!DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Strict//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-strict.dtd"> Streamline Training & Documentation: Discovery-Driven Planning

Tuesday, April 29, 2008

Discovery-Driven Planning

If you're in the market for a practical, sophisticated guide to planning for a new venture, a good option is reading the enhanced version of an article from the July-August 1995 issue of the Harvard Business Review available here (pdf).

In "Discovery-Driven Planning," Rita Gunther McGrath (Columbia Business School) and Ian C. MacMillan (Wharton) lay out a five-step process for pursuing a new venture in a way that controls risk in what is an inherently uncertain situation.

The five steps are:
  1. Create a reverse income statement — "Determine the profit required to make the venture worthwhile ... Then calculate the revenues needed to deliver that profit."

  2. Calculate allowable costs — "Lay out all the activities required to produce, sell, service, and deliver the new product or service to customers. Together, these activities comprise the venture’s allowable costs. Ask, 'If we subtract allowable costs from required revenues, will the venture deliver significant returns?' If not, it may not be worth the risk."

  3. Identify your assumptions — "If you still think the venture is worth the risk ... list all the assumptions behind your profit, revenue, and allowable costs calculations. Use disagreement over assumptions to trigger discussion, and be open to adjusting your list."

  4. Determine if the venture still makes sense — "Check your assumptions against your reverse income statement ... Can you still make the required profit, given your latest estimates of revenues and allowable costs? If not, the venture should be scrapped."

  5. Test your assumptions at milestones — "If you’ve decided to move ahead with the venture, use milestone events to test — and, if necessary, further update — your assumptions. Postpone major commitments of resources until evidence from a previous milestone signals that taking the next step is justified."

    Note that it is at this step that learning from what has happened prior to a particular milestone is explicitly taken into account in deciding how/whether to proceed. The company is "transforming assumptions into knowledge."
As you can see from the above scheme, the central discipline in discovery-based planning is systematically uncovering "the dangerous implicit assumptions that would otherwise slip unnoticed and thus unchallenged into the plan." McGrath and MacMillan offer examples of such assumptions, e.g.:
  • Customers will buy our product because we think it's a good product.

  • Customers run no risk in buying from us instead of continuing to buy from their past suppliers.

  • We will have no trouble attracting the right staff.

  • The rest of our company will gladly support our strategy and provide help as needed.
In sum, "discovery-driven planning forces managers to articulate what they don't know, and it forces a discipline for learning. As a planning tool, it thus raises the visibility of the make-or-break uncertainties common to new ventures and helps managers address them at the lowest possible cost."


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