Monday, December 22, 2008

Planning and Evaluation New Ideas or Ventures

So I've been reading Clayton Christensen's Innovator's Solution and have found the book extremly informative. There are many pearls of wisdom in this book, but I want to mention the concept of discovery-driven planning that is discussed in Chapter 8.

The process that many entrepreneurs and companies use to make decisions on starting a company or pursuing some opportunity includes four steps:

  1. Make assumptions about the future and about the success that a new business idea will enjoy.
  2. Make financial projections based on those assumptions
  3. Decide to start the venture or pursue opportunity
  4. The team responsible for the new venture goes off to implement the strategy

The problem with this approach is that there is generally a feedback loop between #1 and #2, where assumptions are revised to support the financial projects that are required to win funding (from VCs or execs that control budget in companies) and that resulting strategy will likely be wrong (based on research mentioned in the book) when pursuing a disruptive, new market opportunity.

Discovery-driven planning provides a different framework for making decisions. It also has four steps, but the steps are in a different order than the process described above:

  1. Make financial projections
  2. Compile a list of assumption that need to prove true for us to realistically expect the financial projections to materialize. Rank order the assumptions in order of importance.
  3. Implement a plan to test the validity of the most important assumptions. This plan needs to, quickly and with the least cost possible, validate or invalidate the most critical assumptions. This allows the entre/intrapreneur to revise the strategy prior to deciding to implement through significant investment.
  4. Decide on whether or not to implement (in the case of the entrepreneur) or fund an idea/business/innitiative (in the case of VCs and/or companies).

This seems like a very reasonable approach and it can be applied to many circumstances. Test the waters before you dive in head first.