Discovery Driven Planning : Calculating a “BareBones” Net Present Value (NPV)
Although Net Present Value calculations are often blamed for companies’ under-investing in innovation projects, and are a big problem for people trying to drive growth into new areas, it can be useful to get some sense of what the potential NPV of a prospective project might be. My colleague, Ian MacMillan, working with Alan Abrahams and several other folks have come up with a nifty idea they call the “BareBones” NPV approach. Essentially, it asks you to assemble the following information for a project:
1. Launch Time: How long will it be before the project begins to generate its first revenues?
2. Ramp up time: How long will it take from first revenues to reach steady state? The BareBones NPV estimator will assume there is a linear ramp up in revenues from the period of first revenue to the period of steady state.
3. Competitive response time: How long after launch will it take for competitors to respond?
4. Competitive erosion time: How long will it take for the competitors to erode your profits to the point that you are only just recovering your fixed costs? The BareBones NPV estimator will assume that profits drop off linearly from the start of the competitive response time to the end of the erosion time.
5. Total investment. What is the total investment expected to be? The BareBones NPV estimator will assume that this is a one-time investment incurred at the end of the launch time.
6. Discount rate. This number is used to discount future cash flows to account for the fact that if you weren’t doing this project, you could just as easily leave your money in a bank account and earn interest. The idea is that a sum of money in your pocket today is worth more than the same amount 5 years from now, because today’s money could earn interest. If you don’t know the rate for your firm, your finance guys should be able to give you this (and they might insist that you adjust it upward for risk, as well). They might refer to it as the cost of capital but the idea is the same – using money for your project means you can’t use it for something else, and unless your project offers better returns than a savings account, it’s a value-destroyer for your firm.
They have very kindly offered to allow me to put this idea together with a tutorial and software tool, up on this site. If you would like to give it a try, you can download two files: the first is a tutorial which explains how the software works, and the second is a ZIP software file that you can download to play with the actual software. This is a demo version—if you’d like to use the real thing, there are instructions in the zip file for how to get a full copy.
Feedback and suggestions on this are most welcome!
This is the tutorial file: BareBonesNPV_Tutorial.doc
This is the software ZIP file: BareBonesNPV.zip
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- Posted Rita McGrath on June 24, 2008
Discovery Driven Marketing Planning in the Health care area
Here’s another group using Discovery Driven Planning - in this case to develop better marketing plans for health care information technology clients. What I found interesting about their approach is that they contrast the DDP methodology with the ‘classic’ nine step marketing plan approach. You might find that helpful - check it out!
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- Posted Rita McGrath on June 24, 2008
Another application for discovery driven planning: Business Intelligence Projects
One of the neat things about discovery driven planning is watching how it has become popular with quite a large set of consultants, venture managers, entrepreneurs and other people for whom conventional planning is just not working.
I was therefore interested to see a consultancy (Coded Vision Consulting) blog about their approach to discovery driven planning in pursuing business intelligence projects. Essentially, they argue that projects such as those that can’t produce a definable ROI calculation are often hard to justify under conventional planning, but which make a lot of sense for the corporate long term.
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- Posted Rita McGrath on June 24, 2008
It’s hard to grow a socially unpopular core business
The Wall Street Journal yesterday reported that Altria had, after a three-year trial, pulled the plug on a whole line of Marlboro products intended to be safer for smokers than the conventional cigarettes. As the story reports:
Marlboro Ultra Smooth, which had been sold in Atlanta, Tampa, Fla., and Salt Lake City for more than three years, drew little attention from consumers. Philip Morris USA, which had hoped to market the cigarette as a reduced-risk smoke, stopped making new shipments to its wholesalers April 1. Remaining stock is still on sale. Its other cigarettes with the new activated-carbon filters—the Marlboro Ultra Lights in Phoenix and North Dakota, and Basic Ultra Lights in Washington state—also were just discontinued, the company said.
It’s pretty clear that Philip Morris, USA, is going to have to find some other pathways to growth, as this one doesn’t seem to be working. With aggressive marketing also unpopular, it sure does seem to leave the company in a bind. So what could we suggest might represent new growth opportunities, even in a market that doesn’t seem to be allowed to grow (and to which the company is confined, now that it has spun off its international division)?
Well, if we follow the guidelines from MarketBusters, here are some ideas they might try.
First, perhaps there is something about the customers’ total experience that could be changed. It does seem as though a lot of these innovations focus squarely on the product, and in the traditional attributes, not on something about the customers’ total experience. For instance, maybe they could add in featues that improve the purchasing, usage, or disposal experiences. Or sell cigarettes with a different model—I could see brands that are used for different experiences and settings, for instance.
Or perhaps they need to think about a whole different business model. Maybe they could develop a subscription like model, or figure out how to sell cigarettes using an entirely different methodology.
Or perhaps it’s an attribute play. Unfortunately, one of the reasons that many young women (particularly dancers, as a colleague of mine has famously documented) appears to be to maintain their weight at what they consider to be acceptable levels. So given that the company is largely prohibited from promoting such attributes directly, a viral campaign might be in order.
I’m not a huge fan of smoking, by the way, and don’t smoke myself, but as a strategy challenge this one is very interesting.
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- Posted Rita McGrath on June 24, 2008
Discovery Driven Planning: A lesson by a marketing consultant
One explanation for somewhat sparse postings these days is that I’m busy completing our new book, Discovery Driven Growth. Can’t say too much about it (publishers get irate) but in the course of researching the book, I’ve run across a number of different takes on the Discovery Driven Planning idea, and thought for those of you with an interest in the topic that it might be a service to note them here.
So, herewith, a description of a discovery driven plan for the everlastingly interesting widget company from consultant Sunil Sharma..
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- Posted Rita McGrath on June 20, 2008
