Discovery Driven Planning

Developing a business plan for an existing line-of-business (LOB) is quite different than planning for a new initiative. To plan for an existing LOB, one could extrapolate future results from past experiences. But for a new initiative – whether a new business, new market or new product – extrapolation rarely works, because, the predictions for a new initiative are based upon assumptions and not past knowledge. So what is the best planning approach for a new initiative?

Few years back Prof. Rita McGarth of Columbia and Prof. Ian MacMillan of Wharton introduced, Discovery-Driven Planning, a tool that converts startup assumptions into knowledge that, they argue, grounds the planning for a new initiative in reality.

Their tool imposes planning discipline through four documents. A ‘Key Assumptions Checklist’ identifies the business hurdles and assumptions for the initiative. A ‘Reverse Income Statement’ models the business economics. The ‘Pro-Forma Operations Specs’ defines operations needed to run the business. And, ‘Milestone Planning Chart’ specifies when the assumption needs to be tested.

Key Assumptions

Let’s build a simple case to see how it works. Let’s consider the proverbial widget making company, which is contemplating entering a new market with a new product. Its return on investment and other directives call for a profit of $400,000 for the first year from the new initiatives. Some of its other key assumptions may look like:

Required Profits $400,000 Production-Capacity/ Equipment/Day 25
ROS 10% Equipment Cost $10,000
Widget Price $160 Equipment Life 4
Market Size $100 Mil
Order Size 100 Workers/Line 10
Worker Wages $50,000
Sales-Call/Order 4
Sales-Call/Day 2 Material Cost $20
Sales Salary $100,000 Packaging & Shipping/Order $100
Selling Days 250

Reverse Income Statement

Next we develop initial Reverse Income Statement. In discovery-driven planning one starts with the required profit and works up to determine how much revenue is needed and the cost allowed to generate that revenue. In our example required revenue would be $4,000,000 giving us allowable cost of $3,600,000. Also $4 million of sales will call for a 2.5% market share.

Pro-Forma Operations Specs

Then we develop the Pro-Forma Operations Specs.

Sales Manufacturing
Required Unit Sales 25,000 Annual Capacity/Equipment 7,500
Orders Required 250 Equipment Needed 4
Sales Calls Needed 1,000
Sales Person Needed 2 Workers Needed 40
Sales Salary $200,000 Workers’ Wages 2,000,000
Total Capital Cost $40,000 Total Packaging & Shipping $25,000
Annual Depreciation $10,000

Update and Revise Reverse Income Statement

Then we update the income statement.

Sales Salary $200,000
Wages $2,000,000
Material Cost $500,000
Packaging & Shipping $25,000
Depreciation $10,000
Sub Total $2,735,000
Allowable Overhead $865,000

Milestone Planning Chart

Finally we need to develop a Milestone Planning Chart, which could look this.

Milestone Assumptions To Be Checked
Initial Research Market Size
Average Order Size
Sales Call/Order
Sales Call/Day
Sales Salary
Production Capacity Per Line Per Day
Capital Cost of a Line
Equipment Life
Production Days
Workers Wages
Material Cost
Packaging & Shipping Cost Per Order
Prototyping Material Cost
Testing By Customers Unit Price
Production & Selling Material Cost
Shipping Cost
Unit Price
Average Order Size
Sales Call/Order
Sales Call/Day
Market Reaction Unit Price
Profit Margin
Product Redesign Material Cost
Shipping Cost
Re-pricing Analysis Profit Margin
Unit Price
Market Size


This entire process is looped and there is continuous feedback from one stage to next. One could see that such a planning tool allows for a rigorous testing of the assumptions that necessary for a new initiative throughout the initiative. It has strong potential to reduce the uncertainty in planning for a new business. It enforces a planning discipline that creates checkpoints before significant commitments are made that could help the management determine whether it is prudent to go forward or not.

If you want to download the Excel Spreadsheet used for this example then click here.

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