As the weather gets warmer and Q3 approaches, most companies are starting to think about business planning for next year.  In light of planning season I wanted to write just one more short entry based on learnings from Clayton Christensen’s The Innovator’s Solution.  Quickly becoming one of my favorite authors, Christensen advocates for a somewhat unique approach to strategic planning for highly innovative companies.  He calls this planning approach “Discovery Driven Planning.”

In the regular strategic planning process, most companies will draft business plans for perspective business units, consider all of the drafted plans as possible areas for investment, and allocate resources based on the strength of the plans and their predicted chance of success.

Most traditional business plans aim to capture customers from existing markets and use research about the size of the existing market as a basis for the size of the perspective business (e.g. a new business may aim to capture 10% of a $1MM market, yielding $100,000 in revenue).  Using the size of the market as a starting point, the author of the business plan typically goes through and adds/manipulates the assumptions in the business plan until the revenue projections start to look appropriately attractive.  The business plan author knows that without attractive revenue projections, the business will have no chance of getting funded, so it becomes a bit of a game to teak the assumptions to make the revenue look just right.

Christensen rejects this method of strategic planning for highly innovative companies and instead advocates for a more agile planning process.

Typically financial figures for a perspective business are on the last page of a business plan after several pages of stated assumptions.  However, rather than burying financials in the back of a business plan, Christensen advocates putting them right on the cover of the business plan.  His theory is that everyone in the strategic planning process knows roughly how attractive revenue projections need to be in order for the business to get funded.  That level of revenue is table stakes and should be stated up front.  The real unknown variables for innovative businesses are not the revenue projections needed to make them successful, but rather the assumptions that need to be proven in order to make those revenue projections a reality.

Essentially Christensen advocates for short business plans made up of three pages:

Page 1: The financial projections required to make the business unit a success
Page 2: The assumptions that need to be true (or false) in order to make the projections on Page 1 a reality
Page 3: A project plan to validate the assumptions on Page 2 as quickly and as cheaply as possible

As we get deeper into planning season, I’m going to be thinking about Christensen’s method for strategic planning and how I can apply it the planning that I need to work on for next year.

Discovery Driven Planning
  • It seems to me that the important thing is to identify assumptions, develop preliminary ideas based on which assumptions are correct, and then “fail fast” i.e. disqualify options by testing to see which assumptions are false, where possible, or design your approach such that inconsistencies and invalid assumptions are identified ASAP.
    It’s more important for more complex strategies; not of the form “If X, then Y”, but more of the form “If X and Y, conditional on Z where W holds constant and K does not vary by more than N%, then plan P will be successful.”
    I’d focus more on failure than success, because of the time it’s easier/cheaper to falsify assumptions than to try and verify them over time (induction being essentially impossible).

  • Yeah – agree. However, I’m not sure how i feel about the term “fail fast.” Obviously i agree with the principle, but the phrase is becoming so widely used it borders on cliche. I think a tremendous amount of inefficiency is created by bottling complex business concepts into bite sized buzz words for distribution to the masses. Sometimes things are just plain complicated.

  • Fair enough; it happens way to much in business.