Wharton's Ian MacMillan and Columbia's Rita Gunther McGrath, articulated a system they term "discovery-driven planning" in their August 2000 book, The Entrepreneurial Mindset. "[D]iscovery-driven planning," they wrote in an earlier article, "acknowledges that at the start of a new venture, little is known and much is assumed." This they contrast with conventional, "platform-based" planning, in which "assumptions underlying a plan are treated as facts -- givens to be baked into the plan -- rather than as best-guess estimates to be tested and questioned."

 

For launching a new venture, they advocate drawing up a checklist of all key assumptions, a timetable for proving each one, and what they call a "reverse income statement" -- a list of threshold economic criteria that must be met if the project is to go forward.

 

Their system is meant to apply to any entrepreneurial venture.  Developing a business plan for an existing line-of-business (LOB) is quite different than planning for a new initiative. To plan for an existing LOB, one could extrapolate future results from past experiences. But for a new initiative – whether a new business, new market or new product – extrapolation rarely works, because, the predictions for a new initiative are based upon assumptions and not past knowledge. So what is the best planning approach for a new initiative?

 

Discovery-Driven Planning is a tool that converts startup assumptions into knowledge that grounds the planning for a new initiative in reality.

 

The tool imposes planning discipline through four documents.

  1. ‘Key Assumptions Checklist’ identifies the business hurdles and assumptions for the initiative.

  2. ‘Reverse Income Statement’ models the business economics.

  3. ‘Pro-Forma Operations Specs’ defines operations needed to run the business.

  4. ‘Milestone Planning Chart’ specifies when the assumption needs to be tested.

Key Assumptions

A simple case shows how the process works. Consider a proverbial widget making company, which is contemplating entering a new market with a new product. Its return on investment and other directives call for a profit of $400,000 for the first year from the new initiatives. Some of the other key assumptions:

 

Reverse Income Statement

Be specific about what you expect from the business using the reverse-income statement as a tool. (e.g., required profits = necessary revenues minus allowable costs.) Don't start with the costs and hope the profits will flow. Figure out what profit will make this venture worthwhile, then work backward to figure out what it will take to get there.

 

The  initial Reverse Income Statement. Discovery-Driven Planning starts with the required profit and works up to determine how much revenue is needed and the cost allowed to generate that revenue. In the above example, the required revenue would be $4,000,000 (a 2.5% market share), allowing a total  cost base of  $3,600,000.

 

Pro-Forma Operations Specs

Next, develop the Pro-Forma Operations Specs.

 

Milestone Planning Chart

Finally, develop a Milestone Planning Chart.  Plan milestones that are targeted events and goals not arbitrarily chosen dates. Focus on converting assumptions to knowledge. At each milestone, revisit the assumptions and business model, learn from it and adapt accordingly?

 

 

Analysis

This entire process is looped and there is continuous feedback from one stage to next. Such a planning tool allows for a rigorous testing of the assumptions that necessary for a new initiative throughout the initiative. It has strong potential to reduce the uncertainty in planning for a new business. It enforces a planning discipline that creates checkpoints before significant commitments are made that could help the management determine whether it is prudent to go forward or not.

 

Application

Discovery-driven planning is a powerful tool for any significant strategic undertaking that is fraught with uncertainty - new product or market ventures, technology development, joint ventures, M&A programs, strategic alliances, even major systems redevelopment. 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 senior managers address them at the lowest possible cost.

 

Focusing on the adaptive execution of a business, Discovery-Driven Planning is also useful in managing existing business lines as it helps managers focus on key assumptions and adapt to changing external environments.

 

Implementing a DDP involves every aspect of operating and growing a company (including identifying, assessing, developing, and launching new products and services), but is rooted in extensive financial analyses and is centered on significantly growing revenues and reducing costs.

 

Discovery driven planning is a plan to learn, not to show that you had all the answers when you wrote the plan. The technique requires the interaction of five processes, working together. These processes are: 1) determining the frame (objectives) at the level of a project; 2) establishing competitive and market benchmarks; 3) defining operating specifications; 4) documenting assumptions; and 5) establishing key milestones. In uncertain environments, conventional planning makes no sense. Instead, plan with discipline to the next major milestone, then pause and re-plan as new information becomes available.

 

 

 

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