Doz and Kosonen’s new book Fast Strategy presents their research into how companies can dramatically alter their core businesses in response to dynamic strategic environments. I’m just reading through it, and one of their comments caught my eye, as we emphasize a similar approach to Discovery Driven Planning (DDP). With DDP, we always say it’s important for the plan to be “our” plan, not “my” plan, because that emphasizes the value of learning.
In their book (p. 28) a similar point is made, and the quote they use is beautiful:
“...collective decisions are likely to be less conservative and more self-confident than individual decisions made by executives who have more to lose by being wrong for the first time than to gain by being right one more time.”
That calculus - asymmetry in rewards for being “right” drives a lot of dysfunctional behavior in organizations struggling with uncertainty.
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- Posted Rita McGrath on February 10, 2008
In class, when we teach discovery driven planning, we also show how you can use software tools to make the whole process easier.
For those of you who would like to experiment with the tools, they are available for downloading at the Triad Associates web-site. Among the tools are calculators for a mini-NPV analysis, software to do DDP analysis for new ventures as well as internal projects, a real options calculator and many more. Check it out and let me know how it goes.
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- Posted Rita McGrath on February 08, 2008
Browsing through this month’s edition of Inc. magazine, I came across a column by Norm Brodsky on the advice he gave to a young entrepreneur. The guy’s business concept was interesting. He imports dirt from the Holy Land in the hopes of selling it in the US. Apparently it is traditional at funerals to sprinkle dirt on the grave, and he thought families might go for something special from Israel.
Brodsky, in assessing the young man’s business, used classic DDP thinking to work through the numbers. Here’s what he said:
“You targeted almost all of your sales efforts at a very limited market,” I said. “Let’s say there are four million Jews in the United States, and 40,000 die a year. Of that, say, 20,000 have religious burials. Of the 20,000 burials, let’s say 10 percent are done by people who think Holy Land Earth is a good idea—which is optimistic. In that case, your total market would be 2,000 people a year, and you never get 100 percent of your market. You’re doing great if you get 20 percent of it. That’s 400 sales per year at $39.95 a bag. Even if you had the highest possible gross margins and doubled your price, you couldn’t survive on that.” Steven listened and kept nodding. “And that’s not repetitive business, either. It’s a different group of potential customers every year.”
“So maybe I should try something else,” he said. “I get ideas every day.”
“Well, that’s for you to decide,” I said, “but why would you go on to the next thing before you know whether this one can be successful?” I pointed out that he could expand his marketing efforts to Christian Evangelicals, for example. He could also come up with uses that would be repetitive—like planting a tree or a flower in Holy Land Earth once a year to commemorate a loved one’s death or to celebrate a birthday. And maybe he could find related products to sell, such as Holy Land seeds. “You’ve already spent a fair amount of money and, more important, time,” I said. “The expertise you’ve acquired is worth even more than your financial investment. You’ve figured out a lot of things that stopped other people from doing it. And you still have all this imported dirt. Don’t you want to see it through?”
It’s a common situation. I’ve seen a lot of people who get an idea they think is hot, but when they try it, suddenly it’s not as hot anymore. So they shove it aside and start on the next one. You need patience, persistence, and focus to succeed. First efforts often meet with failure. When I started my record-storage business, I thought it would be easy to get sales. I would just offer great service at a good price. I set up a booth at a trade show—and came away without a single sale. I could have said, “OK, if people come to me with boxes, I’ll store them, but I’m going to move on to the next thing.” I won’t repeat the story here; I’ve already told it elsewhere. (See “What Business Are You Really In?” December 2000.) Suffice it to say that I wouldn’t have 3.5 million boxes in my warehouses today if I hadn’t kept asking questions.
To read the whole article, click here.
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- Posted Rita McGrath on February 06, 2008
The skeleton of a discovery driven plan has to do with the key metrics that you use to make assumptions, and which drive the relationships among the elements featured in your plan. It is often difficult, though, for aspiring entrepreneurs to come up with relevant key metrics. In a really new business (think the early days of the Internet) nobody even knew what the relevant key metrics were going to be! To help out, in our first book The Entrepreneurial Mindset, we published a set of questions that you can ask to consider what key metrics might be useful.
Keep reading to get the full list.
Key Metrics: Some places to start
1. Industry benchmarks. In established industries, time and experience have created a consensus about what the current critical metrics are. These become industry benchmarks. In other countries and for new businesses, it’s harder to determine what the critical metrics are or should be. For instance, nobody knows yet what the critical benchmarks should be for many e-commerce businesses (should the model be a transaction based model? An advertising model? Will customers prefer fixed prices, or dynamic pricing?) Although this can be confusing and frustrating, it also creates the opportunity to take advantage of the uncertainty by creating a convincing set of key metrics.
2. Analyses of your own company data. Analyze your recent income statements and balance sheets and use sensitivity analyses to build a picture of which variables most influence your firms profit and profit growth.
3. Analyst reports evaluating other firms in the target industry. You may want to get investment bank and stock market analysts’ reports about the target competitors or the target industry and look at the metrics that they use to evaluate company and industry performance. Cues as to the key industry profit metrics will appear in their comments about the reasons for industry profits.
4. Commercial bankers who specialize in loans to the target industry often keep ratios that they use to assess the riskiness of their loans to firms. They also have industry level data that you can use as benchmarks. So do factors, and sometimes even suppliers.
5. If there is an industry association check to see if it maintains firm and industry level metric databanks. Also scan the association publications and target industry publications for indicators.
6. Data may also be available in publications like Value Line, Compustat and other online data services. The Wharton School has a user-friendly financial analysis service (WRDS) with many on-line databases
7. New industry and competitive information is also being loaded on the World Wide Web at industry specific sites, such as E-Steel, investment sites such as those run by E*Trade and information oriented sites such as Hoovers.com.
8. You can get insights by scanning business publications and the business section of major newspapers and periodicals, notably The Economist. In particular look for commentaries about why the target industry is cooking – key cues to what the industry profit drivers are.
9. The business sections of libraries and bookstores, and specific web-sites that cover business (such as Hoovers.com) will often discuss how to evaluate the numbers..
10. Periodically, industry reports from Federal or International agencies (like the UN or World Bank) on specific industries are published.
11. Don’t forget to take advantage of the vast information available through search engines.
12. Finally, many guides to smart investing discuss how to dissect an industry or company’s numbers at length. You won’t go wrong with classics such as Benjamin Graham’s The Intelligent Investor (Graham, 2006, originally 1973).
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- Posted Rita McGrath on February 06, 2008
To develop a discovery driven plan, you’ll proceed through five interlinked steps. These are:
- Start with a compelling outcome - meaning, know what would make the investment worthwhile
- Benchmark your ideas against market demand and competitive offers
- Define the operational specifications for how the business will work, operationally, including defining your unit of business
- Describe and document your assumptions
- Identify the key milestones that will be useful to you as the business unfolds
You can download a worksheet that walks you through the steps from here:
DDP_Worksheet.doc
Read the rest of the entry for a detailed example.
So if I were to use an example from a previous post (the dog-walking case), let’s see how that might play out with Discovery Driven Planning principles in mind. So here you are, a Columbia Business School MBA, thinking about going into the dog walking business. The first question you’d need to ask yourself is “what would make it worthwhile for me to start this business?” Our typical MBA’s graduate with the expectation of earning very nice (indeed, very very nice) starting salaries, mostly in the worlds of consulting or finance. So at a minimum, if you were going to start an entrepreneurial business, you’d want to have the potential to earn at least what you’d earn by getting on the #1 train and getting off at the Merrill Lynch stop, right? So let’s say our aspiring entrepreneur would set that desire at $120,000 per year before taxes.
You’d then have to think about costs, which in the case of a dog walking business shouldn’t be all that substantial, so let’s say that an additional $30,000/year would cover insurance in the event a pooch has a mishap, advertising, booking costs and administrative overhead. So that means the required revenue for our aspiring dog-walking business is $150,000/year.
The next question to consider is what the ‘unit of business’ is for this business. By unit of business, we mean literally what you are selling. At this point, you can start to get creative. You can get paid for dog-walking any number of ways. You could charge a retainer that covers all dog walking necessary in a given period of time (say, weekly). You could charge by the walk itself. You could charge a retainer plus a usage fee—you get the idea. We strongly encourage people to think broadly about their unit of business before they jump into a new venture - often, that’s where the most creative ideas are to be found.
To keep the example simple, let’s say that you are going to charge prospective cllients a flat fee for an hour walk. How much will they pay? No idea. So I’m going to make an assumption (which will be wrong, and we all know it, so it doesn’t matter at this stage). The easiest thing to do is hunt up comparables. In this case, I found the web site for Peggie’s Pet Service out in California, who offer a whole range of doggie-related services. Peggy will charge you $340/month (as of this writing) for a daily walk, which translates into roughly $11.33 per walk for one dog.
So does that idea work? Let’s run the numbers. At $340/month, annual revenue per dog would be $4,080. If we divide this into our required revenue of $150,000, we’d need about 37 contracted customers for daily walks to hit the revenue number. But whoa - if each walk takes an hour, either we have to walk a rather large number of dogs at a time, or somehow suspend the laws of time to expand the hours available in a day. Even if you double the charges (which is probably more than the market will bear), you’d still need 18 dogs per day to hit the revenue number. You’d have to double the charges and walk 3 dogs at a time to get anywhere close to our desired revenue number.
At this stage the point is not that the business is a bad business - just that it isn’t profitable enough given the assumptions that we’ve made to justify it as a career choice for Columbia MBA’s. That doesn’t mean you should necessarily give up. If you’re committed to the idea, there isn’t any reason you can’t think of a different business model to try, just as our friends with O’Hare pet-hotel business have attemped.
Should you come up with a model that’s viable, and benchmarked against prevailing norms or existing competition (as we did with Peggy), the next step is to think through operationally how to get the business going. For a dog-walking business, you’d definitely need to think about how to market, first customers, building a web site and so on. As you do that, you’ll be making assumptions about timing, cost, difficulty and so forth. The critical thing is to write them down! It’s all too easy to overlook them later on.
The final step is to think through the major checkpoints (or milestones as we referred to it in earlier writings) in the business. For this rather simple business, representative milestones would include:
- Create company, brand, and advertising message
- Contract with first customer
- First service for customer
And so on. At each of these checkpoints, you’ll be able to test more and more assumptions. The key is to go back and re-plan. Don’t be afraid to change direction as you learn, and try to put the least expensive milestones in early, leaving the more expensive or risky ones for later.
Feel free to email me if you have questions.
You can download the original article Discovery Driven Planning here.
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- Posted Rita McGrath on February 06, 2008
