Or, as Gerald J. Kochanski, CFO and treasurer of Nephros Inc., a privately held manufacturer of medical equipment, puts it, "Stuff happens, but few companies have a process in place to learn from it. Instead, they base everything on the premise that if you develop a well-defined recipe, all you need to do is put in the right ingredients and it will come out as planned. Life rarely happens that way, so why should a multi-million-dollar venture?"
Then, why don't companies cook up a better way? "Part of it is ego, some of it is arrogance, and the rest is the political nature of organizations," Kochanski says. "People are afraid they'll get their necks snapped off for saying, 'We got to this checkpoint and things didn't turn out the way we'd hoped.'"
Pulling the plug is never easy, but it's exactly what Air Products and Chemicals did to a planned venture in the automotive-coatings market, once it applied discovery-driven principles. "We needed to test how big the market would be before we'd invest in it, and this gave us a template for doing that," says Ron Pierantozzi, the company's former director of new-business development. "The licensing investment was significant and we didn't want to risk it until we were sure. We made some assumptions about the market and our projected revenues and then tested them. They failed, and we quickly killed the project."
Getting the most from a new discipline, however, requires, well, discipline. While Air Products CFO Huck praises McGrath's methodology for requiring project sponsors to provide "more of the information needed to make informed judgments about investments in new projects than conventional tools do," others note that some companies may not be ready to make such a leap. "I don't think many organizations have the discipline to document their assumptions and then review them at periodic intervals," says Gary Cokins, manager of performance management solutions at SAS.
But more companies may now be motivated to try. When the Trail Blazers were assessing streaming video, "We had no data to draw from, nothing to compare our expectations to," Olson says. "Had we established checkpoints, we could have tested our assumptions and adjusted as needed, instead of simply setting a price that seemed reasonable." Now that he has a year's worth of data to draw on, Olson plans to use McGrath's method going forward.
McGrath sums it up like this: "It pays to design a relatively expensive test" that can validate, redirect, or reveal the futility of a much more expensive investment.
Russ Banham is a contributing editor of CFO.
Three that Failed…
Big bets placed by big companies that proved to be big disappointments. Could "discovery-driven growth" have changed the outcome?
1. Revlon's Vital Radiance line of cosmetics for older women. The problem, the company didn't market the program appropriately, failing, for example, to take into account the fact that older women "don't like to be reminded of [their age] at the cosmetics counter," says Rita Gunther McGrath, professor of business strategy at Columbia University.
2. Michelin's PAX run-flat tire was "a great idea," McGrath says, "except that the company didn't see the implications of a requirement that the undercarriage of the car be redesigned, that customers would have to take their cars to a specially equipped service station to get the tires changed at a cost of more than $1,000 each, and that the tires made the cars heavier, thus requiring more gas."
3. AOL's $850 million acquisition of social-networking site Bebo. AOL "didn't realize how difficult it is to make money via ad placements on social networks," McGrath says. "It also failed to appreciate that Bebo's traffic growth was flattening, and it didn't give enough consideration to the possibility that Bebo's most talented employees would make a hasty exit postacquisition."
…And One that Worked
Sometimes a picture is worth 1,000 square feet of retail space.
Innosight partner Kevin Bolen says that one key aspect of discovery-driven growth is to "be open to surprises and then learn from them." He cites a client in the apparel business that wanted to improve the product-selection process. The traditional approach would be to come up with an idea, develop samples, and then do a retail trial — an expensive proposition. Instead, "we did 'shopalongs' to understand customers' frustration with the shopping process. We then brainstormed 10 potential solutions and tested them with photo mock-ups to gauge customers' initial reactions."
Two of the solutions were well received, so the project moved to the next checkpoint, which entailed using some empty office space for several days, where the company set up a mock retail environment to show prototypes to a variety of consumers. Alterations were made based on those responses, which gave the client the confidence to go to the next checkpoint — the traditional retail trial. So the usual starting point became the third step in a lower-cost, low-risk model that took only an extra two weeks and, had it failed, would hardly have spelled disaster. — R.B.
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