By Megan Kauffman, BA’11; Administrative Coordinator, Wharton Entrepreneurship
Developed by Wharton professor Ian MacMillan and Columbia professor Rita McGrath, discovery-driven planning has become an essential tool in exploring and developing the viability of a new business venture. Professor MacMillan began this research in the early 1990’s by studying venture capitalists and was surprised by the differences between actual and planned performance of VC investments. Through his research he realized VCs reduce the expense of a poor venture by only providing ventures a small about of money up front. If the investee is not being successful VC firms can withdraw quickly with limited loss. When working in uncharted markets, the key is to reduce the assumption to knowledge ratio over time and ahead of substantial investment. He saw how the process VCs use of making increasing incremental investments over time as confidence in a venture increases could be helpful to entrepreneurs and he systematized the process in what is now known worldwide as discovery-driven planning. The relevancy of the tool Professor MacMillan developed over 20 years ago was a discussion topic at the most recent Wharton Reunion Weekend.
Venture planning in new markets with discovery-driven planning is a five step process. The first step is to declare what the financial outcomes must be to make pursuit of a venture worthwhile, using what Professor MacMillan calls the reverse income statement. Specifying what the required profits and profitability must be allows you to calculate what the minimum revenues and maximum allowable costs must be. Step two is to then lay out the entire customer experience by mapping out a consumption chain, from awareness of the product to purchase to use to receipt of services to disposal of the used up product. Then you use this consumption chain to lay out all the physical operations called for to deliver this chain, called an operations specification, specifying all the activities needed to produce, sell, service, and deliver a given product or service. This provides more detail as to what costs will be, should the venture be pursued and it also helps uncover the underlying assumptions that have been made in building the plan.
The keystone in discovery-driven planning is to identify and document these assumptions, and design check points where assumptions can be tested ahead of serious investment. In a checkpoint/assumption table, decisions are made on how these assumptions can be tested using the least amount of money, so the cost of failing is as low as possible. Detailed plans are not needed in the beginning, because they are highly dependent upon assumptions that may be inaccurate. When approaching venture development using discovery-driven planning, it is important to update business plans as each checkpoint is reached and assumptions give way to greater knowledge. Keep the plan simple in the beginning – the more detailed an initial plan, the less likely a team is to replan despite fallacies present. As Professor MacMillan highlighted, as an entrepreneur and investor, “You want to be roughly right, not precisely wrong.”
Today discovery-driven planning is used by budding entrepreneurs to think through the validity of venture concepts in undefined markets, but the process can be used by anyone looking to make a decision when uncertainties abound. Assumptions will be made, but the key is to decrease their ratio to knowledge over time. Creating a framework using discovery-driven planning as outlined by Professor Ian MacMillan helps ensure decision makers stay on an ever improving track from the ideation phase to execution.