Discovery Driven Planning & Innovation As Usual

Introduction

It goes without saying that companies must innovate to survive this global pandemic. But how can they create plans when there are so many unknowns? Even the biggest and most successful companies fail at new launches because of obvious reasons that anyone else could see. This is where Discovery Driven Planning (DDP) can make a large difference. Rita McGrath and Ian MacMillan introduced DDP in 1995 in a Harvard Business Review (HBR) article, and it has since become a classic methodology for planning innovation, even influencing the Lean Startup movement (Gallo, 2017). McGrath and MacMillan are both professors in prestigious business schools on the East Coast, and they were asked to study why large organizations lost money when trying to grow in new ways. The version of the article quoted here was reprinted in 2013.

DDP is truly about discovery and discipline: “Unlike platform-based planning, in which much is known, discovery-driven planning forces managers to articulate what they don’t know, and it forces a discipline for learning” (McGrath and MacMillan, 2013). Without a framework for building a new venture, it is easy to build on hopes and blind faith. One is reminded of the story that Jesus told in Matthew 7:24-27, where the wise man builds his house upon a rock. Similarly, an honest and thorough search for answers will reveal true conditions, but assuming that sand will support a new structure is tempting fate.

Major themes of the article include a comparison of conventional planning tools and their new DDP tools. The idea that assumptions need to be tested and converted into knowledge is central to DDP, and lacking in conventional approaches. They also address dangerous fallacies that create a false sense of security and are only exposed when new ventures fail dramatically.

The first third of the article provides a background on how businesses often have faulty assumptions for new ventures, like Disney’s multi-fronted failure at launching Disneyland Paris. It also includes four areas where businesses do not identify and validate their assumptions. The remainder of the article demonstrates how DDP tools can be used retrospectively in a case study of a company’s successful entry into the floppy disc market in 1988.

Analysis

McGrath and MacMillan’s primary question regarding new ventures is, “Why do such efforts often defeat even experienced, smart companies?” (2013). Besides the obvious answer that these endeavors are inherently risky, they seek to understand the thought process that led to the failures and to analyze what could be corrected. If other companies could learn from the mistakes of Disney, Polaroid, and FedEx, and use better decision-making tools, they would not lose money.

The main thesis of the article is that “Many failures could be prevented or their cost contained if senior managers approached innovative ventures with the right planning and control tools” (McGrath and MacMillan, 2013). The 5 tools include: a reverse income statement, allowable costs calculation, a pro forma (activity summarization) operations specification, a key assumptions checklist, and a milestone planning chart.

The main evidence used by McGrath and MacMillan to support DDP is a case study where the planning and control tools are utilized to analyze Japan’s Kao Corporation. Kao had supplied chemicals to the floppy industry for years, and began to explore whether they could produce floppy disks at a lower cost and higher quality than the competition. No insider information was used by McGrath and MacMillan to enable DDP tools to stand alone.

The first of the 5 tools is the reverse income statement, which starts with the bottom line of a venture. McGrath and MacMillan proposed that in order for the floppy disk business to be profitable, there would need to be revenue and cost disciplines along every phase of the business. Beginning with the end in mind for Kao meant that a 10% profit would be a foundational necessity, and every other assumption would be tested to see if it contributes to this goal. This included calculating allowable cost to deliver a 10% sales margin, identifying required unit sales, necessary market share, and allowable cost per unit (2013).

Next, a pro forma operations specification is created. This means summarizing and calculating all the activities that will be needed to manufacture, operate, market, sell, deliver, and otherwise support the business of the floppy disk venture. All of these areas will include assumptions which must be tracked and checked as the venture unfolds. Everyone benefits from formally framing and defining operational challenges, so that the company is clear on what challenges should be addressed next (McGrath and MacMillan, 2013).

After detailing all of the business activities that must happen, a key assumptions checklist must be compiled and assigned to someone for continuous monitoring. Many businesses simply fail to track their assumptions in a changing world, and only realize when it is too late that they are losing money. A “keeper of assumptions” can also go between departments and act as a liaison between busy managers.

Finally, a milestone planning chart is used to organize the assumptions list into a strategic plan for testing and verifying all of the information. This plan is not something to be beholden to, like a deadline, but rather to be a tool that serves to develop the venture into maturity. McGrath and MacMillan describe it as a plan to learn. After each milestone it is necessary to revisit all assumptions and update them with the new knowledge acquired.

In their book Innovation as Usual, Miller and Wedell-Wedellsborg directly mention Rita McGrath in the chapter entitled “Tweak: How to Help People Improve Their Ideas.” Their ideas match what McGrath and MacMillan suggest, saying “The first version of any given idea will be flawed.” And “Successful innovations… are not found; they are developed… it is not just the solution that tends to develop. What will also change is the understanding of the problem or need.” (Miller and Wedell-Wedellsborg, 2013).

McGrath and MacMillan prove that DDP can help a company like the Kao Corporation to discover and to verify their unknowns. Their list of planning and control tools cover the areas a business needs to understand before starting a new venture. Their list cannot comprehensively cover all new ventures, and they warn that advice of experts must be used in any situation. But the influence of DDP has stood the test of time, and is now commonly known in many industries.

The focus to continue to test assumptions and look for areas to innovate parallels Miller and Wedell-Wedellsborg’s keystone of Focus. When a business is aware of what they do not know, and can generate ideas on how to test assumptions and to work around roadblocks to their launch, they can help their employees focus their energies on finding solutions (2013). The example was given of the Kao Corporation finding and buying an existing floppy disk manufacturer to test their ability to produce a high quality product. This step will require some innovation and integration, but will reap great rewards if the concept can be proved (McGrath and MacMillan, 2013).

Summary & Application

Successful innovators do not just blindly follow an idea, but create a framework to test their assumptions and continuously learn and improve upon their original plan. Discovery Driven Planning is a method that provides tools to test assumptions and has been used successfully for almost 25 years. The value of identifying critical uncertainties and addressing them before money is lost is estimable only in the potential to save company’s and (people’s?) careers’ existence.

Future managers would do well to begin habits of listing and verifying assumptions in their life, and work. The discipline of an honest search for truth and the integrity to admit that a plan is mostly based on assumptions will serve managers well. Tools used in DDP can be easily found and adopted into new business planning. The peace of mind gained from defining the problem and sharing the success of tested assumptions is surely better then hoping for the best without any proof.

James 4:13-16 also contains a warning along these same lines:

“Look here, you who say, ‘Today or tomorrow we are going to a certain town and will stay there a year. We will do business there and make a profit.’ How do you know what your life will be like tomorrow? Your life is like the morning fog—it’s here a little while, then it’s gone. What you ought to say is, ‘If the Lord wants us to, we will live and do this or that.’ Otherwise you are boasting about your own pretentious plans, and all such boasting is evil (New Living Translation).”

Throughout this class I have learned that having creative ideas is not enough to succeed. I want to be like the wise man who hears Jesus’ words and does them; who understands the opportunities to innovate and tests assumptions diligently. I also do not want to be so afraid of failure that I sit back and do nothing. Life is full of opportunities to learn and grow, and is made better by adventure. Every venture may not be created equally, but we serve a creator who has given all of us an equal chance to use what we have been given to serve Him and create value for others.

References

Gallo, A. (2017, December 5). A Refresher on Discovery-Driven Planning. Retrieved April 15, 2020, from https://hbr.org/2017/02/a-refresher-on-discovery-driven-planning

Holy Bible, New Living Translation (1996). Carol Stream, Illinois: Tyndale House Foundation.

McGrath, R. G., & MacMillan, I. C. (2013). Discovery driven planning. Harvard business review, 125-142.

Miller, P., & Wedell-Wedellsborg, T. (2013). Innovation as usual: How to help your people bring great ideas to life. Harvard Business Review Press.