Sample frameDay 299·Innovation · Planning

Morning. Almost every figure in a new venture's plan is an assumption. The format hides that.

Innovation.

Discovery-Driven Planning

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The question

For the venture you're most excited about, do you know the profit it has to earn before it's worth doing at all — and, separately, the price, the volume and the unit cost the world would have to hand you for that profit to exist? Most people can produce the first on request. The second is the one that settles it, and almost nobody has written it down.

The idea

Rita Gunther McGrath of Columbia Business School and Ian MacMillan of Wharton published Discovery-Driven Planning in the Harvard Business Review in 1995, and their complaint was about a specific document: the new-venture plan built the way an established business builds a budget. Conventional planning extrapolates from a base of things already known. A new venture has almost no base, and the format quietly converts what it does have — assumptions — into figures nobody argues with again. Their fix reverses the arithmetic. You start from the profit the venture has to deliver to be worth doing, work out the revenue that would have to exist for that profit to be plausible, and subtract one from the other. What's left is what they call the allowable cost: not what you'd like the thing to cost, but what it is permitted to cost. Then you carry on backwards through the operations that would have to run, and every quantity the arithmetic has fixed goes on a list to be tested in order — which is Assumption Mapping's job again, done with numbers instead of cards. The worked case in the article follows Kao Corporation, the Japanese soap and chemicals company, weighing whether to enter the floppy-disk business it had been supplying for years. A plan graded by how close the outcome came to the forecast teaches you nothing. This one is graded by how cheaply its assumptions turned into knowledge.

The framework

01
Set the bar, then run the statement backwards.
Day 156 gave you the hurdle: the return a use of money has to clear before it deserves the money, built from your own numbers. Take that figure as given and do the thing a hurdle rate on its own can't — run the income statement in reverse. Required profit at the top. Beneath it, the revenue that profit implies, at a price and a volume you have named out loud. Subtract one from the other and what remains is the allowable cost. Costs stop being something the plan adds up at the end and become a constraint the plan has to satisfy, and that inversion is the whole method.
02
How many of these does the world have to agree to?
Working backwards doesn't stop at the allowable cost. It carries on into the operations that must run to produce those figures — units a month, cost per unit at that volume, how many salespeople and how productive each has to be. Write the chain out as sentences in the present tense: a salesperson closes four accounts a month; the unit costs eleven dollars at ten thousand a month. Notice what the arithmetic has done. It hasn't asked whether these are true; it has told you what they'd have to be. A plan that reads as claims can be argued with. A plan that reads as figures can't.
03
The gap between allowable and actual is the plan.
Now put the honest number beside the permitted one. What would this cost to make and sell today, at the volume you have assumed, with the suppliers and the people you can actually get? The two figures are almost never equal, and the distance between them is the only thing in the document worth a meeting. There are four moves and no others: close the gap, raise the price, change the volume, or stop. What you must not do is the fifth thing everybody does, which is quietly lift the allowable cost until it reaches the real one — that is the plan running forwards again, wearing the costume.
04
Milestones exist to redo the numbers, not to celebrate them.
Each milestone sits where a batch of the chain will have been tested, and its job is to send you back to the arithmetic with real figures in hand. Sometimes the allowable cost still holds and you carry on. Sometimes the world has quoted you a different price, the gap has widened, and the venture no longer clears the bar you set while you were calm and uninvested. That is the moment the method exists for, and it works only because the bar was written down first. In a plan that reads as figures, a milestone becomes a progress report, and a progress report has never stopped anything.

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