Venture-Driven Planning

The Idea
You’re weighing a major strategic venture—a first-time alliance, a new market, an innovative product. Beware: business history is littered with stories about smart companies that hemorrhaged multiple millions from ventures gone bad.

Why such massive losses? Too many firms use conventional planning to manage their ventures, say McGrath and MacMillan. They make predictions about a venture’s potential based on their established businesses. And they treat the assumptions underlying those predictions—“The product will sell itself,” “We’ll have no competitors”—as facts. By the time they realize a key assumption was flawed, it’s too late to stanch the bleeding.

How to avoid this scenario? As your venture unfolds, use a disciplined process to systematically uncover, test, and (if necessary) revise the assumptions behind your venture’s plan. You’ll expose the make-or-break uncertainties common to ventures. And you’ll address those uncertainties at the lowest possible cost—so you don’t set your venture on the path to ruin.


The Idea in Practice
McGrath and MacMillan suggest this five-step process for successful venture planning:

1. Bake profitability into your venture’s plan. Instead of estimating the venture’s revenues and then assuming profits will come, create a “reverse income statement” for the project: Determine the profit required to make the venture worthwhile—it should be at least 10%. Then calculate the revenues needed to deliver that profit.

2. Calculate allowable costs. Lay out all the activities required to produce, sell, service, and deliver the new product or service to customers. Together, these activities comprise the venture’s allowable costs. Ask, “If we subtract allowable costs from required revenues, will the venture deliver significant returns?” If not, it may not be worth the risk.

3. Identify your assumptions. If you still think the venture is worth the risk, work with other managers on the venture team to list all the assumptions behind your profit, revenue, and allowable costs calculations. Use disagreement over assumptions to trigger discussion, and be open to adjusting your list.
Example: A company has determined that it needs to sell 250 million units of a proposed new product at a particular price to generate the revenue required to meet the venture’s profit goal. It decides how many orders it’ll need to sell the 250 million units, how many sales calls it’ll take to secure those orders, how many salespeople will be required to make those calls, and how much this will cost in sales-force compensation.

4. Determine if the venture still makes sense. Check your assumptions against your reverse income statement for the venture. Can you still make the required profit, given your latest estimates of revenues and allowable costs? If not, the venture should be scrapped.

5. Test assumptions at milestones. If you’ve decided to move ahead with the venture, use milestone events to test—and, if necessary, further update—your assumptions. Postpone major commitments of resources until evidence from a previous milestone signals that taking the next step is justified.

Ref : "Discovery-Driven Planning"Key ideas from the Harvard Business Review article by Rita Gunther McGrath and Ian C. MacMillan