Competitiveness in the business sphere is an issue of high demands. Financial markets show harder requirements for the companies, where to achieve desirable profit the companies might consider entering new areas in business. It is accepted that using powerful analytical instruments, the companies would be able to choose the optimal business strategy. However, business environment could be considered sometimes unpredictable that even the perfect analysis will not provide a prognosis for the market’s development. The article «Discovery-Driven planning” by Rita G. McGrath and Ian C. MacMillan provide a practical tool –discovery-driven planning, for analyzing the profitability of a venture with a simple strategy. This paper analyzes the aforementioned article providing an overview of this planning strategy as an approach for starting a new venture.
The main idea presented in the article is that many companies mistakenly approach new ventures with a platform-based which is a good approach for ongoing businesses, as it is based on facts proven by experience and time. Approaching new ventures with the same strategy, on the other hand, is based merely on wrong or overly positive assumptions.
The process of Discovery-Driven planning implies the usage of four basic steps representing a strict discipline, which are as follows:
- Planning the venture using the reverse income statement-starting with the required profit then working the “way up the profit and loss to determine how much revenue it will take to deliver the level of profits we require and how much cost can be allowed.” (Rita G. McGrath 32)
- Listing the activities which will comprise “the venture’s allowable cost” in a document called the proforma specs.
- Compiling an assumption check-list, where all the assumptions made through the reverse income statement and the proforma specs could be tracked and regularly updated.
- Revision – the step is intermediate, where the reverse income statements would be revised according to updated information. It should be mentioned that wherever the information is updated throughout the whole venture, the process is looped back to this step for checking whether the process should be repeated or terminated.
- Monitoring- this step is implemented through setting up milestones at which the assumptions made through the previous steps would be tested.
Pros and Cons
The main advantage of Discovery-Driven planning is the ability to test the venture for efficiency in terms of profitability before any major capital was investment and any irreversible procedures made. In that sense, the advantage of Discovery-Driven planning is the ability to analyze the ideas even the most innovative with a practical approach where the assumptions will be made according to thorough analysis, rather than to assumptions based on platform-based planning enterprises.
Accordingly, the disadvantages, which could be arguable, are mainly in the possibility to abandon a new innovative idea due to mistakes in the assumptions or unpredicted changes in the market, which will prove later to be innovative and profitable for the company that decided to accept that risk.
The approach presented in this article is not limited in its implementation to new ventures, as it can be used accordingly for preparing for a new business. The changes made would be associated with the type of the business where it will direct the company on whether the assumptions or the experience of other companies will be used.
McGrath, Rita G., and Ian MacMillan. “Discovery-Driven Planning.” Harvard Business Review (1995): 29-38.