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Evaluation, Planning and Management of Uncertain Growth Projects: Discovery Driven Planning in Action
Alex van PuttenRon PierantozziIan C. Macmillan
Air Products and ChemicalsWharton Entrepreneurial Programs
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The core problem
Assumption/knowledge ratio– Need to plan differently-> plan to learn– Convert assumptions to knowledge
ahead of investment – At major CheckPoints test assumptions
Not rocket science, but used by the rocket scientists at NASA
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Five key disciplines of DDP
1. Frame a worthwhile challenge
2. Recognize competitive market metrics, if any
3. Identify and document assumptions
4. Outline major deliverables
5. Identify major CheckPoints– test assumptions at CheckPoints, ahead of investment
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Fourth discipline: leads to an Assumption Checklist
Element Data Source Last Checked Assumption #
Market growth rate
10% / year Gartner Group Report
Report 2/10/03 1
First “5” Sales $1, $2, $3, $4, $5
Prototype development
Workshops Sept-Dec
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Features in v. 1
Xxxxxx R&D Status report
December 2002
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Price range for product
$50-75/unit Prototype development
Workshops Sept-Dec
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Production volumes
50K / 12 months
Calculation from Growth rate
Not checked yet
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The typical response of managers with troubled projects
QuickTime™ and aTIFF (Uncompressed) decompressor
are needed to see this picture.
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CheckPoint number
CheckPoint event Assumptions tested Cost
1 Market study 1, 3, 7, 10, 18, 19 $1K 2 Feasibility study 1, 3, 7, 12, 13, 14, 15, 16 $3K 3 Product samples 1, 7, 8, 11, 13 $6K 4 Focus groups studies 1, 2, 3, 7 $14K 5 Market research study 1, 2, 3, 4, 5, 7, 8 $25K 6 Trials with Beta users 1, 2, 3, 4, 5, 7, 8, 9, 17 $50K 7 Focus group discussions with beta users 18, 19, 20, 21, 22, 23, 24 $25K 8 Pilot plant 1, 2, 3, 4, 5, 6, 7, 8 $100K 9 Pilot marketing campaign 8, 9, 10, 12, 13, 14, 15, 16 $80K
10 Plant construction 20, 21, 22, 23, 24, 25, 26, 27 $2M 11 Staff recruitment 6, 7 $300K
Typical CheckPoint/Assumption Table
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Real Options Reasoning (ROR)
Three major properties of an uncertain investment opportunity enhance its value
Upside potential
Downside controllability– Low cost of failure and/or– Ability to bail outyields– The right, but not the obligation to invest further
Profit sustainability
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High upside, controlled downside
Profitability
probability
Option cost
0
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Traditional View of Uncertainty
Uncertainty
ProjectValue
Option value
Traditional view
Real Options View
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A Project PortfolioC
apab
ility
Unc
erta
inty
High
Medium
Low
5.5
3.0
Low Medium High 2.0 3.0 4.5
Positioning OptionsSteppingStones
Platform Launches
EnhancementLaunches
ScoutingOptions
Market Uncertainty
Certainty
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Role of New Business Development Group
Develop the strategies for new business platforms
– New technologies and new marketsIncubate the early stages of new businessesDevelop the tools for new business creationIndividuals with diverse backgrounds
– Technologists– Business– Commercial Development– Finance
Copyright Air Products and Chemicals, Inc.
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Creating APD’s Growth Platforms
Discovery Incubation Acceleration
CDO
CSTC
Advanced Materials(Chem Group)
Future Energy Solutions(Gas Group)
Emerging Materials(Electronics)
PerformanceMaterials
EPI
Electronics
Global Healthcare
Healthcare
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ToolboxToolboxLead User AnalysisConsumption chainAttribute AnalysisMarket SegmentationInnovator’s solution
Business ModelBusiness ModelCreationCreation
BusinessBusinessImplementationImplementation
Framing the Framing the VentureVenture
New Business Creation MethodologyTools and Training
ValidationValidationConcept Concept DevelopmentDevelopmentIdeaIdea
Market Research& Competitive Intelligence
Market Research& Competitive Intelligence
Customer & Expert Validation
Customer & Expert Validation
Develop Overall Business StrategyDevelop Overall Business Strategy
Proceed or SunsetProceed or SunsetDecision JuncturesDecision Junctures==
Value Chain AnalysisIndustry Structure
Analysis
ToolboxToolboxCreativity Consultants
Charlie Prather
Woodside Institute
Innovation Network
ToolboxToolboxLearning plan
Consumption chain
Attribute analysis
Discovery Driven Planning
ToolboxToolboxDiscovery Driven Planning
ToolboxToolboxCRA strategy tools
Chesbrough
Discovery Driven Planning
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The Discovery Driven Planning Methodology
Frame a worthy
challenge
Define potentially
winning strategy
Prepare income
statement for
business model
Identify each
assumption
Prepare milestone
plan; begin testing
Stagedroll-out: minimise
investment until each
key assumption
is tested Succ
essf
ul
busi
nes
s
1 2 3 4 5 6
Market research Business plan Implement
1. Set goal2. Figure out how to meet it3. Develop financials4. Figure out what part of financials is uncertain5. Develop plan to test these uncertainties6. Roll-out
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Development of DDP Application at Air Products
Began with Business Building Training of Business Development ProfessionalsImplemented in several pilot programs Expanded the training to include 60+ people in US and EuropeBegan to use on broad basis
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Projects Utilizing DDP
Generally larger business building projectsResearch programs where there is high uncertaintyCoupled with Stagegate ™
– Used to provide inputs to process– Impact analysis tool (reverse income
statement)Entry into new geographies with existing businesses
– Different business models or market dynamics
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Stagegate™ and DDP
Not necessarily in conflictCan be complimentaryStagegate deals with the knownDDP with the unknownDDP can be the input to stagegate™ for high uncertainty projects
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Role of DDP-fit with other tools
Increasing Market uncertainty
Incr
easi
ng T
echn
ical
Unc
erta
inty
LearningPlan
DDP
Stagegate™
Project Management
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DDP/Stagegate™
Scoping– Preliminary Market
Assessment– Preliminary Technical
AssessmentBuild Business Case
– Define new product– Target market identified– Delineation of product
concepts– Value proposition– Project feasibility
Development– Product Prototype– Lab. Research
Testing and Validation– Validate project
Launch
Consumption Chain and Attribute analysis
Reverse Income Statement
Assumption Map
Refined reverse Income statementAssumption testing
Business Plan
Stagegate Stages DDP Inputs
Source: Winning at New ProductsR. G. Cooper
Copyright Air Products and Chemicals, Inc.
How it all fits – It is about Learning
Attribute Analysis
Business Model
Verify market needsDefine deeper level of segmentations
Value Proposition Targeted Segments
Consumption chain Value chain inside firm
ReiterateRefine
MAP
ReverseIncome
Statement
Required Profitability Required Returns SG&A Operations
Did we capture all assumptions?
DefineDo
Decide
Assumption testing
Competitive Advantage
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DDP Example
Leverage APCI capability into a service offeringIdentify key market segments and opportunities to create a substantial business positionUse the process to convince senior management of viability
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The Framing Challenge
APCI 2002
Profits $519 MM
Profit Margin 9.6%
Revenue $5,400MM
----------------------------------------------------------
Required Profit $52 MM to increase AP profits by 10%
Required Revenue $148 MM to deliver 35% margin
Required unit sales 124,000
Allowable costs $96 MM to deliver 35% margin
Allowable investment $445 MM to deliver 11.7% ROA
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Deliverables Specification
Specification Estimate SourceProfit Margin 35% PlanUnit selling price $100/mo/ Plan Required unit sales 124,000 units calculationCost to Serve $30/mo/unit incremental costCapacity 10,000units/xxpeopleSize of world market unknownSize of market segment 370,000 units SRI
Sales Expenses
Average order size 10 Wild guessSales orders required 12,400 CalcNo. calls to make a sale 4 Wild guessNo. sales calls 49,600 CalcSales calls/day/sales person 1 Wild guessAnnual salesperson days needed 49,600 calcSales people needed 200 CalcAvg salesperson salary $70,000 guessTotal sales salaries $14 MM
Installation Expenses $5000/order Internal Knowledge
Total Installation expenses $62MMField Service Expenses
Call center Expenses
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Assumptions Checklist
# Assumption Type1 Selling Price $xx/mo/unit Market2 Cost to Serve $xxmo/unit Internal3 # of points per order 10 Market4 # of calls to sell 4 Sales5 Additional sales force 0 Internal6 Additional call ctr personnel 0 Internal7 Additional field service personnel 0 Internal8 Service will work with all applications yes Technical9 Service will work with any equipment yes Technical10 Existing personnel have knowledge of high value applications yes Internal11 Can effectively compete or find open niches yes Market12 Customers will accept value proposition yes Market13 Business areas will not give away or undermine yes Internal14 Data security will be an issue no Market15 Customers will trust APCI to protect their valuables yes Market16 We can find large segments of customers willing to buy from us (Healthcare, CPI, GI etc) yes Market17 Need new distribution channels no Market18 Offering functional characteristics will compare well yes Market19 Days to Implementation 30 Technical20 Disparate business areas can collaborate yes Internal21 Installation cost $5000/unit Technical222324252627282930
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Test Assumptions at Key Milestones
Create Marketing And Selling Resources•Tech bulletins•Literature•Press Releases
Test Market•Sell to trial segments•Prototype demos•Partners
Create Service Hub•Present capability & Success Stories to Business areas•Write overview business plan•Create roundtable•Cost allocations
Directed Inquiries•“Find” List of competitive pricing and offerings•Focus groups • Can non paid service be charged later?
Establish Future Direction• Brainstorming•Identify next prototypes•Internal Capabilities-TranIT, MPC, Sensors, etc
1,2,3,4,5,11,12,18
1,2,3,4,6,7,8,9,10,11,14,15,17,18,19,21
8,9,10,13,20
12,14,15,16,17,18
5,6,7,11,12,16,17
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Other projects using DDP
Entry into new geographies– Disruptive business approaches for
existing businesses• Several businesses recently approved
by senior management– Allows for options approach to market
developmentR&D programsNew Platform development
– New and existing businesses
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