Discovery-Driven

Growth
A Breakthrough Process
to Reduce Risk and
Seize Opportunity

Rita Gunther McGrath

Ian C. MacMillan

Harvard Business Press

Boston, Massachusetts
Copyright 2009 Rita Gunther McGrath and Ian C. MacMillan
All rights reserved
Printed in the United States of America
13 12 11 10 09 5 4 3 2 1

No part of this publication may be reproduced, stored in, or introduced into a retrieval
system, or transmitted, in any form or by any means (electronic, mechanical, photo-
copying, recording, or otherwise), without the prior permission of the publisher. Requests
for permission should be directed to [email protected], or mailed to Per-
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02163.

Library of Congress Cataloging-in-Publication Data

McGrath, Rita Gunther.
Discovery-driven growth : a breakthrough process to reduce risk and seize
opportunity / Rita Gunther McGrath, Ian C. MacMillan.
p. cm.
ISBN 978-1-59139-685-7 (hardcover: alk. paper)
1. Corporations—Growth—Management. 2. Organizational effectiveness.
3. Strategic planning. I. MacMillan, Ian C., 1940– II. Title.
HD2746.M34 2009
658.4Ⱥ063—dc22
2008041024

The paper used in this publication meets the requirements of the American National
Standard for Permanence of Paper for Publications and Documents in Libraries and
Archives Z39.48-1992.
 Contents

1. Driving Corporate Growth with the Right Disciplines 1

Part I
Focusing on Strategic Growth

2. Creating Your Growth Framework 27

3. Aligning the Organization for Growth 49

4. Designing Specific Growth Initiatives 75

Part II
Executing Specific Growth Opportunities

5. Designing the Business Model Architecture 93

6. Creating Reverse Financials and the Assumption Checklist 121

7. Actively Managing and Redirecting Projects 149

8. Practicing the Necessary Art of Disengagement 171

 Contents

Part III
Making Discovery-Driven Growth Work for You

9. Implementing Discovery-Driven Growth 193

10. Sustaining Discovery-Driven Growth 211

Notes 227
Index 237
About the Authors 247

vi
 CHAPTER ONE

Driving Corporate Growth

with the Right Disciplines

Despite its centrality, driving corporate growth is paradoxical—every-

one 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 corpo-
rate efficiency. Our argument is that their worries are well grounded.
The time-tested, comfortable approaches to everyday management

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 Discovery-Driven Growth

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 suc-
cessful companies that stumbled disastrously when they tried to pur-
sue 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 prod-
ucts 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 compa-
nies without a compelling approach to growth as nothing more excit-
ing 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 methodolo-
gies to pursue exceptional growth are doomed to be disappointed. They
will simply not be able to accomplish growth that allows them to break

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 Driving Corporate Growth with the Right Disciplines

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 plan-
ning 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 indi-
vidual 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

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 Discovery-Driven Growth

line and drive efficiency—techniques that were working well for the
core business—were smothering the new growth ventures. IBM execu-
tives 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 im-
portant. 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.

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 Driving Corporate Growth with the Right Disciplines

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 be-
yond the potential payoff. Worse, they are learning less than they could
otherwise.
In this book, we show you how your company can achieve ambi-
tious 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 initia-
tives: 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), organiza-
tions 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.

5
 Discovery-Driven Growth

What Is Discovery-Driven Growth,

and Why Does It Work?

Unlike conventional management practices, the discovery-driven ap-

proach 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 si-
multaneously being cheap—or parsimonious, if you prefer—which
means that you’re reducing the cost of real-life tuition even as you ex-
pand 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 in-
vest in unfolding growth.
The discovery-driven approach to growth works because it com-
pensates for three cognitive and emotional biases that can lethally
distort decision making in high-uncertainty situations. The confirma-

6
 Driving Corporate Growth with the Right Disciplines

tion 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 ini-
tial 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 impos-
sible 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 pro-
grams 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 ig-
norance. They’ll defend a failing approach to the brink of—and some-
times 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 appre-
ciation 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 di-
rection, 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.

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 Discovery-Driven Growth

How Discovery-Driven Is Your Mindset?

T he 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 per-
suade 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 Theory

DDP is widely recognized for its effectiveness in helping executives

find their way through highly uncertain environments. The key idea
behind a discovery-driven plan is that as your plan unfolds, you want
to be reducing what we call the assumption-to-knowledge ratio. When
the assumption-to-knowledge ratio is high, there is a huge amount of
uncertainty, and one should prioritize learning fast, at the lowest pos-
sible cost. As the ratio shrinks, focus and resource prioritization become
more important. Since we first wrote about the concept in 1995 in the Har-
vard Business Review, DDP has been embraced in all kinds of contexts.4
Unlike many (dare we say most) popular management practices that
have been enthusiastically championed before there was much evidence
that they actually work, DDP has been tested again and again and
shown to be effective in a broad range of organizational contexts.5 Cor-
porate venture units have used it to design and manage strategic growth

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 Driving Corporate Growth with the Right Disciplines

TA B L E 1 - 1

Simple quiz to find your openness to discovery-driven growth

Less discovery-driven Numerical voting More discovery-driven

Our senior team is entirely 1 2 3 4 5 6 7 Our senior team gives considerable

focused on quarterly numbers attention to developing new
and making plans. businesses in addition to running
today’s businesses.
We don’t have a lot of 1 2 3 4 5 6 7 People are constantly talking about
conversations that have to what they have learned in running
do with learning. their businesses.
We judge people by their 1 2 3 4 5 6 7 We judge people in terms of sets
individual contribution. of opportunities.
New business development 1 2 3 4 5 6 7 New business development is
is low on the senior team’s item 1, 2, or 3 at most important
agenda. management meetings.
We are uncomfortable with 1 2 3 4 5 6 7 We are prepared to cope with high
high failure rates. failure rates, as long as the cost is
contained.
You get promoted around 1 2 3 4 5 6 7 You won’t get promoted around
here by demonstrating that here unless you can demonstrate
you can drive good numbers that you’ve developed new
in the core business. business.
There is simply no time to 1 2 3 4 5 6 7 We have time set aside to work on
think about new business— new business development in
I’m swamped running my addition to our normal activities.
“day job.”
We evaluate projects according 1 2 3 4 5 6 7 We evaluate projects according to
to calendar deadlines. key checkpoints.
We struggle with extracting any 1 2 3 4 5 6 7 We have in place good processes
benefits from failed projects. that make sure we get as much as
we can from a failed project.
We fund new opportunities 1 2 3 4 5 6 7 When it’s a new opportunity, we
pretty much the way we use as few resources as possible
allocate funds to established until the idea is demonstrated.
businesses.

projects. Entrepreneurs have used it to get started and communicate to

investors. Venture capitalists have used it to assess the viability of poten-
tial investments. Firms have used it to assemble an overall growth pro-
gram. Even not-for-profit organizations have adopted the approach.
One of our favorites was a minister who used it to plan a growth strat-
egy for his church, when he was considering different levels of personal
time investment he could make in “congregation-building” activities.

9
 Discovery-Driven Growth

The concept is taught in the curricula of leading business schools

such as Wharton, Columbia, Dartmouth, Insead, Waseda, Harvard, and
Northwestern (and many others) and in entrepreneurship programs at
places like Stanford and Babson College. Consulting firms such as
Clayton Christensen’s Innosight and others have employed the tech-
nique with their clients. Our international affiliates have been using it
in Germany, Switzerland, Japan, and South Korea, and we’re proud to
note that it has been cited in many books and articles.6 Our point is
that DDP is not armchair theorizing or an unproven management con-
cept. Real leaders in real firms have demonstrated success with the
technique, and there’s no reason that you can’t do likewise.

The Difference Between Conventional

and Discovery-Driven Growth

All competitive advantages are subject to erosion in the face of com-

petitive entry and changing customer requirements.7 This implies that
you have two basic choices to make: can you continue to grow by in-
vesting in an extension of competitive advantage in your core busi-
ness? Or do you need to supplement this growth by creating powerful
positions from new initiatives? Companies operating with a discovery-
driven discipline realize sooner that their core positions are facing the
threat of erosion. These firms are often much quicker and better at
finding new and adjacent spaces that can be drivers of future growth.
But they also are realistic about the differences between pursuing the
conventional business and the disciplines that are appropriate for the
new businesses.
DDG involves the systematic investment of time and effort into cre-
ating breakthrough growth in a pragmatic, low-risk way. The essential
discipline is to specify a future that is both attractive and realistic and
then to work backward into what has to be done today, the next day, the
next week, and the next month to realize that future. The emphasis is on
creating a future strategy, not driving your strategy from your past suc-

10