Exploring Portfolio Decision-Making Processes

J PROD INNOV MANAG 2011;28:641–661 r 2011 Product Development & Management Association DOI: 10.1111/j.1540-5885.2011.00832.x

Exploring Portfolio Decision-Making Processes Linda Kester, Abbie Griffin, Erik Jan Hultink, and Kristina Lauche

Portfolio management is the set of activities that allows a firm to select, develop, and commercialize a pipeline of new products aligned with the firm’s strategy that will enable it to continue to grow profitably over the long term. To appropriately manage the firm’s new product portfolio, decisions must be made about which projects to fund, to what levels, at what point in time. Previous research has investigated portfolio management decisions as individually discrete decisions. Significant streams of research have investigated both project selection and project termination decisions. This research project shows, however, that portfolio decision making may be better understood if it is considered as an integrated system of processes that considers these decisions simultaneously, along with other decisions such as those to continue a project with reduced funding. Using in-depth data from four diverse case studies, we use a grounded theory approach to develop a general model of how firms make new product portfolio decisions. According to the findings from these cases, effective portfolio decision-making processes produce a portfolio mindset, focus effort on the right projects, and allow agile decision making across the portfolio’s set of projects. Effective portfolio decision making is the result of the interaction between three types of decision-making processes that managers use in making decisions: evidence-, power-, and opinion-based. Being able to use each of these types of processes to make decisions depends upon having the data inputs that they require. Three domain-based decision input-generating processes (i.e., cross-functional collaboration, practices of critical thinking, and practices of market immersion) are associated with making evidence-based portfolio decisions. In addition, organizational politics produces the inputs that are associated with power-based portfolio decision making, while managerial intuition is associated with opinion-based portfolio decision making. Firm cultural factors, including trust, collective ambition, and leadership style, are associated with how these evidence-, power- and opinion-based processes are combined into an overall portfolio decision making process, and whether the firm’s processes are more rational and objectively made, or more politically and intuitively made. The article presents propositions for how the decision-making processes interact in their associations with decision-making effectiveness.

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n today’s competitive environment, continuous innovation is necessary to sustain firm success and long-term business growth (Hauser, Tellis, and Griffin, 2006). Continuous innovation implies that the firm has multiple products in development at any point in time. Long-term success is contingent upon investing appropriately in ongoing product renewal and product line extensions, as well as investing in products for new market spaces. However, funds are limited, and thus the firm must determine which products to invest how much in at what point in time—in other words, they must continuously make decisions concerning the overall portfolio of product development projects that they will execute across time to maximize firm success. Long-term firm success

Address correspondence to: Linda Kester, Department of Product Innovation Management, Faculty of Industrial Design Engineering, Delft University of Technology, Landbergstraat 15, 2628 CE Delft, The Netherlands. E-mail: [email protected].  Support for this research was provided by the Marketing Science Institute (MSI) and by the Institute for the Study of Business Markets (ISBM).

depends upon having effective decision-making processes concerning the entire new product development (NPD) portfolio of opportunities (Cooper, Edgett, and Kleinschmidt, 1999; Chao and Kavadias, 2008). However, if not managed proficiently and in line with the firm’s strategy, the negative impact of poor portfolio decisions can be significant (Cooper, Edgett, and Kleinschmidt, 2001b). Bill Ford acknowledged in 2006 that it was management’s failure to make the right portfolio decisions that led Ford Motor into financial trouble. Forced to refocus their efforts in the midst of the economic recession, Ford, General Motors, and Chrysler all announced a complete change in product strategy at the beginning of 2009, to begin focusing on building portfolios of more fuel-efficient cars, following the lead of their at that time betterperforming competitor, Toyota (Fujimura, 2009). Recent research has found two systematic problems with NPD portfolios. First, within many firms the NPD focus has shifted from radical to more incremental innovation, resulting in unbalanced

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portfolios (Barczak, Griffin, and Kahn, 2009; Cooper, Edgett, and Kleinschmidt, 2004a–c). Second, because of that incremental focus, many NPD project portfolios have become overloaded to try and achieve revenue growth goals. This leads to fire fighting (Repenning, 2001), where portfolio managers are occupied resolving urgent problems, losing the ‘‘big picture’’ of where efforts should be directed for highest success. The result of these two challenges is that many firms face reduced success due to their inability to make effective NPD portfolio decisions. There have been regular calls in the literature to attend to developing effective portfolio decisionmaking processes (Cooper et al., 1999, 2004a, 2004b,

BIOGRAPHICAL SKETCHES Linda Kester is a Ph.D. candidate at the Faculty of Industrial Design Engineering at the Delft University of Technology in Delft, The Netherlands. She has a Master’s in Strategic Product Design from the Delft University of Technology. Linda’s dissertation research explores new product development portfolio decision making in large firms using both the qualitative methodology presented in this paper as well as through an additional empirical test of the qualitatively developed model. Dr. Abbie Griffin holds the Royal L. Garff Presidential Chair in Marketing at the David Eccles School of Business at the University of Utah, where she teaches business-to-business marketing and firstyear core marketing classes to MBA students. Professor Griffin’s research investigates means for measuring and improving the process of new product development. She was the editor of the Journal of Product Innovation Management from 1998 to 2003. In 2009, Professor Griffin was named as the 4th Crawford Fellow for her contributions to the field of innovation and new product development. Professor Griffin is an avid quilter, skier, hiker, swimmer, and scuba diver. Dr. Erik Jan Hultink is professor of new product marketing at the Faculty of Industrial Design Engineering at the Delft University of Technology in Delft, The Netherlands. He received his M.Sc. in economics from the University of Amsterdam and his Ph.D. from Delft University of Technology. His research investigates means for measuring and improving the processes of new product development and launch. He has published on these topics in journals including the International Journal of Research in Marketing, Journal of the Academy of Marketing Science, Journal of High Technology Management Research, Industrial Marketing Management, R&D Management, IEEE Transactions on Engineering Management, and Journal of Product Innovation Management. Dr. Kristina Lauche is Professor of Organizational Development and Design at Nijmegen School of Management, Radboud University Nijmegen and Professor of Organization Studies of Innovation at the Faculty of Industrial Design Engineering at Delft University of Technology, The Netherlands. She previously worked at the Swiss Federal Institute of Technology and the University of Aberdeen, studying organizations from high-risk industries to manufacturing and consumer goods. Her main research interests are technology implementation and appropriation, decision making in complex environments, and team processes in new product innovation.

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2004c; Hauser et al., 2006). To date, academic focus primarily has been on methods for selecting (Blau, Pekny, Varma, and Bunch, 2004; Cooper, Edgett, and Kleinschmidt, 2001a; Englund and Graham, 1999) and terminating (Balachandra, Brockhoff, and Pearson, 1996; Biyalogorsky, Boulding, and Staelin, 2006; Schmidt and Calantone, 1998, 2002) individual NPD projects. However, NPD portfolio decision making is much more complex than just selection and termination decisions. It also includes decisions to delay projects, or to continue them, but with reduced resources. Insights that prevent or resolve challenges in the daily practice of overall portfolio decision making are scarce. The present research addresses a part of this gap in the literature by investigating portfolio decisionmaking processes in their entirety. The purpose of this research is to develop a general model of the components of portfolio decision-making processes and their outcomes, and to provide insights into how some of those components may be combined to contribute to portfolio decision-making effectiveness. It uses a grounded-theory, multiple case study approach to investigate portfolio decision-making processes in all of their contextual richness. It is expected that later research will be able to use this model to extend the findings empirically. The next section reviews the literature on portfolio decision making and presents the research questions. After that, the methodology is presented, followed by the investigation’s results. The paper closes with a discussion of managerial implications, limitations, and potentials for future research.

Literature Review This literature review begins with the existing research on individual project selection and termination decisions. It then presents empirical results about managing new product portfolios and summarizes gaps in the literature. It closes by presenting the investigation’s research questions. The project selection literature primarily has focused on developing sophisticated quantitative modeling methods deriving from financial and operations research theories (Camillus, 1982). The common denominator of these methods is to present the selection decision as a rational, evidence-based rigorous comparison of numbers (Cooper et al., 2001b; Dickinson, Thornton, and Graves, 2001). Although the majority of these financial methods are theoretically well justified, they have significant practical

EXPLORING PORTFOLIO DECISION-MAKING PROCESSES

shortcomings. For example, NPD project data often are speculative until market launch (or even after). The absence of accurate data can make these methods unreliable, even though they are presented as ‘‘objective’’ (Blau et al., 2004; Linton, Walsh, and Morabito, 2002; Poh, Ang, and Bai, 2001). In response to this problem, even more sophisticated probabilistic financial methods have been developed, such as real option methods (Janney and Dess, 2004; McGrath, 1997). Although real option methods can help obtain more realistic risk and reward calculations, they are not user friendly, and thus are more academically than practically relevant. Interestingly, companies relying solely on financial methods for project selection decision making perform worse than other companies (Cooper et al., 2004a, 2004b, 2004c). However, financial methods are still the most popular project selection methods for portfolio decision making (Blau et al., 2004; Poh et al., 2001). Termination decisions are critical to portfolio management, as these decisions stop projects that either are not expected to provide sufficient profits, or are no longer aligned with firm strategy. Termination decisions free up resources, creating room for other, hopefully more lucrative opportunities. However, project termination is one of the most difficult decisions to make in practice (Balachandra et al., 1996; Calantone, Di Benedetto, and Schmidt, 1999). ‘‘Individuals get emotionally involved in the project and are very reluctant to terminate it, even if there are many clear signals that the project is not going to be successful’’ (Balachandra and Friar, 1997, p. 92). The source for this ‘‘escalation of commitment’’ usually is attributed to an initial personal involvement with the project, and theoretically may therefore be avoided if termination decisions are made by others not involved in the project. However, recent findings indicate that biased belief updating (i.e., the distorted valuation of new information in relation to initial beliefs) also contributes to escalation of commitment (Biyalogorsky et al., 2006). These findings imply that even if portfolio decision makers have not been involved in initiating a project, they still may be influenced by subjective feelings that can lead to an overly positive evaluation of the project. To summarize the research on individual project decisions, project selection research primarily focuses on quantitative methods for selecting projects to maximize the portfolio’s value. Termination research investigates how individuals make project termination decisions, assuming that human beings are rationality

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bounded, but finding that in reality they are not (Eisenhardt and Zbaracki, 1992). The literature has not yet moved from decisions on individual projects to how to manage overall portfolios more effectively. Only three pieces of research have investigated empirically overall portfolio performance. Using data from mutual funds, Eggers (2006) found that ‘‘using a scattershot approach to investigate a multitude of new product arenas at one time would actually be detrimental to the firm.’’ Fund managers who focus their attention on making decisions about what new products to commercialize in just one arena (fund) perform better than those who dilute their attention across multiple funds, each of which typically has different growth and income goals. In a different context, Voss, Montoya-Weiss, and Voss (2006) investigated the relationship between theater success and portfolio innovativeness. Portfolio innovativeness was operationalized as the percentage of theatrical offerings during the year that were new to the world (never produced before), in comparison to those that had previously been produced elsewhere (e.g., a contemporary Broadway success or a classic, such as a Shakespeare play). They found a skewed inverted U shaped relationship between overall portfolio innovativeness and total year revenues, with peak revenues when about 25% of the offerings at a theater were new to the world. The largest project investigating new product portfolios empirically used survey data from 205 diverse businesses (Cooper, Edgett, and Kleinschmidt, 2000; Cooper et al., 1999, 2001a, 2001b). This research benchmarked current practices for project evaluation methods (such as financial methods, strategy alignment methods, and scoring models) and investigated the results achieved with various evaluation methods. The project identified three NPD portfolio performance outcomes: strategic alignment (i.e., NPD efforts align with the firm’s business strategy); maximized portfolio value (i.e., the portfolio has the highest return for the financial input); and balance (i.e., the portfolio has harmony with respect to specific parameters, such as incremental versus radical innovation). The firms with the best-performing portfolios (selfstated ratings) against these goals were more likely to use an explicit, established evaluation method with clear rules and procedures supported by management, that was applied consistently across all appropriate projects, and that considered decisions about all the projects in the portfolio simultaneously (Cooper et al.,

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2001b). Business strategy alignment project selection methods were more highly associated with achieving some of the above outcomes than financial methods, but they were not significantly better than any of the other evaluation methods. The PDMA’s most recent NPD Best Practices study provides corroborating evidence for two of Cooper et al.’s (2001b) findings (Barczak et al., 2009). This study of over 400 firms found that ‘‘the Best’’ firms— the top 21% in terms of overall NPD performance— were more likely to use a well-defined and structured portfolio management process, and also were more likely to use the ‘‘strategic buckets’’ business strategy alignment portfolio management method. In summary, managing the NPD portfolio to provide a stream of successful new products is crucial to a firm’s long-term existence. Doing that requires that firms make effective NPD portfolio decisions. However, the extant literature has provided little understanding in how these decisions are made. The general conclusions from the two small empirical studies are merely that strategic focus matters in choosing the set of projects, and that there is an optimal innovativeness level (which may vary by industry context). Both the Cooper et al. (1999, 2000, 2001a, 2001b) and PDMA research (Barczak et al., 2009) suggest that it is not the specific project evaluation method that is important to success, but rather that other supporting processes and capabilities may be crucial. Cooper et al. (1999, 2000, 2001a, 2001b) started from a project selection and evaluation focus, finding a few capabilities that seemed to be important in effectively managing NPD portfolios. However, it is unlikely that their research uncovered all dimensions associated with making effective portfolio decisions. Across the literature, there still remains a large gap in understanding what constitutes effective NPD portfolio decision making. The main objective of this research is to understand more completely how firms make NPD portfolio decisions: how they make project selection and termination decisions across projects and over time; what inputs are required; what challenges they encounter in making these decisions; and why these challenges occur. The inquiry’s objective is to build theory for this important and broadly scoped, phenomenon-driven research question (Eisenhardt and Graebner, 2007), overcoming the compartmentalization characteristic of prior research. The integrated model that is developed can act as a theoretical framework for future quantitative research.

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Methodology Due to the complex nature of portfolio management, a multiple case study approach was the most suitable research method as contextual conditions are important and the boundaries between phenomenon and context are not clear (Yin, 2003). The focus was on identifying how the processes of portfolio decision making occur. As no a priori theory was available to explain this phenomenon, a grounded theory approach was used in the research (Bryant and Charmaz, 2007; Charmaz, 2006). Multiple cases from different industries, geographies, and technology orientations were used to strengthen the external validity and enhanced the generalizability of the conceptual model developed (Yin, 2003; Miles and Huberman, 1994).

Sample The unit of analysis is the strategic business unit of a large firm or a medium-sized company that operates as a single strategic business unit because that is the level within organizations at which portfolio decisions are made. Multiple dimensions were purposively sampled across quality of portfolio management capabilities, geography, and industry. According to one report, two of the most mature industries in portfolio management experience are financial services and pharmaceuticals/medical devices (Kalypso Consulting, 2007). The least mature industry in portfolio management experience is consumer packaged goods. These findings guided the industries targeted for study. Then, two innovation benchmark reports were used to identify firms considered ‘‘High-Leverage Global Innovators’’: those who were successful managers of innovation processes (Jaruzelski, Dehoff, and Bordia, 2006; Jaruzelski and Dehoff, 2007). A high-leverage global innovator in financial services in Europe and one in the medical device arena in the United States agreed to participate. At the least mature portfolio management extreme, two firms (again, one U.S., one European) from the consumer packaged goods industry agreed to participate in this project. Non-disclosure agreements were signed with all companies. Tables 1 and 2 present an overview of the collected data and case descriptions.

Data Collection: A Multi-Method Approach The data collection procedure was carefully designed to deal with some of the reliability and validity issues up

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Table 1. Case Sample and Collected Data Size

# Meetings

# Interviews

US Medical Devices (USMD)

Large

2

23

President, VPs, & directors of marketing, R&D, manufacturing, sales, quality, finance; HR product managers; legal managers

European Financial Services (EUFS)

Large

1

13

Managing director, CFO, director of research, portfolio managers, product managers

Medium

5

13

President, CEO, VPs of marketing, manufacturing, sales, finance; R&D managers; packaging manager; HR manager; sales managers

Large

5

26

Directors of research, quality, R&D, marketing; development manager; R&D managers; research managers; marketing managers; brand managers; manager operations; sales manager

13

75

Company

US Food (USFd) European Food (EUFd)

Total

front: strengthen internal validity by triangulating methods and data sources; assure process consistency by formulating research questions and developing a formal interview guide; enhance external validity through diverse theoretical sampling and feedback sessions at the case firms; and minimize researcher bias by assigning different roles to different researchers (Eisenhardt, 1989; Maxwell, 2005; Miles and Huberman, 1994; Yin, 2003). Three data collection methods were used over a ninemonth period: studying company documents, conducting semi-structured interviews, and observing portfolio decision-making meetings. All data were collected iteratively (Miles and Huberman, 1994; Yin, 2003). Company documents provided insights into the formal processes in place for portfolio decision making (rather than some individual’s opinion of what the process is), and produced familiarity with companyspecific jargon and culture, organizational structure, and strategic vision. Studying previous meeting minutes helped prepare for meetings attended later.

Types of Informants

Interviews are subject to reactivity bias (Maxwell, 2005). This was minimized by avoiding leading questions and using a formal interview guide (see the Appendix). Topics covered were derived from the strategic decision-making and NPD literatures, and the findings from a pilot study of 19 key informants from 11 multinational firms (Kester, Hultink, and Lauche, 2009). These interviews confirmed that it was necessary to explicitly investigate both quantitative and qualitative decision-making processes in firms. Interviewing senior managers from multiple disciplines (e.g., marketing, R&D, operations, finance, sales) produced multiple perspectives and reduced informant bias (Maxwell, 2005; Miles and Huberman, 1994). All interviews were digitally recorded, and then transcribed by a professional transcription service. Observations are generally less subject to reactivity issues, especially when they occur in their natural setting (Maxwell, 2005). Meeting observations helped triangulate the interview data as they allowed the

Table 2. Case Sample and NPD Portfolio Performance Firm

Portfolio Decision-Making Processes

Portfolio Description

NPD and Firm Outcome

USMD Formal, rational. Clear decision Steady stream of projects under development, Division growing 10%–15%/year from authorities assigned, and clear meeting with no bottlenecks in the process. A bit new products. Success rates above and formal sign-off processes. unbalanced toward incremental products. industry average. Very profitable. EUFS

Formal sign-off authority delineated, but informal decision-making processes.

Sometimes inconsistent product flow. Occasional bottlenecks, rapidly resolved. Portfolio is balanced in terms of newness/ innovativeness.

Firm growing more quickly than competitors from new products. Success rates above industry standards. Very profitable.

USFd

Clear final authority for decisions (CEO), but no formal processes for how decisions are made. Intuition and politics reign.

No real portfolio. NPD projects randomly enter the development pipeline. Most are incremental, opportunistic, or imitate competitors’ offerings.

Firm growing slowly, if at all. Success rates not measured. Average profitability.

EUFd

Having difficulty transitioning from completely politically and intuitively made to more rational processes, but are trying.

Overloaded NPD pipeline with bottlenecks Firm size stagnant. Success rates in multiple areas. Unbalanced toward below industry standards. Average incremental products. Rife with opportunistic profitability for the industry. projects.

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researchers to observe what actually happened in the portfolio decision-making process as opposed to what informants said had happened. Meetings lasted between 2 and 8 hours. Some meetings were formal, with PowerPoint presentations providing detailed information on project assumptions and progress. Other meetings were informal in nature with general discussions of only some aspects of the set of projects. Decisions were made about as few as 2 projects or as many as 20 projects in any one meeting, depending upon the firm. As not all of the NPD portfolio decision-making meetings could be recorded, extensive notes were taken at each. These notes were as descriptive as possible to avoid any premature interpretations. Data collection (Table 1) resulted in a total of 1,750 pages of company documentation; 75 semi-structured interviews equaling 4,598 minutes of recorded material; and 13 meeting observations equaling 49 hours of meeting time.

Data Analysis Each interview and all field notes were subjected to a detailed three-step coding procedure: initial line-byline coding, focused coding, and axial coding (Glaser and Strauss, 1967). Initial coding obtains detailed information from the transcripts. The set of codes was systematically evaluated after every three to five interviews and grouped into higher level (more abstract) codes and emerging theoretical categories. These higher-level codes and emerging categories formed the basis of focused coding, which is more conceptual

CULTURAL FACTORS

DECISION INPUT GENERATING PROCESSES Cross-Functional Collaboration

Trust

in nature, and synthesizes and explains larger segments of data (Charmaz, 2006). Following the ‘‘constant comparative method’’ (Bryant and Charmaz, 2007), information provided by the informants was compared across interviews and observations within each case. When new information was encountered, it was evaluated to see if it could help explain an emerging theoretical category. If not, a new code was created. This process continued until no new codes emerged. Axial coding specifies the properties and dimensions of a category and relationships between categories by comparing the emerging categories across the cases (Charmaz, 2006). This process resulted in 14 core theoretical categories, each with related first- and second-level codes that formed the basis of the theoretical model (see Figure 1). Differences were identified between input processes to portfolio decision making (what type of information is collected in preparation), styles of decision making (the underlying rationale when making the decision), dimensions of portfolio decision-making effectiveness, and organizational culture relating to portfolio decision making. Feedback sessions of these results with the case firms further deepened the understanding of the theoretical structure that emerged from the data.

Building a Model of NPD Portfolio Decision Making This section first explains the model (Figure 1) in general terms, and then details the underlying definitions PORTFOLIO DECISIONMAKING PROCESSES

PORTFOLIO DECISIONMAKING EFFECTIVENESS

EVIDENCE-BASED

PORTFOLIO MINDSET

POWER-BASED

AGILITY

OPINION-BASED

FOCUS

Practices of Critical Thinking Practices of Market Immersion Collective Ambition

Politics

Transformational Leadership

Intuition

= Positive effect expected = Negative effect expected

Figure 1. The General Model of Portfolio Decision Making

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of the constructs, supports them with quotes from the data, and links them to the extant literature.

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efforts on projects that will achieve long-term strategic goals; and are agile in their ability to make decisions. Effective NPD portfolio decision making achieves all three organizational objectives simultaneously.

General Structure of the Proposed Model (Figure 1) ‘‘Effectiveness’’ is the degree to which desired organizational objectives are met (Ostroff and Schmitt, 1993). In this research, the organizational objective is to obtain high-quality decisions concerning the actions to be taken about the projects in the firm’s NPD portfolio. Firms evaluate portfolio decision-making effectiveness along three dimensions of organizational outcomes: the extent to which the decision-making system produces a portfolio mindset in the firm; allows for decision-making agility; and produces focused development efforts. The interaction between evidence-, power-, and opinion-based decisionmaking processes leads to more or less effective portfolio decision making. Cross-functional collaboration, critical thinking and market immersion produce facts and data which lead to evidence-based decision making. Organizational politics drive power-based decision making, and the use of intuition is associated with opinion-based decision making. Three cultural factors differentially influence the use of the decision-input generating processes: the extent and nature of (dis)trust in others’ expertise and motivation; the strength of their collective ambition (i.e., the extent to which people across domains and levels share company goals and values); and whether the leadership of the strategic business unit is transformational.

Dimensions of Portfolio Decision-Making Effectiveness (Table 3) Cooper et al. (2001b) defined a superiorly performing NPD portfolio as one that contained a set of projects that were strategically aligned with the firm’s business strategy, achieved the highest return for the development dollar investment, and achieved a balance of investments in more and less risky projects. However, their research said little about how a firm gets to the point of having a superior set of projects. This study extends Cooper et al.’s (2001b) research on NPD portfolios by identifying the organizational processes of portfolio decision-making effectiveness leading to these outcomes. According to these informants, portfolio decision making is most effective when firms make decisions based on an embedded portfolio mindset; can make decisions that focus short-term development

Portfolio mindset. Making decisions from an embedded portfolio mindset means that management makes decisions based on a complete understanding of all of the projects in the NPD portfolio and how each is aligned to the firm’s strategy. An effective portfolio management process provides an ongoing overview of all of the projects being considered, all those under way, where each project is in the NPD pipeline, and when each is expected to launch into the market. The senior management of the European financial services company (EUFS) maintained a continuous overview of their portfolio in relation to their (longterm) strategic vision, while middle management knew how individual projects connected to market needs (quote in Table 3). A transparent top-down and bottom-up communication system helped maintain a portfolio mindset during decision making at all levels in the business unit. Having a portfolio mindset also means making decisions so that every project aligns with the firm’s long-term strategy. Senior management in the U.S. medical devices company (USMD) had a clear overview of how the projects in their current pipeline would fuel short-term growth. However, they were unable to connect project decisions to a long-term strategic vision, impeding the development of higher impact projects for future division growth. As the VP of R&D said: ‘‘Corporate does not give me any forgiveness for what happens this year. So we don’t have [long-term projects]. We haven’t wrestled with that. There’s not a long-term perspective around here.’’ While the extant literature in both finance and innovation talks about the importance of having a risk-, complexity-, and innovativeness-balanced portfolio of investments or NPD projects, neither literature addresses the decision-making processes that allow a firm to achieve these outcomes. This research specifically counters the perspective of previous NPD research, which investigated only individual selection or termination decisions, indicating that more effective decisions are made when the entire portfolio is kept in mind at all times. Focused effort. Effective portfolio decision making uses a focus on the link between short-term actions and long-term goals to make decisions. This focus

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Table 3. The Constructs of Portfolio Decision-Making Effectiveness Portfolio Decision-Making Effectiveness Construct

Portfolio Mindset

Focused Effort

Agility

Definition

The firm has a complete overview of the entire portfolio as well as in-depth knowledge about each individual NPD project.

The firm keeps their resources focused on those short-term actions that help achieve long-term goals.

The firm readily changes the composition of its NPD portfolio to reflect potential opportunities and threats.

Proof quotes

You need to have a 10,000 feet view in this business. Managing the portfolio is . . . You have to be able to tie processes together; that is very important in our organization. And make sure you have an overview, because innovation is always hectic. (Portfolio manager, EUFS)

Especially when it is difficult to grow in the long term it is important to focus. When your chances of big successes are decreasing you need to think carefully about where to focus your resources to do things best. You need bigger projects to achieve your long term goals and you need to know where to focus now in order to have a better chance at succeeding with those radical projects. (Marketing Director, EUFd)

We can make decisions fairly quickly because . . . just a . . . we don’t have a lot of bureaucracy to try to go through. (VP Manufacturing, USFd) Our opportunism makes that we can easily respond to new opportunities. (Brand Manager, EUFd)

Link to the extant literature

Superior portfolios are balanced (Cooper et al., 2001b)

Differentiation from the literature

The concept of having a portfolio mindset is new to the literature and applies specifically to portfolio decision making. The overall concept of having a portfolio mindset can apply to different kinds of strategic portfolios (financial portfolios, services, alliances, etc.). The aspect that is specific for NPD portfolio decision making is the in-depth knowledge about where each individual NPD project is located in the development pipeline and how this affects the overall NPD portfolio. Making individual selection and termination decisions is insufficient.

Agility in supply chain management (Braunscheidel and Suresh, 2009), information systems, and operations management To the authors’ knowledge the concept of focused effort has to date not been discussed in the strategy and management literatures.

prevents teams from chasing innovation opportunistically. The European food company (EUFd) had great difficulty focusing: The strengths of our firm are in our enthusiasm and drive to make successful new products. The downside is that we are often too opportunistic . . . . Our opportunism makes that we can easily respond to new opportunities. The downside is that we too often switch course of direction, which makes us fickle in executing our strategy. (EUFd Brand Manager)

When the market environment changed, with increasing competition, shorter product life cycles, and higher regulatory demands, EUFd was forced to think more carefully about where to focus their efforts

While agility in operations management is defined as a capability, we identified agility as an outcome of a firm’s portfolio decision-making capabilities. Additionally, agility in supply chain management is reactive in nature, while agility as a result of a firm’s portfolio decision-making processes has both reactive and pro-active components.

to generate longer-term success. This company is now refining their long-term corporate strategy into more detailed near-term brand strategies to help focus portfolio decisions. Decision-making agility. Portfolio decision making is more effective when firms can make decisions quickly, when this is warranted, as when new technologies are invented. An agile firm can quickly shift its development focus to incorporate a new technology into its product line. Alternatively, it can quickly eliminate a project that either no longer strategically fits the portfolio, or that has become technologically disadvantaged. The U.S. food firm (USFd) was the most agile decision-making firm in the sample, due to its short decision-making lines. Although this

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company lacked a clear strategic vision, it was capable of bringing new products to market quickly, giving it time-to-market advantages over competitors. Conceptually, the operations management, supply chain management, information systems, and software development literatures all see agility as an implementation capability. These literatures are concerned with a firm’s ability to quickly change processes, reorient supply chains to obtain scarce materials from new sources, or implement new information technology systems. These findings extend the agility concept into the realm of NPD portfolio decision making, which heretofore has not been considered.

Portfolio Decision-Making Processes (Table 4) Figure 1 shows that portfolio decision-making effectiveness derives from the interaction between three decision-making processes: evidence-based,

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power-based, and opinion-based. This section first describes each decision-making process, and then illustrates some of the interactions associated with more and less effective portfolio decision making. Evidence-based decision making. In evidence-based decision making, decision makers present and debate the detailed assumptions behind the technical, financial, and market information generated for the project. USMD had regular cross-functional meetings in which the decision-making board asked the project managers about the assumptions underlying the evidence presented before they made decisions. The decision-making board had the reputation of not accepting poorly supported answers, causing everyone in the company to do their utmost to fully understand and ground their domain-specific evidence in fact. Power-based decision making. Power-based decision making processes result when the goals of some

Table 4. The Constructs of the Portfolio Decision-Making Processes Portfolio Decision-Making Processes Construct

Evidence-Based Decision Making

Power-Based Decision Making

Opinion-Based Decision Making

Definition

Evidence-based decision making is the process by which firms use objective information and empirical evidence, while understanding the underlying assumptions, to build an objective decision-making rationale.

Power-based decision making results when an unequal distribution of power allows more powerful groups or individuals to make decisions that reflect their personal interests.

Opinion-based decisions are based on overall feelings and personal experience to build a subjective decision-making rationale.

Proof quotes

All you need is your VP coming down on you once about why did you go that direction. Show me what caused you to go in that direction. And if you have research that showed you to go in that direction, then you’ve got that support. If you say, well, I really thought that was going to work. That’s just not good enough. (Research Director, USMD)

The lack of transparency in the early [NPD] stages kind of allows marketing to work on it by themselves. And then after three or four months, when they have already spent a lot of time and money on the new product they will bring it into the meeting. So they basically make all the decisions internally. (Development Manager, EUFd)

Even our CFO likes to somehow tell us what’s going to be fabulous to sell downstairs in our store, and he absolutely doesn’t shop and he is so what flavor of ice cream—vanilla. He will never vary. And, he’s trying to tell us what consumers will like and what the new hot marketing trend is. (VP Marketing, USFd).

Link to the extant literature

Rationality in strategic decision making (Dean and Sharfman, 1996; Hough and White, 2003). Evidence-based management in managerial practice (Briner, Denyer, and Rousseau, 2009).

The use of political power in strategic decision making (Elbanna and Child, 2007) and management decisions (Hurley and Hult, 1998)

Relates to the concept of intuition in strategic decision making (Elbanna and Child, 2007) and decision making under stress (Klein et al., 2003).

Differentiation from the literature

Evidence-based decision making uses a combination of inputs to obtain a full understanding of the data for making portfolio decisions. To date no one has investigated the inputs to rationality. We provide empirical support for the process of evidence-based decision making and its inputs (contribution to evidence-based management).

The existing literatures focus on processes of politics but not on how this may lead to an unequal power distribution in the firm and how this influences the decision-making process.

The existing research is descriptive in nature without providing understanding of how feelings and experiences are embedded in organizational decision-making processes, such as portfolio decision making.

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individuals or subgroups dominate other individuals, subgroups, or even company goals. Even though EUFd had ‘‘formal’’ decision-making meetings, the actual decisions were made beforehand within the marketing group, giving the portfolio meetings an informative rather than decisive character, as was witnessed during meeting observations. Marketing was rewarded for short-term business results and therefore drove a high output of incrementally new products, which was not in line with the firm’s overall long-term strategy. Power-based portfolio decisions may not take the best interest of the firm into account. Opinion-based decision making. In opinion-based decision making, decisions are based on personal experiences and feelings rather than on facts. At USFd, discussions revolved primarily around people agreeing or disagreeing with others’ overall opinions until the CEO, who held the power in the decision-making process, made a decision. Personal conflicts can arise in opinion-based decision-making processes because there is no argumentation about any specific pieces of evidence that may support the opinions of different people involved in making the decision. Decision-making process interactions and effectiveness outcomes. Although four cases is a small number from which to generalize, none of the case firms made portfolio decisions using just one decision-making process. However, different types of processes tended to dominate different firms’ decision making, with different impacts on the elements of decision-making effectiveness. Both EUFd and USFd, the two least sophisticated firms in making portfolio decisions, primarily combined opinion- and power-based processes. While this combination allowed them to be agile in making decisions, it also often produced decisions based on ‘‘me-marketing,’’ or what they themselves liked. When their tastes represented those of their target markets, this led to some successful new products. However, when their tastes or needs differed from their target markets, failures—sometimes large, expensive failures—resulted. While their dominant decision-making processes may not have prevented them from focusing on particular projects in the short term, as people in power can dictate others’ actions, they did not support making decisions from an overall portfolio mindset. These firms made project decisions (selection, continuation, termination) individually and independent of how individual projects related

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to the overall strategy or the objectives of the other projects in the development pipeline. A decade ago, portfolio decision making at EUFS also was done using predominantly opinion- and power-based processes. However, recently they have been working to use more evidence-based processes. This has resulted in interactions between all three types of processes in their decision making, with some decisions still dominated by opinion-based processes. In other cases, initial opinion-based recommendations have been changed based on new evidence: We communicate. Try to figure out why we have a different vision [of the project’s potential]. We ask research why they came with a negative report when we actually see a lot of demand. Then they investigate it again. Sometimes they come back to us saying that they made a wrong estimation. And it also happens that they show us the data and we realize that we have been wrong. (EUFS Brand Manager)

While lately EUFS has been making decisions more from a portfolio mindset, they also indicated that at times they found themselves moving more slowly than in the past. They do find that, when they have used evidence in decision making and demonstrated how a project fits into their longer-term strategy, they can more easily maintain a focus on moving that project forward. USMD’s decision making was dominated by evidence-based processes. Opinion-based decision making was not condoned by management, and power-based decision making played only a minor role in the firm. This firm tended to be less agile in decision making than the other three cases, due to the time required to gather and analyze information. But the more interesting impact of these interactions on decision-making effectiveness was the firm’s inability to focus in the short term on those more innovative projects that would lead to longer-term strategy implementation. Perhaps because decision making was based almost strictly on data and facts, the portfolio was imbalanced toward shorter-term, less innovative projects for which it was easy to gather more concrete data. Because of the huge uncertainties inherent in more radical and innovative projects, getting them approved for development required using opinions (as no data are available) and power. Based on the (limited) findings from these case studies, the following propositions were formulated. (Note that according to Babbie [2010, p. 45], propositions are ‘‘specific

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conclusions, derived from the axiomatic groundwork [fundamental assertions on which a theory is grounded], about the relationships among concepts.’’) Proposition 1: Firms use a combination of evidencebased, power-based, and opinion-based decision-making processes in making NPD portfolio decisions. Proposition 2: Achieving different aspects of NPD portfolio decision-making effectiveness depends upon the interactions between evidence-, power-, and opinionbased decision-making processes. Corollary 1: Decision-making processes dominated by power- and opinion-based processes may be more agile, while processes dominated by evidence-based processes may be less agile. Corollary 2: Decision-making processes dominated by power- and opinion-based processes are less likely to lead to decisions based on a portfolio mindset. Corollary 3: Decision-making processes dominated by evidence-based processes may reduce the ability to focus on those short-term tasks that will lead to long-term strategic goals, whereas power-based processes may lead to more focused effort. While the existing literature in various domains addresses, at least in some limited manner, each of these types of decision-making processes, none of the extant literature explicitly posits that all three corollaries are simultaneously responsible for overall decision-making effectiveness.

Decision-Input Generating Processes (Table 5) This research identified five decision-input generating processes that fueled the three portfolio decisionmaking processes: cross-functional collaboration, practices of critical thinking, practices of market immersion, politics, and intuition. Cross-functional collaboration. Technological, financial, and market data must be combined to make evidence-based portfolio decisions. While a clear division of responsibilities helps build domain-specific expertise, cross-functional collaboration is required to combine and integrate the data. Cross-functional collaboration has both formal and informal aspects. Co-location of different disciplines was one mechanism to increase

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informal collaboration at both USMD and EUFS. At USMD, collaboration also was supported through formal cross-functional meeting and decision procedures. The EUFS board also required that members of all functions formally signed off on each portfolio decision. On the other hand, at EUFd, development frequently was impeded as marketing’s initial decisions had to be revised or stopped because important inputs from R&D or manufacturing constraints had not been considered. As an R&D manager said: Take for instance this so-called ‘‘small project.’’ I don’t think marketing realizes for that project how much R&D needs to invest. For them it’s just a small project that they can do on the side. Marketing cannot just decide for R&D that something is very simple and easy to do, while in fact it is the other way around. You need to have an integrated perspective and collaborate better to look at the investments for the entire organization.

Because portfolio decisions require combining information from many functions, expertise has to be brought together and shared to arrive at a unified decision supported by all. Cross-functional collaboration provides an understanding of the underlying assumptions for the numbers generated as supporting evidence for a decision by each function. Thus: Proposition 3: Cross-functional collaboration is associated with using evidence-based processes of portfolio decision making.

Practices of critical thinking. Critical thinking is about understanding portfolio decision risks. At EUFS, critical thinking was embedded in their way of working. Factual evidence steered in-depth discussions, which focused on what the data meant, and how they could be used to understand the project’s problems and risks. Top management asked critical questions and demanded evidence-based argumentation for each decision both in formal documents and meetings as well as in informal settings. EUFd did not practice critical thinking; they took ‘‘facts’’ as presented for granted. As observed in portfolio meetings, a marketing manager would present a new product idea and distribute the required documentation. The others present barely looked at the data provided and did not question the assumptions underlying the project’s justification, despite the numbers seeming unrealistic (even to an

Don’t assume the data are right but provide argumentation. Ask questions and see what happens. (Portfolio Manager, EUFS)

Learning orientation and open-mindedness (Calantone et al., 2002; Baker and Sinkula, 1999). This construct is about using lessons learned to collectively challenge factual evidence and peers to derive objective decision inputs that can be used to build a well-argued decision-making rationale. It is more specific than having a learning orientation.

We don’t have our own little department here. Each one of the quality engineers sits in the same office area as the rest of their teams. They sit with their team so they hear all the conversations. This is really our VP of R&D’s philosophy that they sit there amongst the teams, hear what’s going on. (Director Quality Engineering, USMD)

Marketing-R&D interface (Griffin and Hauser, 1996) in NPD and cross-functional collaboration (De Luca and Atuahene-Gima, 2007).

Most existing literature primarily focuses on collaboration between marketing and R&D (with a few looking at manufacturing). We identified cross-functional collaboration as the process in which all major domains collaborated to provide inputs for portfolio decisions.

Proof quotes

Link to the extant literature

Differentiation from the literature

Building objective decision inputs using factual evidence to steer in-depth discussion about what the data mean for making the decisions at hand.

Practices of Critical Thinking

People across domains approach each other and collaborate, using crossfunctional breadth of experience and expertise as inputs to analyze and make decisions.

Cross-Functional Collaboration

Definition

Construct

Market immersion goes far beyond just having a market or customer orientation. In market immersion people from all functions in the organization are actively involved in collecting and analyzing market data.

Market orientation (Jaworski and Kohli, 1993); customer orientation (Li and Calantone, 1998).

There’s a strong value to observing. Just having people who like to solve problems, standing there on the side. And that’s why we’re a firm believer in having the engineers there as well. Because they have the same problem-solving abilities, but they also approach it from a little different perspective. (Director Quality Engineering, USMD)

The entire firm embraces market research activities to fully understand customers’ needs and identify opportunities for NPD.

Practices of Market Immersion

Inputs to Portfolio Decision Making

Table 5. The Constructs of the Inputs to Portfolio Decision Making

Intuition in managerial decision making (e.g., Khatri and Ng, 2000; Dane and Pratt, 2007). Previous research focused primarily on the cognitive processes of intuition embedded in individuals and not on the extent to which the use of intuition can be perceived as an organizational process and a source of decision input.

We differentiate between the general level of politics in the firm and the extent to which this leads to an unequal power distribution in the portfolio decision-making process.

I have strong feelings about each new product and about what our customers want. You need to sense their needs and you need to be able to have a feeling about the market. Is this the right product for the right market? (Product Manager, EUFS)

The input generating process of forming an initial opinion about a situation based on past experiences and feelings.

Intuition

Firm-level politics in the strategic decision processes (Eisenhardt and Zbaracki, 1992; Dean and Sharfman, 1996).

I have worked for the company for quite a long time, so I know the people, so I know who I have to convince and who my allies are. But for somebody that is fairly new it is very different. They often don’t stand a chance because they don’t know yet how it works here. (Platform Manager, EUFd)

The informal processes of influence, persuasion, and negotiation that people use to gain support for decisions that are driven by the personal interests or motivations of individuals or groups.

Politics

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outsider to the business). If the rationale producing these numbers was faulty, the resulting decisions likely were flawed. Critical thinking results in analytical knowledge with quantitative expressions of technical and market risks and of the financial ramifications of the potential decisions. The best of these processes even provide risk-adjusted estimates and scenario-based ranges for these estimates. Proposition 4: Practices of critical thinking are associated with using evidence-based processes of decision making. Practices of market immersion. Market immersion is much more than having a market or customer orientation. People who are market-immersed are active customer champions and advocates. In market immersion, people across all the functions in the firm involved with NPD have detailed personalized market knowledge at both the micro (customer and competitor) and macro (aggregate market trends) levels. Target customer knowledge includes a detailed understanding of customer needs, the importance of each need, and the trade-offs that customers are willing to make between different features or solutions to different needs. Aggregate market knowledge includes general trends and information about market size, potential, growth rate, competitors, competitor shares, and price points, and thus contributes to evidence-based decision making. Of the case firms, USMD was the market immersion exemplar. Market research reports were thoroughly analyzed by all functions (not just by marketing), and when the data were ambiguous, data from other sources were sought. Large-scale survey studies identified general trends or important general problems, but focus groups and especially one-on-one interviews obtained in-depth insights into customer needs. However, this company most highly valued cross-functional field observations to obtain a complete picture of the user and the use environment. They involved individuals from all functions and levels in observation. Market immersion in USMD was fully embedded across all of the functions of the organization, and no portfolio decision was made without significant market input and detailed customer discussion and debate. Proposition 5: Practices of market immersion are associated with using evidence-based processes of decision making.

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Politics. Politics are the processes of influence, persuasion, and negotiation used to gain informal support for decisions. An unclear evidence-based decision structure or locus of decision-making authority encourages the use of politics to influence decision outcomes. One typical outcome of political maneuvering is manipulating the numbers in financial evaluation methods. In EUFd’s strongly political culture, middle managers could not get a decision approved without getting political support from their senior counterparts. There was thus significant political maneuvering to influence decisions outside of official decision-making meetings. Politically determined decision inputs can be a threat to decision quality as the attention is no longer on objective rationales for the decision, but rather on personal goals that may have little to do with actual project facts and risks. Proposition 6: High levels of politics are associated with using power-based processes of decision making. Intuition. Intuition generates subjective inputs to decision-making through forming opinions about a situation based on past experiences and feelings. When decision makers are experts, intuition can lead to making good decisions quickly. However, when they are less knowledgeable, basing decisions just on intuition can lead to inappropriate decisions. Both food firms had managers who routinely made decisions purely on intuition that was not substantiated with fact-gathering or fact-based debate. The rationale behind their intuitions was either absent or supported by general statements. EUFd’s senior management regularly told middle management to pursue so-called must-do projects on the basis of ‘‘strategic importance,’’ even though other evidence suggested canceling these projects. In EUFS, people also relied strongly on their past experiences and feelings in evaluating new opportunities and forming initial opinions. However, this initial opinion was then tested against knowledge from others across multiple functions and backed up with data. One portfolio manager explained: Our product managers are very capable of forming well-informed opinions. The more experienced they are, the better they can evaluate things. But we also need market data. Research goes a step further and really investigates what the future may look like.

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The subjective decision inputs generated by processes of intuition contribute to opinion-based decision making. Thus: Proposition 7: High levels of experience-based intuition are associated with using opinion-based processes of decision making.

Cultural Factors Affecting Portfolio Decision Making Three prevailing cultural factors (Table 6) were associated with how portfolio decision inputs were generated: the extent and nature of (dis)trust between people in the firm; the degree of collective ambition; and a transformational leadership style. Trust. Trust is the extent to which people are comfortable with the inputs from other functions. In

EUFS and USMD, people respected and valued the expertise of peers from other domains, which resulted in extensive cross-functional collaboration in and outside of formal meetings. People believed that they would not be able to successfully collaborate if they did not fully trust each other. As one EUFS portfolio manager said about his colleagues: What I like about the people that I work with is that they are open and task oriented. We are amicable, work next to each other and help each other with the exchange of knowledge and services. I find that very positive: the open work environment and professional people.

When people distrusted each other’s motivation or expertise, the quality of cross-functional collaboration was reduced, as was found at EUFd. Although crossfunctional collaboration was well established on paper, marketing deliberately kept other domains from interfering with the selection of new product ideas.

Table 6. Cultural Factors in Portfolio Decision Making Cultural Factors Construct

Collective Ambition

Trust

Transformational Leadership

Definition

Collective ambition is the extent to Trust is related to the extent to which people across domains and levels which people are comfortable with share the same goals and buy into the the inputs from other functions. same strategies.

When a transformational leadership style is embedded in the firm, managers are accessible and approachable, and they encourage people to think strategically and develop their potential in the best interest of the firm.

Proof quotes

Well, because we together develop the strategic plan and indicate what the areas of interest are we don’t easily have conflicts. Research already supports the plan. We are all on the same page. (EUFS)

One of the positives here is that you have quite a lot of authority to make decisions yourself. You feel rather free in making decisions and quickly receive trust from your peers. You feel supported by others in the decisions you make. We just have a very open and trustworthy environment in which we operate. (Product Manager, EUFS)

At the end of the day, I need to . . . at least my management style is I need to be able to explain why we’re doing it. Why it’s important. And so it isn’t me telling them what to do. It’s me who recognizes it needs to be done. But here are the reasons that something needs to be done. And from that point forward they can . . . they can carry on with that. (VP R&D, USMD)

Link to the extant literature

Shared goals and values in organizational integration (Kahn, 2001).

Intra-organizational trust (Grey and Transformational leadership (Bas and Garsten, 2001); systemic trust Steidlmeier, 1999; Jung, Yammarino, (Shamir and Lapidot, 2003); trust and Lee, 2009). between team members (Javernpaa, Knoll, and Leidner, 1998).

Differentiation from the literature

Collective ambition goes beyond Our construct of trust links to Kahn’s concept of shared goals in the existing concepts of intracontext of organizational integration. organizational trust. This construct is not only about having a shared vision; it is also about everyone in the firm buying into the same strategies to achieve the firm’s goals.

Transformational leadership is a broadly defined concept. We identified specific aspects of transformational leadership style that were embedded in the organization: accessibility and approachability, encouragement of strategic thinking, demands for argumentation, political sensitivity, decisiveness, and transparency.

EXPLORING PORTFOLIO DECISION-MAKING PROCESSES

Other domains (R&D and operations) developed a skeptical attitude toward marketing, distrusting the motivation underlying their ideas and criticizing the NPD projects they initiated. As their director of research said: We actually speak in two different ways. In the European management board meeting we say yes, this is what we shall do. And when we are back on our own turf we say, well just wait a bit and do this and that instead.

Proposition 8a: Trust is positively associated with cross-functional collaboration. People who trust the expertise and motivation behind the decision inputs generated are more comfortable answering critical questions about their process inputs. When there is distrust, however, people follow their own agenda, moving away from a problem-solving focus and behaving politically. EUFd had implemented a portfolio database management system with project scorecards to enable more objective portfolio decision making. However, people did not trust the project scores presented because they did not trust their peers to fill in scores objectively based on knowledge of the business, and thus based their decisions more on politics. The discipline of producing precision [in project scores] should not be by using an educated guess or a political impact or just putting something high on the list.[EUFd Director]

Proposition 8b: Trust is positively associated with practices of critical thinking. Proposition 8c: Trust is negatively associated with the level of politics in the firm. Collective ambition. Collective ambition is the extent to which people across domains and levels share the same goals and are working toward the same purpose. One informant explained collective ambition as the following: I’ve given an example . . . about two men working in the quarry. And they’re both chipping along at the granite. And someone asked the men what they were doing. And the first man said I’m chipping at this rock. And the other man said I’m building a cathedral. And it’s just strictly a matter of perspective. I think if these people understand the greater purpose it does what you said. It’s the collective ambition for the good of a team and

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for the good of the company as opposed to I’m just doing my little job. (VP R&D USMD)

EUFS had the strongest collective ambition of the four case firms. This helped them collaborate cross-functionally, as everyone was working for the best interest of the company, rather than for their own group’s best interests. Misalignment of goals or a lack of collective ambition can give rise to personnel who focus on personal or functional group goals that may lead to political behavior. USMD started to experience the effects of such a shift when the new VP of marketing voiced different goals than those held by other management board members. This misalignment caused disruption and frustration on the management board, who feared that their carefully built company culture would be affected by his political maneuvering. Proposition 9a: Collective ambition is positively associated with cross-functional collaboration. Proposition 9b: Collective ambition is negatively associated with the level of politics in the firm. Transformational leadership. Managers with a transformational leadership style are accessible and approachable, and they encourage people to think strategically and develop their potential in the best interest of the firm (Rubin, Munz, and Bommer, 2005). The degree of transformational leadership embedded in the firm’s culture influences all five decision input generating processes. The transformational leaders in USMD and EUFS believed that the best decisions were those that included cross-functional experience and expertise and were guided by what was best for the firm and supported by thorough argumentation. They actively drove critical thinking and considered it important that they were easily approachable. These leaders felt that they had to fulfill an exemplary role and carefully assured transparency throughout the decision-making process to prevent political maneuvering. They also recognized that having complete customer understanding across all layers of the organization helped them make betterinformed portfolio decisions. A transformational leadership style drove active involvement in the market: You only get this involvement [in research] when top management is really behind it. You’ve got to lead by example. (USMD, Senior Researcher)

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These transformational managers encouraged people to build their experience to contribute to the collective knowledge base of the firm and enable faster decision making. One of the product managers at EUFS described how his senior managers helped him build his experience: I do a lot of things nowadays based on my experience. A large portion of that experience I received from my predecessors. The product manager who I took over the product line from taught me a lot about how you have to launch new products into the market and how you acquire the right information for your decisions. That knowledge . . . is embedded in the organization and in me.

From the case data, the following relationships are thus posited: Proposition 10a: Transformational leadership is positively associated with cross-functional collaboration. Proposition 10b: Transformational leadership is positively associated with practices of critical thinking. Proposition 10c: Transformational leadership is positively associated with practices of market immersion. Proposition 10d: Transformational leadership is positively associated with the building of experience-based intuition. Proposition 10e: Transformational leadership is negatively associated with the degree of politics in the firm.

Discussion While most research on portfolio management has focused on individual selection and termination decisions within NPD portfolio decision making, the goal of this research was to study portfolio decision making from an integrated perspective, looking at how decisions are made simultaneously across the full set of NPD projects in development. The result is that the ‘‘how’’ of portfolio decision making is complex. The present research identified a number of constructs that describe the systemic nature of portfolio management, proposing a general model of portfolio decision-making effectiveness and its antecedents (Figure 1). Several aspects of Figure 1 are expected to hold for any strategic decision-making process of the firm. For

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example, it is likely that all strategic decisions are made through some interaction between evidence-, power-, and opinion-based processes, even though the literature on strategic decision making has investigated these three research streams separately. The simultaneous investigation of them in this research constitutes a contribution to this literature, even though this aspect of the model is expected to hold independent of the type of decision investigated. However, a number of aspects of this model are unique to making NPD portfolio decisions, differentiating them from other types of strategic decisions that the firm makes. First, making evidence-based portfolio decisions depends upon having inputs that are generated through deep market immersion. These customer and market inputs are not as crucial to making other kinds of strategic decisions in the firm, such as decisions about the firm’s financial portfolio or manufacturing strategy decisions. Making these decisions will require other types of expertise, but not input from understanding the firm’s customers. Second, NPD portfolio decisions require inputs from across multiple functions, whereas, for example, manufacturing and financial strategy decisions do not. Thus, ongoing cross-functional collaboration is much more important for NPD portfolio decisions than for the firm’s other, more functionally oriented, strategic decisions. NPD decision making is multi-functional by nature. Finally, the research indicates that firms that are most effective in portfolio decision making have a portfolio mindset. The concept of a portfolio mindset most likely also applies to other types of strategic portfolio decisions, such as financial stock portfolios, alliance portfolios, or portfolios of services. However, the unique aspect of having a portfolio mindset in the context of NPD entails that managers know exactly where each project is located in the development pipeline as this changes over time, which enables them to quickly detect and resolve potential bottlenecks.

Theoretical Implications A number of constructs in the general model of portfolio decision-making effectiveness show a linkage with, or complement or extend existing concepts in the organizational behavior, management, marketing, and NPD literatures. Thus, this research shows that a number of different theoretical lenses need to be combined to advance understanding in this domain.

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Previous research has only investigated portfolio decision making by one theoretical lens at a time. This research demonstrates that the previous single domain oriented research, which has been useful in helping understand how individual decisions are made, has not been sufficient in helping understand the system of decision making as it needs to be implemented over time. In the NPD literature, Cooper et al. (1999, 2000, 2001a, 2001b) define three performance outcomes for a ‘‘successful’’ NPD portfolio: it maximizes portfolio value, is aligned to strategy, and represents a ‘‘balanced’’ set of projects. The strategic decision-making literature suggests that achieving strategic success, such as having a successfully performing NPD portfolio, can only be achieved through having effective strategic decision-making processes (Forbes, 2007), where ‘‘effectiveness’’ is defined as having an appropriate organizational outcome rather than as a measure of firm performance or success. The dimensions of decision-making effectiveness found in the present research thus may represent direct organizational antecedents to achieving successful NPD portfolio outcomes, for example, in terms of Cooper’s performance dimensions, as the quotes in Table 7 suggest. From the limited data this research speculates that achieving strategic alignment, maximum portfolio value, and balance all may result from the firm’s ability to develop a portfolio mindset in their decision making. ‘‘Focused effort’’ may relate to achieving strategic alignment. Agility in decision making may contribute to portfolio maximization by quickly eliminating projects that have become marginalized due to some change in the environment. Alternatively, rather than mediators, as suggested above in this paragraph, these dimensions of decision-making effectiveness may instead moderate the relationship between the three decision-making processes and Cooper’s portfolio performance outcomes. This research thus provides a testable set of antecedents that can be investigated empirically in future research as to whether they help firms directly achieve portfolio success, as defined by Cooper et al. (1999, 2000, 2001a, 2001b), or whether they act as moderators between other organizational processes and portfolio success. This research also extends the theory of cross-functional collaboration in three ways from how it is considered in the NPD literature (e.g., Griffin and Hauser, 1996; De Luca and Atuahene-Gima, 2007; Song, Neeley, and Zhao, 1996). First, the cross-functional collaboration needed for portfolio decision-

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making effectiveness involves integrating people from all major disciplines of the firm (i.e., operations, sales, finance, marketing, and R&D) in generating decision inputs, rather than just the R&D and marketing domains, the primary focus of the NPD literature. Additionally, these collaborations take place before NPD begins—which also has not been considered in previous research. Finally, collaboration is needed in understanding how multiple projects fit together strategically as a whole. Previous research has considered cross-functional collaboration only on a project-by-project basis. In a broad sense, critical thinking shows a linkage to a learning orientation, which refers to the organization-wide activity of creating and using knowledge to enhance competitive advantage (Calantone, Cavusgil, and Zhai, 2002). Aspects associated with the learning orientation which were also found in the case firms are: commitment to learning, openmindedness, shared vision, and intra-organizational knowledge sharing (Baker and Sinkula, 1999; Calantone et al., 2002). These aspects of the learning organization are manifested in the practices of market immersion, in cross-functional collaboration, and in a collective ambition to make effective portfolio decisions. The practices of market immersion go beyond just having a market orientation, a set of behaviors, and processes that deal with disseminating market intelligence (Kohli and Jaworski, 1990; Lukas and Ferrell, 2000). Market immersion requires that individuals from all major functions not only have both a complete and detailed understanding of their customers and other stakeholders, as well as an understanding of the market in aggregate, but that they actively are customer advocates. This customer understanding is obtained through active engagement by all disciplines in market-research activities. Direct customer contact through observation and conversation is essential. The model proposes that portfolio decision-making effectiveness is determined by the interaction between evidence-, power-, and opinion-based decision-making processes. While evidence-based decision-making processes may in theory lead to more objective and thus hopefully ‘‘better’’ decisions (Ansoff, 1991, 1994), the reality is that the data associated with predicting market, technological, and financial success for these projects will always be incomplete. Because these numbers represent forecasts, they will always be at least somewhat inaccurate. Thus, even decisions based purely on market, financial, and technical data,

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Table 7. Case Evidence of the Association between Decision-Making Effectiveness and Cooper et al.’s (2001b) Portfolio Performance Measures Value Maximization

Strategic Alignment

Balance

Portfolio Mindset

You may decide to abandon the project. You may have taken forward three or four designs, they all look valid. They looked promising. But when we reassess it the market has declined. We’re not gonna pursue it any further. Or it becomes a lower priority. We’ve seen this other project that has the same level of risk but higher reward. And we can replace it with that. So you have to continually reassess this . . . both the initial assumptions and then during the project phases. (Director Quality Engineering, USMD)

We compare our portfolio to our strategy policy and the mismatch determines what we shall do next. (Portfolio manager, EUFS)

You need to be able to keep the overview while tying projects together; from smaller projects to huge investments. You need to evaluate to what extent projects fit together. To what extent do they complement each other? To what extent is it interesting to the stock holders and will it increase the value? (Product manager, EUFS)

Focus

Focus allows you to calculate all your risks and therefore you can take many risks. You can actually . . . you can be very risky with everything you do because all your risks are calculated because you understand the box in your end. (Director R&D, USMD)

We need to figure out what we want and where we want to focus. What percentage of our turnover should come from NPD. What is our vision? (Marketing Director, EUFd)

How much of that should be radical new products and how much incremental? What is our vision and how many projects do we need to realize that? (Marketing Director, EUFd)

So, $11,000 a day for every day that you are faster or longer. So if you can buy 4 weeks for $20,000, you just made $80,000 of your investment. I suppose it has . . . the success of the product has something to do with that. So it’s a big benefit in the groups here to say . . . . Spend the money. Get it done on time. (VP R&D, USMD)

They prefer the project that they themselves came up with over the project that they were asked to do. If their project was initiated based on the strategic framework then I would be happy with it. And that is where I want to get to with the marketing people. The way it now often goes is that someone wakes up early in the morning and thinks ‘‘I have a fantastic idea and I’m gonna start a new project.’’ We need to get a better connection with the brand strategy. (Director of R&D, EUFd)

Agility

Kill projects in time and keep the focus onto those big projects. Don’t get too much distracted by small projects or those that are not commercially feasible. Get a more balanced spread over the different stages. (Brand Manager, EUFd)

argued and understood by all functional domains, may lead to product failures. Because the evidence is never complete or accurate, other forces, such as individuals’ opinions and the power bases of those involved with making these decisions, will at some point come into play in making decisions. This is especially true for more breakthrough ideas, where uncertainty in the quality of the data will be highest. These processes have benefits in that they may allow the firm to be agile in its decision making, and provide the short-term focus necessary to execute toward the long-term plan. Furthermore, when managers are experts in the domains being considered, or when managers operate politi-

We too quickly start developing new products that are mainly incremental in nature. As soon as someone has an idea it’s like ‘‘hey this is cool, let’s start a new project.’’ And now we actually have too many projects that are all incremental. (Brand manager, EUFd)

cally with the best interests of the firm and its stakeholders at heart, decisions based on these processes may be effective and can lead to a series of successful new products. In addition to potential interactions between the decision-making processes, it is possible that feedback loops may exist (this possibility was suggested by both reviewers). While the process has been modeled linearly, portfolio decision making is a longitudinal process, and thus, for example, power-based decisions may in turn lead to increased politics in the firm. Opinion-based decisions that lead to product successes may increase managers’ confidence in their expertise and lead them to depend more on their

EXPLORING PORTFOLIO DECISION-MAKING PROCESSES

intuition in the future. Resolution of the feedback loop issue is left to future research.

Managerial Implications Portfolio decisions must be made while maintaining an overview perspective of the firm’s offerings, mitigating the risks involved in innovation, and responding quickly and aptly to opportunities and threats in the dynamic market environment. That managers are often dealing with a large number of NPD projects and an even larger number of products in the market adds to the complexity of portfolio decision making. The research on portfolio decision-making effectiveness presented here can help managers make better portfolio decisions by providing a framework for diagnosing the firm’s strengths and weaknesses. Identifying the dominant decision-input generating processes in the firm can help managers address interactions across their portfolio decision-making processes. For example, an over-reliance on subjective opinion and the absence of mechanisms to generate more evidence-based inputs, in combination with an autocratic leadership style, is likely to lead to inappropriate portfolio decisions. By implementing methods of market immersion, encouraging cross-functional collaboration, and stimulating practices of critical thinking, companies could shift their portfolio decision process balance more toward evidence-based decision making and simultaneously work on developing a portfolio mindset, improving their portfolio decision effectiveness and, hopefully, their long-term business success. The relationships identified illustrate which strings might be pulled to help achieve portfolio management effectiveness. It is the role of senior management to become aware of the firm’s culture and their own contribution to the extent to which decision making is based on evidence, subjective opinion, or power.

Future Research and Limitations Research should investigate further the relationships between the constructs, determine the extent to which there are interdependencies between them as well as feedback loops across them, and identify other potential moderators influencing the relationships between decision-making processes and portfolio decision-making effectiveness. The theoretical concepts developed need to be operationalized into measures for a quantitative survey, which would then allow the proposed relationships to be tested

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empirically. Finally, it will be especially interesting to managers to identify the mechanisms by which managers can achieve changes in the specific parts of the portfolio decision-making system to improve their portfolio decision effectiveness. While this research opens a new direction for portfolio management research, it also has its limitations. Although the cases were carefully chosen and balanced, these findings are based on only four companies. Each case was characterized by a certain combination of cultural factors and decision processes, and it is impossible to isolate the impact of any one of them from these four cases. It is likely that some of the findings will generalize to other industries and other companies, while others will not. A further corroboration and confirmation of the model by other researchers and with another case sample is therefore desirable.

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Appendix. Abbreviated Interview Guide Introduction by interviewer Role and responsibilities  What is your role within company X in relation to portfolio management? Decision characteristics  Can you describe a recent portfolio decision? (What was the decision about and how was it made?) Organizational context and processes  Can you describe how portfolio decision-making processes within company X work?  How are portfolio decisions governed within your company?  In what way does the strategy affect the way portfolio decisions are being made?  What are the most important strategic aspects that you have in mind when making portfolio decisions?  When you are involved in a portfolio decision who do you talk to? What kind of information do you need to make portfolio decisions?  Where or from whom do you obtain this information?  What are the strengths of how portfolio decisions are being made within company X?  What do you think could be improved? Dealing with uncertainty and complexity  What kind of uncertainties do you have to deal with?  Can you describe a situation in which you were confronted with a difficult portfolio decision? (Why was this decision difficult? How did you handle it?) Methods  What kinds of methods are being used within company X for making portfolio decisions?  How do you use these methods?  What are in your opinion the pros and cons of these methods? Individual decision making aspects  How do you think your experience and expertise helps you in making portfolio decisions?  How do you think the way you make portfolio decisions differs from a novice? Motivation  Are you rewarded for the decisions you make?  What is for you personally at stake when making portfolio decisions?  What is the most important driver behind choosing one option over another? Closing questions  In short, how would you describe your company’s style in portfolio decision making?  How would you describe your personal style in portfolio decision making?