Discovery Driven Growth: Averting risk, saving money and growing anyway
Rita Gunther McGrath
The new book, Discovery Driven Growth is about driving growth in the face of uncertainty. In these unpredictable and adverse times, coping with uncertainty has become every business leaders’ imperative. When revenues plunge and performance drops precipitously, it is easy to panic, freeze in the headlights or otherwise guarantee that the effects of the downturn will be far more serious and longer lasting than they need to be. In the book, you’ll find helpful approaches that allow you to move forward with confidence, despite uncertainty. At its core is a planning and execution methodology that helps you to create a portfolio of projects that protect and enhance current profit streams while also securing footholds to future growth, all at low cost and little risk. The key is that you need to manage with a different mindset than you use when times are more tranquil.
Master your portfolio
When times are good and resources are plentiful, it’s easy for companies to get a little sloppy about which projects they undertake and for what purpose. In more uncertain times, this just isn’t practical. But that doesn’t mean giving up on projects that have longer term or important future payoff. Instead, you need to get control of the portfolio of activities in your company; making sure that you are appropriately investing in three kinds of strategic initiatives. The first are projects designed to grow your core business or radically improve its performance. The second involves developing and expanding new growth platforms, which have the potential to be your core business of the future. The third are investments in strategic options that have the potential to become future platforms. While every company’s portfolio will be different, depending on their strategy, what matters is whether you are giving enough emphasis to all three types. As an example, figure 1 illustrates the portfolio of a company that went through a strategic re-assessment, based on the concepts in our book. The horizontal axis in the grid represents market uncertainty while the vertical access is technical or capability uncertainty. Each bubble in the grid is a strategic initiative, with the size of the bubble representing its market potential and risk. Note that the bigger bubbles are to the south-
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east of the chart, and that the downside of riskier initiatives are kept contained. Note also that there are some projects distributed across the dimensions of uncertainty in the entire portfolio.
High
Medium
STRATEGIC OPTIONS
NEW GROWTH PLATFORMS
Low CORE ENHANCEMENTS
Low Medium High
Market and Organizational
Uncertainty
Manage uncertain initiatives with discovery driven planning
Discovery Driven planning is the centerpiece to a mindset that will allow you to contain risks while pursuing opportunities. Unlike the taken for granted assumption in conventional management practice that good managers can predict outcomes, the discovery-driven approach begins with the recognition that with uncertain projects you really can’t know the result a priori . Instead, the goal is to learn as much as possible for as little cost as possible, always being prepared to redirect your activities as new information is revealed. With discovery-driven projects, you invest small amounts of money that you can afford to lose to generate the knowledge that you need to invest more confidently. Discovery-driven growth begins by specifying a performance outcome that would make your growth efforts worthwhile—whether at a corporate level or a strategic project level. You define success up front, as well as the guidelines for where and how
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the organization will go after these goals. Thereafter, the rest of the discovery-driven tools are used to approach closer and closer to that goal, containing risk and downside exposure until you have reduced uncertainty to the point that you can confidently invest in capturing your targeted growth, or shut down early and inexpensively if things don’t work out.
As your plan unfolds, you want to be reducing what we call the assumption-toknowledge ratio. When the assumption-to-knowledge ratio is high, there is a huge amount of uncertainty, and one should prioritize learning, inexpensively and fast, at the lowest possible cost. As the ratio shrinks, focus and resource commitments to increasingly hard outcomes replace learning as the objective.
5 Key Steps to Discovery Driven Growth
The book is organized to reflect the sequence of steps we have found to be most straightforward and practical when a firm is developing a discovery-driven growth program.
Step 1: Framing the challenge. In the first part of the book you start by framing the strategic growth challenge for the organization as a whole. We frame a growth challenge at the CEO or senior team level and define the growth frame for the entire enterprise. The outcome of this process is a set of guidelines for which types of initiatives will be pursued. As a result, everybody else in the company will be clear about what kinds of opportunities are legitimate, and will therefore be supported because they are a good strategic fit.
Step 2: Create an opportunity portfolio. Next you analyze how resources are currently being allocated to projects and then consider how these allocations would need to change, given the growth frame. We take a portfolio view of different kinds of growth opportunities. How much profit and cash flow growth needs to come from the core business? How much to expand into adjacencies? How much will go into low-cost, high potential opportunities for future growth? In today’s market the typical portfolio of initiatives will contain a mix of short term projects designed to enhance positive cash outflows and low cash drain, high potential projects positioning you to rapidly go for growth when the upturn occurs. We show how to select and build a portfolio of initiatives around your corporate growth strategy.
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After deciding what initiatives are needed to achieve the corporate goals, we take up the issue of framing individual initiatives. We show you how to specify what success must look like in terms of upside potential before you even consider making an investment, and how you would start a discovery-driven plan for it.
Step 3: Managing Strategic Projects. Next we look at how to manage individual strategic projects. You start with identifying a unit of business that will create the architecture of your business model. A unit of business is quite literally the unit of what you sell—what the customer pays for. You may find, as you work through a discovery-driven plan, that the unit of business you started off with does not deliver revenues and profits in the way you wanted, and so you may have to redefine the unit.
You may also find that achieving your goals the way you originally thought is unrealistic.
Then you’ll need to think through what key measures or metrics will ultimately drive success in your growth project, and how to compare your key metrics for the project with those of potentially competitive organizations. This is often a reality check for business planners, who make assumptions that might seem sensible in the rarefied atmosphere of a planning office, but fail to conduct this competitive reality check.
Step 4: Connect plans to financials. Then come the tools that help keep a discovery-driven plan coherent and connected to reality. Among these are the reverse income statement and the reverse balance sheet. We now tie together the decisions you made in the earlier chapters, and we then simulate your future business allowing you to engage in what-if speculation, and assure yourself that you are being realistic—all while the investment in the future business is extremely small.
Step 5: Convert assumptions to knowledge. The last piece of discovery driven planning is the identification, documentation and testing of assumptions as you develop your operational plan. We show you how to develop an operations specification and an assumption checklist, how to test assumptions, and the financial logic that underlies the business model. We also show you how operational activities and assumptions are intimately linked, and we offer suggestions for containing risk and reducing costs as you try to test your assumptions. We also look here at the best practices in redirecting projects. Companies that successfully use discovery-driven strategy frequently redirect projects instead of vaingloriously trying to execute to an increasingly unrealistic original
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plan. What you accomplish in terms of performance will remain the same, but redirection changes how you accomplish that performance.
Disengaging when necessary. You will also learn how to develop a disengagement plan to take on the challenge of shutting unsuccessful projects down, what we call the painful but necessary art of disengagement. How do you make sure that killing an initiative is seen as a constructive process that allows the company to benefit as much as possible from the investments it has made? Here, we also discuss the allimportant question of how you handle the inevitably disappointed stakeholders and supporters for the project, as well as the politics of the project-termination decision.
Discovery Driven Growth: A proven concept
Unlike many management books which develop a theory and try to find examples that fit the theory, this book shows how real companies have used the ideas to deliver on their growth objectives. It is about tried and true techniques that managers in many firms have used, and gives many examples from companies such as DuPont, IBM, Swiss
Reinsurance and Nokia, as well as smaller, less well-known startups.
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