In the Classroom II
Using Discovery-Driven Planning in Business Building

Building a business is a process of learning, beginning with great uncertainty that is reduced as the business unfolds and key assumptions are tested. A systematic process for converting ignorance into knowledge can help accelerate the learning, enable strategic adjustments, and speed decisions about whether to pull the plug on failing ventures.

Wharton Professor Ian MacMillan and colleague Rita Gunther McGrath created "discovery-driven planning" to help facilitate adaptive planning in environments of high uncertainty. It is one of the tools and frameworks presented in Business Building: Conceiving, Planning, and Executing Corporate Ventures, a Wharton Executive Education program that MacMillan directs.

"Discovery-driven planning is vastly different from conventional planning," McGrath and MacMillan write in their book The Entrepreneurial Mindset: Strategies for Continuously Creating Opportunity in an Age of Uncertainty. "In conventional planning, success means delivering numbers that are close to what you thought you would deliver. In discovery-driven planning, success means generating the maximum amount of useful learning for the minimum expenditure."

Discovery-driven planning can help to identify and test assumptions that managers have about the business, particularly in uncertain or unfamiliar environments. For example, when McDonald's first opened a fast-food restaurant in Beijing, it assumed Chinese patrons would move in and out quickly as customers did in other parts of the world. But the first customers preferred to savor the foreign experience, and managers ultimately had to expand the size of the restaurant. By identifying and tracking assumptions about customer turnover and explicitly assessing their impact on the business through tools such as a "reverse income statement," managers can use discovery-driven planning to recognize and respond to such surprises and failed assumptions more quickly.

Six Disciplines of Discovery-Driven Planning

Discovery-driven planning is based upon six disciplines:

1. Framing: Identify the purpose of your new venture, and be specific. What bottom-line results will make this venture worthwhile? Next, how will this new product or service be produced and delivered? How many will you need to sell to make a profit? Choose your business model to make sure it, and the earnings logic attached to it, are profitable enough to meet your goals. Discovery-driven plans begin with where you want to end up and work backward, in contrast to conventional plans that sketch a path from where you are into a successful future.
   
   
2. Competitive Market Reality Specification: Many business plans suffer from an inflated view of markets and a deflated view of competition that leads to overly optimistic prospects. The process of discovery-driven planning forces a disciplined look at competitive conditions and assumptions needed for success. For example, when MacMillan and McGrath were asked to review a plan by a textile manufacturer to vertically integrate into clothing sales, they recognized that to meet the numbers for year five of the business, the company would have to be making one in eight of all garments sold to women in department stores annually — at premium prices. The company went ahead with the plan anyway, but shut down 16 months later after losing $12 million.
   
   
3. Specification of Deliverables: By specifying deliverables, discovery-driven planning helps translate broad strategy into daily operating activities needed to achieve results. For instance, the number of sales you need for the venture to become profitable will determine the size of your sales staff, and thus the cost of the sales process. Many managers also make the erroneous assumption that the sales force will be delighted to sell a new product, when their training and commissions tend to make it easier and more rewarding to sell existing products. Specifying deliverables helps clarify how everyone fits into the strategy and the competencies that need to be developed.
   
   
4. Assumption Testing: The key to discovery-driven planning is converting assumptions into knowledge at minimum cost. While developing deliverables, managers also identify an assumption checklist that will be tested as the business unfolds. This checklist can make it easier and quicker for managers to spot small differences from expectations that could signal the project is headed off course. What can seem like slight variations can be devastating in their final impact.
   
   
5. Managing to Milestones: Once the assumptions are identified, the next challenge is determining when to test them. A milestone is a critical, identifiable point in time at which key assumptions are tested. In discovery-driven planning, you plan in detail as far as the limits of current knowledge make sensible, then stop, revisit your assumptions, and replan at each milestone. This is the approach used by the U.S. space program to put a man on the moon in the 1960s. The "keeper of the assumptions" ensures that as each milestone of the project is reached, the related assumption can be tested, and the plan can be revised as a result.
   
   
6. Parsimony: A key discipline in discovery-driven planning is parsimony. Using a real options approach, the goal is to preserve flexibility and minimize investments until relevant assumptions have been tested. Think of this step as spending your imagination before your money or making small investments to learn now rather than incurring big losses down the road.

The overall focus of discovery-driven planning is on learning. "It gives people permission to learn instead of making them feel obliged to justify the differences between what was planned and what the reality is," McGrath and MacMillan write.

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This month's articles:

• Thought Leaders: Insights from a survey of more than 350 companies on successful CRM practices.
  
  
• In the Classroom I: Professor Robert Holthausen on mergers and acquisitions in a time of economic turmoil and corporate scandals.
  
  
• In the Classroom II: Use "discovery-driven planning" to test your assumptions in building businesses.
  
  
• Certificate of Professional Development: A focus on value creation changed the way Schick executive Andrew Chrostowski approached his work.
  
  
• The Last Word: The right knowledge can add value all along your value chain.