Discovery Driven Planning
Why
can’t you tell what competitors are
thinking?
Planning to learn when uncertainty is high
Assessing your project as it unfolds
Ideatoons (Practicum)
Schedule
Week
Topic
Readings
Industry Profile
Practicum
12-Sep-05
Business Needs: Framing the
Challenge
Chapter 2
Why Business Models
Matter
False Faces (perceptual
reversals)
19-Sep-05
Building Blockbuster Innovations
Chapter 3
3M and Norton
Slice and Dice
(Attribute Maps pp. 24-35)
26-Sep-05
Redifferentiating Products: New
Technology or New Uses
Chapter 4
Recognizing the Potential of
an Innovation
Think Bubbles
(Quizzing to understand the
customers’ experiential context
pp. 50-56)
3-Oct-05
Disruptive Innovation
Chapter 5
The Disk Drive Industry
Industrial Design Competition
10-Oct-05
Building Breakthrough
Competences
Chapter 6
Dell Computer (It’s not about
the computing)
The Idea Box
(Dr. Fritz Zwicky’s morphological
box)
17-Oct-05
Selecting Your Competitive
Terrain
Chapter 7
The Excavator Industry
Hall of Fame (forced connection)
24-Oct-05
Assembling Your Opportunity
Portfolio
Chapter 8
Motorola’s Iridium Satellite
System
Cherry Split (fractionation)
31-Oct-05
Executing Your Entrance
Strategy
Chapter 9
PETCO
Tug-of-War (force-field analysis)
7-Nov-05
Putting Discovery-Driven
Planning to Work
Chapter
10
14-Nov-05
Managing Under Uncertainty
Chapter
11
21-Nov-05
2nd Innovation Workshop
28-Nov-05
Strategy as Discovery
Chapter
13
Ideatoons (pattern language)
Innovation the Microsoft
Way
Future Fruit (rationalizing future
uncertainty)
Circle of Opportunity (forced
connection)
Discovery Driven Planning
Planning?

How do you plan and manage an initiative
whose outcomes are not yet known?

You can’t be sure that your competitors will react
as you expect



Your assumptions are just that (assumptions)
You can’t be sure that technology, markets, etc.
will pan out as you hope (or promise)
You don’t want to be responsible for meeting
‘the numbers’

In this extreme uncertainty
Discovery Driven Planning

Classical planning is good in well understood
businesses


You extrapolate to the future from the wellunderstood and predictable platform of past
experience
Definitely NOT technology businesses
Assumption to Knowledge Ratio

In any highly uncertain venture


You make considerable numbers of assumptions
Relative to the knowledge you have

Assumptions about




Technologies
Assets
Markets
People
Six Components
Of Discovery Driven Planning

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Framing
Competitive specification of deliverables
Benchmarking
Assumption testing
Managing to Milestones
Parsimony
Framing
Articulating The Business Model and its Objectives

Know what will make the business worthwhile if
things work out




Be hard-nosed
 Any new initiative must be worth the effort, expense and
risk
What is your Objective?
What is your Vision? (1, 3, 5, 10 years out)
Reverse Financial Statement:


Start with profit and revenue targets and work to the pro
forma financials
E.g., p. 247, Tables 10-1 ; 10-2 ; 10-3
Reality Specification

Make sure your expectations are realistic

Specify the market reality
 Acknowledge that competition will force you





To uphold benchmark standards for basics
And to differentiate on others (the Attribute Map)
Understand the key ratios in your area / industry
E.g., Table 10-4 (p. 252)
Precise understanding is not necessary here

You need to always keep in mind the key ratios, attributes
and objectives that characterize your business
Communication
Specification of Deliverables

1.
Translate broad strategy

Into daily operating activities

StrategyTacticsOperations
Everybody understands operations
No one understands strategy
2.
3.
4.
Create a focus for competence creation
The most dangerous assumptions reside in the operations
The more integrated your deliverables
The harder it is for a competitor to copy them
E.g., Table 10-5 (p. 253-5)
… which leads to revised reverse financials Table 10-6
Assumptions Testing

In discovery driven planning

the whole plan is organized around




Document and test each assumption


converting the maximum number of assumptions
to knowledge
at minimum cost
The assumptions checklist
Figure 10-2 (p. 257)
Managing to Milestones
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Critical identifiable points in time at which key assumptions are
tested
 Usually these are events, e.g. complete design
 Sequence these to minimize cash burn and corporate
expectations while you are learning
No Milestone should occur without triggering a test of
assumptions
Case Study: Box 10-3 (p.242)
Assumptions to Milestones: Figure 10-1 (p. 244)
E.g., for the Kao Floppy Disk Business
 Figure 10-4 (p. 261) based on the assumptions of figure 10-3 (p.
259)
 And see Milestone/Assumption map fig 10-5
Parsimony


An outgrowth of Real Options reasoning
Philosophy: The last milestones to pursue



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Are those that make you commit to assets
And lose flexibility
Assets should be bought only as a last resort
Fixed commitments should be kept variable

By paying per use, or by subcontracting
Rate of Discovery
How
fast you need to process
information about your market
It
depends on inherent industry
change rate
Where to use Financial Dynamics
Sustainability
(and what kinds of corporate assets or services generate value)
Different Industries; Different Rates of Change
Mainly Tangible Assets
Mainly Knowledge-Intangible Assets
DCF &Traditional
Financial Dynamics is Necessary
Future
Volatile
for
Accurateis
Valuation
Past is indicator
of Future
Valuation Methods
are Accurate
Property,Mortgages,
Mining & Extractive
Industries
Commodity
Manufacturing
(e.g., paper)
Utilities &
Voice Telephony
Branded-Luxury
Merchandise
Local Services
(e.g., Legal,
Government)
Retailing,
Complex
Education &
Manufacturing
Pure R&D
(e.g., cars, chips)
Data Telephony,
Global Network
Services (e.g.,shipping)
Insurance,
Electronic Markets
& Risk Management
Software,
Videogames,
Cinema, Music,
News
How Sustainable is your Business?

Now that you have devised an innovation strategy

Tell us if it is sustainable

What phase are you in?

Fluid phase

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Transitional phase

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Standardization of components, and consumer-producer interaction
lead to dominant design
Specific phase

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Mainly lab based or custom applications of technology
Products built around the dominant design proliferate; innovation is
incremental
What disruptive innovations are predicted?

When will they replace your invention and undermine its commercial
value?
Sustainability
Sustainable Business Models face Low Risk of Technological
or Market Disruption

Ferment vs. Stability

Ferment

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Lab based or custom applications of technology; competition for dominant standard
Stability

Products built around the dominant design proliferate; innovation is incremental
State of Evolution of Tech
Era of Ferment
High Uncertainty
High influence of
nontechnical factors
Era of Incremental Change
Medium Uncertainty
High influence of
nontechnical factors
High
Complexity
Little Uncertainty
Low influence of
nontechnical factors
Near Certainty
Nontechnical factors
may be ignored
Low
Sustainability
S-Curve (Foster and others)

Eras of incremental change terminate with a ‘discontinuity’
 We look for limits on the technology’s life cycle using knowledge
of the technology's physical limits


E.g., Moore’s Law will run out on current platforms at 2013
Advance of a technology is a function of development effort
Rate of Tech Progress
Rate of Supercomputer Progress
Physical Limit
Communication Bottlenecks
Multi-processor
Speed of Light
Single-processor
Effort
Effort on Supercomputing
Case Studies on Successful
Discovery-Driven Planning
(with some ex post Ideatoons analysis)
Ford
Edison
Microsoft
… And today’s Ideatoons Practicum
What is it?

Model T Stock Footage
Factory Row
Starting up
1957 rebuild

1913 Green

Ford and Model T

1925 Model T

1903 Model T
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Detroit’s ‘knowledge cluster’
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
Detroit had grown to become America’s premier motor and
machine tool center over the 19th century as a result of the Great
Lakes shipping industry.
 Ships laden with iron ore from Diluth would travel through
the St. Lawrence seaway delivering it to smelters in
Pittsburgh (next to Pennsylvania’s coal fields).
 They stopped halfway at Detroit, where a burgeoning
industry built up around steam, then diesel engines on the
ships.
‘Portable’ versions of these engines was a natural development
in Detroit.
Disruptive Innovation

Nearly 300 different cars were made and marketed
in 1908 (often little different from each other)


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in 1909, eighteen new firms began building cars
in 1910 eighteen went bankrupt.
By 1914 there were only 50 auto companies;
by 1925 (the year that Walter Chrysler started his company)
over half of cars sold were either Ford or GM
the bursting of the stock-market bubble in October, 1929
winnowed the automotive field to these three.
The Selden Cartel



Henry Ford’s technology was not radically different from his 300
competitors
What catapulted him from relative unknown to kingpin was his defiance
of the Selden Cartel.
In 1895, George Selden, a Rochester, New York lawyer who had never
built a car, applied for and received US patent number 549,160 for an
internal combustion engine



Henry Ford refused to pay their royalties, or to let the Selden Cartel
regulate their production,


The patent was purchased by a consumer watchdog group ‘The Selden
Patent Group,’ which operated as a trust
It used the patent to collect royalties, and to decide who could build cars,
and how many they could build if permission was granted.
prompting a lawsuit in 1903 which Ford eventually won in 1910.
The trial made Ford an immediate folk hero.
The Model T


It was not only a better car in 1915 than it was in 1908 – it also sold at
half of the original price.
There was no obvious increase in material, labor or overhead invested
in each car

Instead, Ford’s systemization and automation of production
followed the principles of Fred Taylor’s scientific management.

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In Ford’s ‘Taylorized’ Highland Park plant, one man could now do what three or four
had done before. This knowledge leaked off to his competitors in no time.
Within 10 months Willie Durant (again with the help of Taylor) adapted the
assembly line to assembling Chevrolet’s in Flint.
Despite his popularity as a ‘business guru,’ Taylor continued to provide
such services at his customary fee of $35 per day.
Tech Advances


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A Ford Model T
 originally painted in red, green, blue and grey varnishes,
 but in black after Henry Ford discovered in 1914 a superior
Japanese paint which only came in black
cost $850 (a teacher’s salary) in 1908
 It came without speedometer, windshield wipers or even
doors,
 and the gas gauge was a long thin stick that the owner had
to find for himself and insert into the tank
By 1915, assembly lines had allowed Henry Ford to incorporate
speedometers, wipers and doors and still lower the price to $440.
 It was down to $295 by 1925.
Taylor


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‘Taylorized’ mass production made Henry Ford so rich
 that, in 1914 he took 20% off of the retail price of a Model T
When the result was even more sales,
 he announced that if 300,000 Americans bought Model Ts in
1914 he would return $50 to every buyer
 a gesture which ultimately cost him $15 million
Next he raised the pay of his 13,000 workers from $2 per day to
$5 per day.
 The New York Evening Post exclaimed it ‘a magnificent act of
generosity.
 The Wall street Journal accused Ford of ‘economic blunders if
not crimes’ by injecting ‘spiritual principles into a field where
they do not belong.’
Model T Ford: Questions


Describe parallels between the early
automotive industry the early personal
computer industry.
Why do you think that the automotive industry
developed up in a “knowledge cluster”?

How might this drive the pace, and provided
investment for the new auto companies?
Model T Ford: Questions


How was the U.S. patent system was used to
stifle creativity?
Why do you think Ford as a company
prevailed despite the fact that it did not
possess better technology. How did it benefit
from a combination of good marketing, good
technology, sound production, and luck?
Model T Ford: Questions


Efficiency improvement through automation was largely a
procedure of standardizing parts and processes – in other words,
making transactions routine. How does routinization bring about
reduced costs, faster and more efficient production?
Ford's substitution of technology for human effort was not a 1-to1 replacement of man by machine; rather, the more subtle three
people can now do the task formally allocated to four. Is this
typically the way automation impacts firm economics, or is it
unique to Ford?
Model T Ford: Questions


Much of Ford's success resulted from
replacing materials, labor, and machines with
knowledge. Describe this process.
The benefits from the technology accrued
mainly to customers (in better quality and
lower prices) and workers (in higher wages).
Why?
Who invented the lightbulb?




Not Thomas Alva Edison
Humphry Davy, an English chemist, invented the first
electric light in 1809
Joseph Wilson Swan, an English physicist, was the first
person to invent a practical and longer-lasting electric
lightbulb in 1878
But new technology



Offered new customers
Substituting for gas and arc lighting
… and a new competitor
So What did Edison Do?

“all parts of the system must be constructed with
reference to all other parts,, since in one sense, all
the s form one machine part

1878 - Thomas Alva Edison, referring to an electrical grid in his
article on the phonograph in the North American Review

Edison and his team of engineers in Menlo Park,
N.J., spent years building the entire electric system,
from light sockets and safety fuses to generating
facilities and the wiring network.

Edison beat all his predecessors at one crucial task:
managing the whole process of innovation, from lightbulb moment to final product
Edison’s Strategy

Develop the working DC system


When George Westinghouse introduced a
superior AC system


Protect it with patents
He attacked with a smear campaign
He eventually switched to AC systems when
customers demanded
Microsoft’s O/S Innovation
The most profitable innovation in history

Linking & Leveraging
Strategy



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Get the business
Create the standard
Leverage the business
Crush the competition

An Early Competitor
Case Study in MS-DOS

MS purchased Seattle Computer Products' QDOS

for Quick and Dirty Operating System (written by Tim Paterson)

Written as a version of CP/M, with 4000 lines of assembler.

IBM tested Gates’ cleaned up MSDOS 1.0, finding well over 300
bugs, and decided to rewrite the program


This is why PC-DOS is copyrighted by both IBM and Microsoft.
Gates locked up the IBM deal with the help of his father’s
law firm

est. value of services $250,000
Case Study in DOS

You could order one of three operating systems
for your original IBM PC:

Digital Research's CP/M-86 for $495

UCSD p-System for several hundred dollars


this was a souped-up BASIC operating systems like
that used by the Commodore 64

but portable like Java
DOS 1.0 for $39.95
Case Study in DOS


Microsoft’s OEM brochure touted future
enhancements to DOS:

Unix-compatible pipes, process forks, and
multitasking, as well as graphics and cursor
positioning, kanji support, multi-user and hard disk
support, and networking

None of these was ever added
Innovation = Invention + Commercialization!