INTRODUCTION
Discovery driven planning is a planning technique introduced by Rita Gunter McGrath and Ian C. MacMillan in a Harvard Business Review article in 1995. Discovery-Driven Planning basically converts start-up assumptions into knowledge that grounds the planning of a new initiative in reality. Discovery driven planning is a practical tool that recognizes difference between planning for a new venture and planning for a more conventional line of business. In Discovery Driven Planning, it is assumed that plan parameters may change because new information is revealed; therefore the plan is subject to change. Discovery-driven planning is different from conventional planning. In conventional planning, managers examine future results from a well understood environment of past experience. However, discovery driven planning converts assumptions into knowledge. In conventional planning, success means delivering numbers close to what you thought you would deliver. In discovery-driven planning, success means generating the maximum amount of useful learning for the minimum expenditure.
Discovery Driven planning works with five steps listed below :
Creating a reverse income statement.
Calculate allowable costs.
A key assumptions check-list.
Revision of reverse income statement.
A milestone planning chart.
Discovery driven planning is a tool that helps to deal with uncertainty - new product or market ventures, technology development, joint ventures, major redevelopment etc. Discovery driven planning helps the managers to learn what they don't know and helps to address new ventures at the lowest possible cost.
REFERENCE: http://en.wikipedia.org/wiki/Discovery_driven_planning
http://hbr.org/product/technical-note-putting-discovery-driven-planning- t/an/KEL355-PDF-ENG?N=4294967001&Ntt=Project+Management
HARVARD BUSINESS REVIEW (www.hbr.org)
EXAMPLE
However, Discovery driven planning can be better illustrated with the help of an example:
We take a mobile company say XYZ CO. LTD who is going to manufacture a new product in mobile industry. XYZ CO. LTD believes that they can launch a new product with lowest cost and high quality as compared to other competitors.
Hence, following steps of discovery driven planning can determine whether the launch of such product will yield adequate return on investment and required profit.
The Reverse income statement: The reverse income statement is a statement prepared in which we start with the profits required by the company rather than starting with the estimates of revenue to be earned. This statement starts from the bottom and proceeds towards up so as to determine how much revenue will be earned with the required level of profits and how much cost can be allowed.
For example, if the net sales of XYZ company is100 million dollars and
income before taxes are 10 million dollars i.e. 10% return on sales. It will
have to require profit of atleast 10%.
From the given data we can find that XYZ CO. will have to yield profit of 1
million dollars i.e. 10% of 10 million dollars and if the target is to sell the
mobile at 50 dollars per piece then unit sales will amount to 200000
handsets i.e. 10 million dollars divided by 50 dollars per piece.
List all the activities and calculate allowable cost: In this step, we lay out all the activities required to produce, sell and deliver the product to the customer. These activities comprises of allowable costs.
For example, to calculate allowable costs, XYZ CO. has to calculate the cost
incurred in manufacturing, sales etc.
Compile assumption check list: In this step, each assumption is discussed and checked to the best of the company's knowledge.
Revision of reverse income statement: The entire income statement is looked back so as to identify whether that product still yields adequate return and desired profit as in case of XYZ company proposing to sell a new handset.
Milestone planning chart: Milestone planning refers to a technique in which managers test all the assumptions and convert them into knowledge.
For example, can XYZ Company enhance its profit margin and return with all the assumptions is the main motive of milestone planning.
ANALYSIS
REVERSE INCOME STATEMENT
Total Figures
Required profits = 1 million dollars
Necessary revenues to deliver 10% sales margin = 10 million dollars
Allowable costs to deliver 10% sales margin = 9 million units
Per Unit Figures
Required unit sales at 50 dollars per unit = 200000 units
LAYOUT OF ACTIVITIES
1. Sales
Required disk sales = 200000 handsets
Average order size = 1000 handsets
Orders required (200000/1000) = 200 orders
Annual salesperson days (100,000/2) = 50,000
Sales force for 250 days per year
50000 salesperson days/20 = 200 people
Salary per salesperson = 10000 dollars
Total sales-force salary cost (10000 x 200) =2 million dollars
2. Manufacturing
Annual production capacity per line = 10 handsets per hour
240 handsets per day x 300 days = 72000 handsets
Production staffing (30 per line x 20 lines) = 600 workers
Salary per worker = 5000 dollars
Total production salaries (600 x 5000dollars) = 3 million dollars
LIST OF ASSUMPTIONS
Profit margin = 10%
Revenues = 10 million dollars
Price per unit = 50 dollars
Production capacity per line = 10 handsets per hour
Average order size = 1000
Selling days per year = 250
Annual salesperson's salary = 10000 dollars
Production days per year = 300 days
Workers per production line per day = 30
Annual manufacturing worker salary = 5000 dollars
Material cost = 50 dollars
Packing cost = 20 dollars
Allowable administration costs = 4 million dollars
REVISION OF REVERSE INCOME STATEMENT
Required profits = 1 million dollars
Necessary revenues to deliver 10% sales margin = 10 million dollars
Allowable costs to deliver 10% sales margin = 9 million units
Sales force salaries = 2 million dollars
Manufacturing workers salaries = 3 million dollars
Allowable administration cost = 4 million dollars
TEST ALL THE ASSUMPTIONS AT MILESTONES
Profit margin
Revenues
Price per unit
Production capacity per line
Average order size
Selling days per year
Annual salesperson's salary
Production days per year
Workers per production line per day
Annual manufacturing worker salary
Material cost
Packing cost
Allowable administration costs
CONCLUSION
XYZ company applied discovery driven planning as a tool and discovered an amount so as to obtain desired return on sales and profit. In this example, the profit margin came out to be 10%, return on sales is 10 million dollars and allowable costs including allowable administration costs came out to be 9 million dollars. In this respect, XYZ Company will be a able to get a clear view of what activities, how much revenue, how much profit is required to make its product a success in the world market. Also the managers of the company will be able to unclear and unfold the activities and convert all the assumptions into knowledge.
Hence, discovery driven planning can be considered a powerful tool for any undertaking in which high risk is involved.
