio composition characteristics. Still, companies approach new initiatives in the front-end from a single-project perspective, while a portfolio point of view is necessary (Kock et al., 2015). This can be realized by management practices, front-end innovation portfolio management, that enable the generation of many diverse ideas where strict decision-making is still present (Kock et al., 2015). Firms use the seven characteristics to select, terminate and prioritize, however they can also be used to generate new ideas. Analyzing the portfolio according to the characteristics will enable firms to identify gaps in for example newness, markets and number of initiatives, and effectively generate ideas based on this input. Earlier research addressed that formalizing focus areas for idea generation positively influences innovation performance (Salomono, 2008; Kock et al, 2015). Using the composition characteristics will provide formalization, while it is also dynamic in its use. Future research could assess the implications of using the dimensions for front-end innovation portfolio management.
Finally, using the different literature streams of portfolio management can be seen as a relevant way to identify new contributions. Next to this research, Conegundus de Jesus et al. (2018) have done this with their literature review on patent portfolio management, where input from innovation portfolio management literature is successfully used to generate new implications. The topic of this literature review was very specific, while other management issues might also benefit from the other literature streams on portfolio management. To be more specific, project portfolio management can be seen as a negotiation and bargaining process, however not much IPM research has focused on this (Martinusuo, 2013). As alliances always consider multiple firms that need to reach a deal, innovation portfolio management might be able to learn from this. Secondly, Heimeriks et al. (2009) describe training as a solution to build the important capability of knowledge sharing and benefiting from alliances, which can also be important for innovation management to benefit from the innovation portfolio.
6.2 Managerial implications and recommendations
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substitute or complement each other, and have both resource constraints or advantages due to economies of scale. At last, managers need to realize how diversity can play an important role in exploration, creating radical innovations and in recombining (technological) knowledge.
Finally, these seven composition characteristics can point to needs for new innovations. Managers can identify gaps and complementarities within the portfolio and use the portfolio of running initiatives to generate input.
6.3 Limitations
The first, and obvious limitation is the fact that this research has used a systematic literature review approach. Therefore, this research only proposes directions for future research and not empirically tests the composition characteristics found in the alliance portfolio literature. The literature on innovation portfolio management has provided enough information to assume the viability of the composition characteristics in IPM. Yet, experiments in the physical world are still necessary.
Second, it is thereby important to add that neither these results, nor future empirical results will be conclusive as firms operate in different circumstances. This could be seen in the alliance literature where technological disruptions, firm size and age, influence the composition characteristics. The influences of firm specific attributes and environmental changes on the new composition characteristics within innovation portfolio management remain unclear.
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8. Appendix
Appendix 1. Characteristics of Articles: Results
Title Alliance Concentration in Multinational Companies: Examining Alliance Portfolios, Firm Structure, and Firm Performance
Authors Bos, Faems, Noseleit
Year 2017
Composition characteristic
AP Size
Motivation Explore if the distribution of alliances across focal firms' internal structure influences how firms can benefit from alliances by knowledge recombination. Because often firms consist of multiple, geographically dispersed units.
Data collection timing
2000-2010
Sample size 32 firms Research method Quantitative Management theory Knowledge-Based View Discipline Management
Segment Multinational Pharmaceuticals
Region Global
Relevant research objective
Does the more alliance portfolios are concentrated with a limited #geographic unit of the firm --> + firm performance? Might be limited by portfolio size (hard to identify, assimilate, and exploit the locally available knowledge).
Relevant variables
● Alliance portfolio size (sum of all operational alliances)
Relevant findings
● Size --> - moderates the 'alliance portfolio concentration > FP' relationship. (Less than five alliances are positive, more than 26 is negative)
With small alliance portfolios recombination can be triggered. Relevant
limitations
