Management and Strategy

Evaluating any new venture is really difficult. It is a very subjective process. The environment is so uncertain that using traditional tools like DCF or IRR will never work. Following is one approach for evaluation of such ventures

1. Develop a reverse income statement
2. Lay out all the activities needed to run the venture i.e. Pro forma operations specs (sales, manufacturing, shipping and equipment and depreciation)
3. Track all assumptions
4. Revise the reverse income statement based on assumptions and operations specs
5. Plan to test assumptions at milestones

The process is really an interesting way of looking at ventures. It is what we normally call backward planning in regular project management, only here we are doing reverse evaluation of venture. Basically trying to take profits we want to make and calculating back how much we will need to invest and will it be worth it.

Source: Discovery driven planning by Rita Gunther McGrath and Ian C. MacMillan(HBR:95406)

Aggregate project plan enables management to improve the way it manages the development function.

Following are eight steps of an aggregate project plan

1. Define project types as either breakthrough, platform, derivative, R&D or partnered projects
2. Identify existing projects and classify them by project type
3. Estimate average time and resources for each project type based on earlier experience
4. Identify existing resource capacity
5. Determine the desired mix of projects
6. Estimate the number or projects that existing resources can support
7. Decide which specific projects to pursue
8. Work to improve development capabilities

Source: Creating project plans to focus Product Development by Steve C. Wheelwright and Kim B. Clark (HBR: 92210)

Following are some dangerous implicit assumptions made by managers

1. Customers will buy our products because we think it is a great product
2. Customers will buy our products because it is technically superior
3. Customers will agree with our perception that the product is “great”
4. Customers run no risk in buying from us instead of buying from past suppliers
5. The product will sell itself
6. Distributors are desperate to stock and service the product
7. We can develop the product on time and on budget
8. We will have no trouble in attracting the right staff
9. Competitors will respond rationally
10. We can insulate our product from competition
11. We will be able to hold down prices while gaining market share rapidly
12. The rest of our company will gladly support our strategy and provide help as needed

It is important to overcome these assumptions. Confidence is good over confidence is recipe for failure.

Source: Discovery Driven Planning by Rita Gunther McGrath and Ian C. MacMillan(HBR: 95406)