Discovery-Driven Growth

A Breakthrough Process to Reduce Risk and Seize Opportunity

Rita Gunther McGrath, Ian C. Macmillan

• Publisher: Harvard Business Review Press
• Year: 2009
• Print ISBN:
  9781591396857
• eBook ISBN:
  9781422129494
• Topic: Business
• Subtopic: Business Strategy
• Index: Business

You've been charged with growing your business. Incremental growth can no longer deliver the results you need. You need truly dynamic growth - and you need to achieve it without risking a hugely expensive gamble. How can you encourage innovative new ventures and pursue ambitious growth while minimizing risk?In Discovery-Driven Growth, authors McGrath and MacMillan show how companies can plan and pursue an aggressive growth agenda with confidence. By carefully framing their strategic growth opportunities, testing each project assumption against a series of checkpoints, and creating a culture that acts on evidence and learning instead of blind stumbling, companies can better control their costs, minimize surprises, and know when to disengage from questionable projects--before it's too late.Providing tools that will help you select and better assess the potential of any strategic venture, from new product lines to entirely new businesses, the authors outline a comprehensive process that lets you identify, manage, and leverage your company's full portfolio of opportunities. By reducing up-front costs and eliminating unnecessary risks, you'll be able to avoid missteps and explore more options to create the breakthrough growth that your business requires.

CHAPTER ONE

Driving Corporate Growth with the Right Disciplines

Despite its centrality, driving corporate growth is paradoxical—everyone recognizes its importance, yet it is easy to get it wrong. The result is that every day, in offices and conference centers, in meeting rooms and airports, anxious executives in well-established companies worry deeply about how they are going to lead strategic growth in their organizations. CEOs worry about how to deliver the growth they pledged to their boards, CFOs worry about how they will appease a growth-hungry stock market, and COOs and their direct reports worry about how they are going to deliver the growth targets that were promised at the last stockholders’ meeting, while still retaining corporate efficiency. Our argument is that their worries are well grounded. The time-tested, comfortable approaches to everyday management don’t work well in dynamic, rapidly changing, and therefore cruelly uncertain environments. Consequently, while many companies invest in growth initiatives, the results are uneven.

Why So Many Good Companies Fail at Growth

We’ve all heard many cautionary tales about well-managed and successful companies that stumbled disastrously when they tried to pursue opportunities for growth. Revlon’s 2006 introduction and almost immediate abandonment of Vital Radiance cosmetics (a $100-million-plus flop), Michelin’s 2008 withdrawal of the PAX run-flat tire system, and even fabled General Electric’s exploration of new financial products are just a few examples of smart companies whose processes for managing growth seem to have let them down badly. But failing to grow is not an option. Today’s core business is highly unlikely to be an engine of growth for tomorrow. Accordingly, investors will see companies without a compelling approach to growth as nothing more exciting than a ten-year bond.

For over two decades, the two of us have been studying why so many well-conceived, carefully planned growth programs go wrong and why so many good companies just can’t seem to get traction from their growth initiatives. We’ve also gained experience with companies that are getting it right and enjoying the growth and prosperity that ensue. In our many years of working with companies such as Nokia, Air Products and Chemicals, 3M, DuPont, IBM, and many others, we’ve distilled practices that allow managers to choose better strategic growth projects, reduce the risk of these projects, and either execute them with relentless success or discontinue them at very low cost. This book is the result.

Our core thesis is that companies that use conventional methodologies to pursue exceptional growth are doomed to be disappointed. They will simply not be able to accomplish growth that allows them to break out of the pack and deliver exceptional results. Consider how IBM learned, painfully, that its one-size-fits-all management style was crippling its growth efforts and how the company needed to operate differently.

How IBM Learned to Use the Right Initiatives to Drive Growth

In April 2001 we were sitting with a few folks from the strategic planning office at IBM. As you’ll remember, IBM was virtually given up for dead when Lou Gerstner was appointed CEO in 1993 and began what he later would describe as a transformation effort. Throughout much of the 1990s, the company focused on ripping out costs, fixing individual businesses, and generally getting its house in order. But that clearly wasn’t going to be enough to restore Big Blue to its former glory as the most desirable of the blue chips. Despite sincere efforts, growth projects stalled, and Gerstner wanted to get to the bottom of it.

Strategy chief J. Bruce Harreld later recounted in a keynote address how the change came about:

In the early summer of 1999, we had decided to go after a new business area. So in September, there is Lou Gerstner sitting in his office on a sunny afternoon and he sees a line drawn through the project on the budget. It turns out that the executive in charge had said, “due to our current cost pressures, we decided to cut back on those activities we decided to invest in in June.”

Lou wrote this note, in frustration. “I have had it,” he said. “This is a bunch of crap for this big business unit to believe that this little thing is going to have any material impact on their results for June. I want you, you and you [the colleagues who were at our meeting in 2001], to understand what’s going on here. There is something systemically wrong with IBM and how we manage that we can’t embrace and stay with new investments for growth.¹

What they found echoes the conclusions from our own research. Essentially, the techniques that IBM was using to manage its bottom line and drive efficiency—techniques that were working well for the core business—were smothering the new growth ventures. IBM executives started to explore new disciplines, new techniques, that could help the company nurture small growth initiatives without losing sight of its core business operations.

As Harreld later put it: “We needed different management systems with businesses at different stages of maturity. The new businesses, the growth businesses, needed to be protected and needed a different kind of management style. They weren’t like our mainframe business.”

The insight learned at IBM through many painful experiences is that you can’t manage growth programs using conventional approaches. This single insight profoundly changed the way the company funds, structures, and plans growth projects, to the point at which IBM’s emerging business opportunity (EBO) program has become a global exemplar for how a large organization can capture new opportunities for growth.

Different Sources of Growth

In this book, we’ll show you why conventional approaches are often lethal to innovative growth projects and how you can supplement these approaches. Exceptional growth can be driven from three places. You can grow your core or radically improve the performance of the core by using conventional management tools. You can create new growth platforms (sometimes called adjacencies), or you can invest in strategic options that have the potential to become future platforms. As you move more and more into new platforms and strategic options, the discovery-driven tools we describe in the book become more important. Success depends on how you create an engine for growth from your capabilities and assets and properly direct it toward new spaces, using the disciplines that make sense—conventional tools if you know a lot and what we call discovery-driven tools if you don’t.

Breakout growth is not only about launching bold, new initiatives. Many good growth programs begin first with incremental growth, which creates investment in learning where big new opportunities lie. That’s the point at which many companies go for breakout growth. Many breakout opportunities don’t look that way at first—they are the result of combining things until you finally do have a winner (Procter & Gamble’s Swiffer cleaning systems would be an example). There are, of course, many companies out there making what they hope will be breakout moves. What they often find out, painfully, is that they are using the wrong tools to do it and are therefore taking on risk far beyond the potential payoff. Worse, they are learning less than they could otherwise.

In this book, we show you how your company can achieve ambitious growth targets without the hugely expensive and uncontrolled gambles that could compromise your firm. We show you the practices and disciplines that allow you to break out from the pack by an astute, disciplined, and highly aggressive strategy that massively enhances your firm’s growth potential while barely increasing your risk. Discovery-driven growth principles are unique: by employing them, you can go for aggressive growth targets and not risk massive downside losses.

The techniques we discuss are appropriate for new growth initiatives: new ventures, new businesses, new product lines, new franchises, new locations, new markets, joint ventures, strategic alliances, and even potential mergers. The cornerstone of these disciplines is discovery-driven planning. Through discovery-driven planning (DDP), organizations set up bold plans to pursue futures they frame, to learn where their true futures lie, and to test their assumptions about those futures at the lowest possible cost. With DDP comes a host of other practices and disciplines that we’ve developed, tested, and studied over the years. We’re confident that if you apply them, your growth programs are likely to be less risky and more fruitful than they would be with conventional methods.

What Is Discovery-Driven Growth, and Why Does It Work?

Unlike conventional management practices, the discovery-driven approach begins with the recognition that bold but uncertain outcomes are not predictable—you have to discover new ideas and deliberately redirect the resulting initiatives as reality unfolds. In contrast to how you run an ongoing business, you really can’t know the result a priori. This isn’t because you’re stupid or ill informed. On the contrary: the data that would let you be more certain simply doesn’t exist yet. The challenge is getting enough directional data quickly enough to make what we call “roughly right” decisions. Nor is this wild-eyed gambling. Only a fool or a compulsive gambler would want to spend a lot of money without understanding the odds of success. With discovery-driven growth (DDG), you invest small amounts of money—money you can afford to lose—to get the information that you need so that you can invest more confidently. So as you invest in learning, you’re simultaneously being cheap—or parsimonious, if you prefer—which means that you’re reducing the cost of real-life tuition even as you expand the scope of opportunities you can go after.

DDG begins by specifying a performance outcome that would make your growth efforts worthwhile, whether at a corporate level or a strategic-projects level. You and your colleagues define success up front, as well as the guidelines for where and how the organization will go after these goals. Thereafter, the rest of the tools in the growth process then provide mechanisms for learning how 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 unfolding growth.

The discovery-driven approach to growth works because it compensates for three cognitive and emotional biases that can lethally distort decision making in high-uncertainty situations. The confirmation bias leads people to embrace new information that reinforces (confirms) their existing assumptions and to reject information that challenges them. Not so bad in an existing business, where your initial assumptions have a good shot at being on the right track, but dangerous in a new business where you’re not yet clear on what you are doing. The recency bias and human cognitive limits lead us to forget that we made assumptions in the first place, making it nearly impossible to learn from our unfolding experiences. The winners’ curse causes us to overvalue winning in a competitive situation, even to the point that the price we’ll pay vastly exceeds the value of the prize. We could go on, but you get the idea; many researchers have reported on these biases.²

Even worse than individual biases are the social and political processes that effectively inhibit organizational learning. Because the test of a conventional plan’s correctness is how close projections came to outcomes, there is huge pressure on people involved in growth programs to stick to the plan and make it happen at all costs. People stick with guesses they have made public, rather than admit to possible ignorance. They’ll defend a failing approach to the brink of—and sometimes past the brink of—disaster, rather than make the more sensible decision to redirect or shut down a strategic project. Conventional planning practices thus tend to encourage dysfunctional defense of what are essentially WAGs (wild-ass gambles). (For descriptions of how social processes can lead projects astray, see the articles by B. M. Staw and J. Ross.)³ See “How Discovery-Driven Is Your Mindset?” on the next page and take the simple quiz in table 1-1 to gain a better appreciation of what personal and social biases you and your colleagues might inadvertently be bringing to the conference table.

What needs to replace conventional planning when you are trying some bold new growth program is a process that allows you to set a direction, probe inexpensively, redirect where necessary, and, hopefully, grasp emergent growth, but shut down early and inexpensively if things don’t work out. This is what DDG is all about.

How Discovery-Driven Is Your Mindset?

The simple quiz in table 1-1 opposite can help you highlight where your attitudes may get in the way of your developing a more discovery-driven mindset. Circle the number that best reflects your perspective of which statement most closely reflects your organization’s mindset at the moment.

If your average of these responses is below 4, you will need to persuade a critical mass of your leadership team to rethink the way they go after growth opportunities. If your responses fall between 4 and 5, you’re on your way but could perhaps use some work and a reminder that growth is going to require different behavior than business-as-usual. If you scored above 5, congratulations, but make sure you have processes in place to avoid slipping back when times get tough.

Discovery-Driven Planning: A Time-Tested and Proven Approach, Not Just a...

Table of contents

• Cover
• Copyright
• Dedication
• Chapter One: Driving Corporate Growth with the Right Disciplines
• Part I: Focusing on Strategic Growth
• Part II: Executing Specific Growth Opportunities
• Part III Making Discovery-Driven Growth Work for You
• Notes
• About the Authors