Evaluation, Planning andManagement of Uncertain GrowthProjects: Discovery Driven Planningin ActionAlex van PuttenRon PierantozziIan C. MacmillanAir Products and ChemicalsWharton Entrepreneurial Programs
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 NASA2
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 investment3
Fourth discipline: leads to an Assumption Checklist Element Data Source Last Checked Assumption # Market growth 10% / year Gartner Group Report 2/10/03 1 rate Report First “5” Sales $1, $2, $3, $4, Prototype Workshops 2 $5 development Sept-Dec Features in v. Xxxxxx R&D Status December 3 1 report 2002 Price range for $50-75/unit Prototype Workshops 4 product development Sept-Dec Production 50K / 12 Calculation Not checked 5 volumes months from Growth yet rate4
The typical response of managers with troubled projects QuickTime™ and a TIFF (Uncompressed) decompressor are needed to see this picture.5
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 out yields – The right, but not the obligation to invest further Profit sustainability7
High upside, controlled downside probability Option cost 0 Profitability8
Traditional View of Uncertainty Project Value Real Options View Option value Traditional view Uncertainty9
A Project Portfolio Capability Uncertainty High Stepping Positioning Options Stones 5.5 Medium Platform Launches y int Scouting rta Options 3.0 Ce Enhancement Low Launches 2.0 3.0 4.5 Low Medium High Market Uncertainty10
Role of New Business Development Group Develop the strategies for new business platforms – New technologies and new markets Incubate the early stages of new businesses Develop the tools for new business creation Individuals with diverse backgrounds – Technologists – Business – Commercial Development – Finance11 Copyright Air Products and Chemicals, Inc.
Creating APD’s Growth Platforms Performance Advanced Materials Materials (Chem Group) Future Energy Solutions EPI CDO (Gas Group) Discovery Incubation Acceleration CSTC Emerging Materials Electronics (Electronics) Healthcare Global Healthcare12 Copyright Air Products and Chemicals, Inc.
New Business Creation Methodology Tools and Training Market Research Market Research Customer & Customer & Business & Competitive & Competitive Expert Validation Expert Validation Implementation Intelligence Intelligence Industry Structure Analysis Value Chain Analysis Develop Overall Business Strategy Develop Overall Business Strategy Concept Business Model Framing the Idea Validation Development Creation Venture ToolboxToolbox Toolbox Toolbox Toolbox Lead User Analysis Creativity Consumption chain Learning plan CRA strategy Discovery Driven Consultants Attribute Analysis Consumption chain tools Planning Charlie Prather Market Attribute analysis Chesbrough Segmentation Woodside Discovery Driven Discovery Institute Innovator’s solution Planning Driven Planning Innovation Network Proceed or Sunset = Decision Junctures13 Copyright Air Products and Chemicals, Inc.
The Discovery Driven Planning Methodology Successful Staged business Prepare roll-out: Define income Prepare minimise Frame a Identify potentially statement milestone investment worthy each winning for plan; begin until each challenge assumption strategy business testing key model assumption is tested 1 2 3 4 5 6 Market research Business plan Implement 1. Set goal 2. Figure out how to meet it 3. Develop financials 4. Figure out what part of financials is uncertain 5. Develop plan to test these uncertainties 6. Roll-out14 Copyright Air Products and Chemicals, Inc.
Development of DDP Application at Air Products Began with Business Building Training of Business Development Professionals Implemented in several pilot programs Expanded the training to include 60+ people in US and Europe Began to use on broad basis15 Copyright Air Products and Chemicals, Inc.
Projects Utilizing DDP Generally larger business building projects Research programs where there is high uncertainty Coupled 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 dynamics16 Copyright Air Products and Chemicals, Inc.
Stagegate™ and DDP Not necessarily in conflict Can be complimentary Stagegate deals with the known DDP with the unknown DDP can be the input to stagegate™ for high uncertainty projects17 Copyright Air Products and Chemicals, Inc.
Role of DDP-fit with other tools Increasing Technical Uncertainty Learning Plan DDP Stagegate™ Project Management Increasing Market uncertainty18 Copyright Air Products and Chemicals, Inc.
DDP/Stagegate™ Stagegate Stages DDP Inputs Scoping Consumption Chain and Attribute – Preliminary Market analysis Assessment – Preliminary Technical Assessment Build Business Case Reverse Income Statement – Define new product – Target market identified – Delineation of product concepts – Value proposition – Project feasibility Assumption Map Development – Product Prototype – Lab. Research Testing and Validation Refined reverse Income statement – Validate project Assumption testing Business Plan Launch Source: Winning at New Products R. G. Cooper19 Copyright Air Products and Chemicals, Inc.
How it all fits – It is about Learning Verify market needs Define deeper level of segmentations Attribute Analysis Reiterate Refine Business Model Value Proposition Targeted Consumption chain Competitive Advantage Value chain inside firm Segments MAP Did we capture all assumptions? Define Do Decide Reverse Assumption Income testing Statement Required Profitability Required Returns SG&A Operations
DDP Example Leverage APCI capability into a service offering Identify key market segments and opportunities to create a substantial business position Use the process to convince senior management of viability21 Copyright Air Products and Chemicals, Inc.
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% ROA22 Copyright Air Products and Chemicals, Inc.
Deliverables Specification Specification Estimate Source Profit Margin 35% Plan Unit selling price $100/mo/ Plan Required unit sales 124,000 units calculation Cost to Serve $30/mo/unit incremental cost Capacity 10,000units/xxpeople Size of world market unknown Size of market segment 370,000 units SRI Sales Expenses Average order size 10 Wild guess Sales orders required 12,400 Calc No. calls to make a sale 4 Wild guess No. sales calls 49,600 Calc Sales calls/day/sales person 1 Wild guess Annual salesperson days needed 49,600 calc Sales people needed 200 Calc Avg salesperson salary $70,000 guess Total sales salaries $14 MM Installation Expenses $5000/order Internal Knowledge Total Installation expenses $62MM Field Service Expenses Call center Expenses23
Assumptions Checklist # Assumption Type 1 Selling Price $xx/mo/unit Market 2 Cost to Serve $xxmo/unit Internal 3 # of points per order 10 Market 4 # of calls to sell 4 Sales 5 Additional sales force 0 Internal 6 Additional call ctr personnel 0 Internal 7 Additional field service personnel 0 Internal 8 Service will work with all applications yes Technical 9 Service will work with any equipment yes Technical 10 Existing personnel have knowledge of high value applications yes Internal 11 Can effectively compete or find open niches yes Market 12 Customers will accept value proposition yes Market 13 Business areas will not give away or undermine yes Internal 14 Data security will be an issue no Market 15 Customers will trust APCI to protect their valuables yes Market 16 We can find large segments of customers willing to buy from us (Healthcare, CPI, GI etc) yes Market 17 Need new distribution channels no Market 18 Offering functional characteristics will compare well yes Market 19 Days to Implementation 30 Technical 20 Disparate business areas can collaborate yes Internal 21 Installation cost $5000/unit Technical 22 23 24 25 26 27 28 29 3024 Copyright Air Products and Chemicals, Inc.
Test Assumptions at Key Milestones Create Marketing And Selling Resources •Tech bulletins •Literature 1,2,3,4,5,11,12,18 •Press Releases Test Market •Sell to trial segments 1,2,3,4,6,7,8,9,10,11,14, •Prototype demos 15,17,18,19,21 •Partners Create Service Hub •Present capability & Success Stories to Business areas •Write overview business plan 8,9,10,13,20 •Create roundtable •Cost allocations Directed Inquiries •“Find” List of competitive pricing and offerings 12,14,15,16,17,18 •Focus groups • Can non paid service be charged later? Establish Future Direction • Brainstorming •Identify next prototypes 5,6,7,11,12,16,17 •Internal Capabilities-TranIT, MPC, Sensors, etc25 Copyright Air Products and Chemicals, Inc.
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 development R&D programs New Platform development – New and existing businesses Copyright Air Products and Chemicals, Inc.26