Download Discovery Driven Strategy: The Discipline of Exceptional Growth

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 south1-1
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.
Technical and Execution
Uncertainty
Figure 1: A Growth Portfolio
High
Medium
Low
STRATEGIC OPTIONS
NEW GROWTH PLATFORMS
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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