Van putten

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

2

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

3

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

4

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

2

Features in v. 1

Xxxxxx R&D Status report

December 2002

3

Price range for product

$50-75/unit Prototype development

Workshops Sept-Dec

4

Production volumes

50K / 12 months

Calculation from Growth rate

Not checked yet

5

5

The typical response of managers with troubled projects

QuickTime™ and aTIFF (Uncompressed) decompressor

are needed to see this picture.

6

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

7

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

8

High upside, controlled downside

Profitability

probability

Option cost

0

9

Traditional View of Uncertainty

Uncertainty

ProjectValue

Option value

Traditional view

Real Options View

10

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

11

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.

12

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


13

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


14

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


15

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


16

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


17

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


18

Role of DDP-fit with other tools

Increasing Market uncertainty

Incr

easi

ng T

echn

ical

Unc

erta

inty

LearningPlan

DDP

Stagegate™

Project Management


19

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


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

Copyright Air Products and Chemicals Inc

21

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


22

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


23

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


24

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


25

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


26

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


Van putten

Business

Transcript of Van putten