In a previous post about immigration policy and the efficacy of employing emergent strategies, I briefly touched on the benefits of testing assumptions. A solution to a problem isn’t always about finding the right strategy, it’s about managing the process through which that strategy is developed. And part of strategy development, especially for new ventures, involves making many assumptions. Testing those assumptions is an important step in the Discovery Driven Planning (DDP) process.
Discovery Driven Planning, a five step process developed by Rita Gunther McGrath and Ian C. MacMillan, is a way to plan new ventures that allows for the uncovering, testing, and if necessary the reversal of assumptions made when starting a new project. The name comes from the idea that the potential of a new venture is discovered as it is developed. So as you develop your new venture, employing the discovery driven framework that will test your assumptions before you get too far could save you money, time, and headaches.
The five steps of Discovery Driven Planning are:
- Bake profitability into your venture’s plan
- Calculate allowable costs
- Identify your assumptions
- Determine if the venture still makes sense
- Test assumptions at milestones
The details
- To “bake profitability into your venture’s plan” you create a “reverse income statement” that will determine the profits necessary to make the project worthwhile. Starting with the required profits allows you to calculate how much costs can be allowed, and by imposing this cost discipline you ensure that you’re on the right track to profitability.
- To calculate allowable costs you will need to list all the activities required to produce, sell, service, and deliver the new product or service. Or more simply, if you know that your project must account for 10% of a firm’s total $100 million profit, you know the project must generate $10 million with allowable costs not to exceed $90 million.
- Identifying your assumptions is arguably the most important step. A new venture doesn’t rely on past data, so managers and innovators rely on assumptions of the market, the company, even the consumer (or nonconsumer in the case of new markets). Identifying these assumptions, and having discussions over assumption disagreements can help you adjust as necessary and plan better projects.
- To determine if the venture still makes sense you have to be honest. Test your assumptions against the reverse income statement and determine if you can make the required profit. If you can’t, you should scrap the project. Don’t simply rely on your gut, and hope for the best.
- Finally testing your assumptions isn’t a one and done deal. Assumptions should continue to be tested at milestones, and resources shouldn’t be allocated unless evidence from a previous milestone signals that taking the next step is justified.
Discovery Driven Planning methodically converts assumptions into knowledge and the new proven data is then incorporated into the emerging plan. Anyone journeying into a new venture or a new market (such as solar energy in growth economies) should employ a DDP framework for a safer, less uncertain, and more disciplined development and learning approach that could avoid not only headaches, but potential colossal failure.
For more of our Thursday Theory Tips, read:
Thursday Theory Tips – Who are your best customers?
