HANNAH BATES: Welcome to HBR On Strategy, case studies and conversations with the world’s top business and management experts, hand-selected to help you unlock new ways of doing business. To plan for the future, businesses usually look to their past and extrapolate. But what if you’re exploring a new market or navigating a business with a lot of uncertainty? Columbia Business School professor Rita McGrath offers one solution: discovery-driven growth. It’s an approach that can help you design experiments to check your assumptions. In this episode, you’ll learn how to apply the principles of discovery driven growth to your business planning – no matter what business you’re in – using four best practices. This episode originally aired on HBR IdeaCast in April 2009. Here it is.
PAUL MICHELMAN: Hello, I’m Paul Michelman from Harvard Business Publishing, and I am delighted to be joined today by Rita McGrath. Rita is an Associate Professor of Management at Columbia Business School. She writes the Dynamic Strategies blog for harvardbusiness.org. And she’s the author of Discovery Driven Growth: A Breakthrough Process to Reduce Risk and Seize Opportunities, which she co-wrote with Ian McMillan. Rita, thanks for joining us today.
RITA MCGRATH: Thank you for having me, Paul. I’m delighted to be here.
PAUL MICHELMAN: Well, great. Rita, our mission today is to introduce our audience to the core concepts of discovery-driven growth, and to discuss how they can go about putting it to use in their organizations. So to begin, can you give us a high-level, introductory definition of what discovery-driven growth is?
RITA MCGRATH: Sure, most business planning calls for a great deal of knowledge about what you’re doing. So the presumption in a lot of conventional business planning is that you have some basis of past experience, which you can draw on to create the platform for the future. Discovery-driven planning, discovery-driven growth in contrast, says, wait a minute, there are a lot of situations that you want to go into, particularly areas that are new to you, new markets, new opportunities, new spaces where there isn’t a platform of past experience. And the way that we like to talk about that is you have a very high ratio in those environments of assumptions that you need to make relative to knowledge you have. When you’re operating on assumptions, being right is not the solution, because you don’t know. If you knew, anybody could do it and it wouldn’t be really breakthrough growth. So the concept with discovery-driven growth is you’re going to plan, but plan to learn. And learn your way into what those future growth opportunities are, rather than the traditional way of doing it, which is extrapolating from the past. So the core idea is to plan to learn, not to plan to be right.
PAUL MICHELMAN: So is it a process that’s exclusively geared to new innovation?
RITA MCGRATH: Actually, no. One of the more interesting things we’ve done with this recently is we’re looking now at a lot of cases where people’s core businesses, because of uncertainty, because of changes in the environment, because of regulatory shifts or whatever, are now becoming high assumption to knowledge area situations. So the idea originally began just with ventures, and it was confined to entrepreneurship and new ventures. Now what we’re finding is it’s very broadly applicable to any business with a significant amount of uncertainty in it. And unfortunately, a lot more businesses are in that situation than have ever been before.
PAUL MICHELMAN: Rita, in your book you lay out four steps to help executives plan for their growth efforts, and I thought we’d walk through those, if that’s OK? So the first one is take advantage of organizational processes.
RITA MCGRATH: Right, the core idea there is that you can build into your company’s ways of overcoming some of the downsides of operating like a traditional business. In a traditional business what you want is to scale, you want it to be reliable, you want it to be replicable, you make your numbers, you don’t fail. In a new business, failure becomes something you really want to be more tolerant of, and I’ll talk about that more just now. But you want to create structures which protect and support the smaller, more experimental efforts, from the juggernaut of the ongoing business. So a great example there would be the way IBM has structured its emerging business opportunity program, where there’s a direct line of resource sight to the very top of the company, and the emerging businesses are actually re-combinations of existing businesses. So that they’re building into their very processes the ability to re-combine, get out of areas, get into areas. And it’s much more flexible than it used to be. So you can build that into the way that you run your company. So that would be the first idea.
PAUL MICHELMAN: OK, the next idea was manage the growth agenda.
RITA MCGRATH: Definitely, now this is a big one. You see this all the time. Executives will get up before boards and say, oh yeah, growth, that’s really important and that’s what we want to do. And then what I’ll do is, before I go meet with them, I’ll say, well, send me, just out of curiosity, humor me, send me the last three management meeting agendas for when you guys got together to talk about important serious stuff that corporate executives talk about. And so I’ll get this agenda. I’ll take this highlighter pen, right? And I’ll go through the agenda. And what do you find when you look for growth, or new business development, or whatever thing, it’s item number 18, right next to Material Safety Data Sheet Update. Well, what that tells you is, nobody’s paying attention. If you really mean it, if you’re really serious, my rule of thumb is growth or new business development, however you want to define it, will be item number one, number two or number three. Now that has a cost. It means something else is not number one, two or three. But if you really mean it, it’s got to be there. Why? If you don’t mean it, if you’re not spending time on it, if it’s not something you’ve personally put your stamp on, the rest of the organization is not stupid. They’re going to look at that and go, the boss isn’t paying attention, neither am I, and so it takes it off the agenda.
PAUL MICHELMAN: Next up, manage high tolerance of experimentation and disappointments. Not an easy task, I expect.
RITA MCGRATH: It isn’t. It isn’t. People in conventional businesses are trained to be very afraid of failure, because in a conventional business that makes sense. You should meet your numbers. You should hit your goals. In a new business or business which is under high uncertainty, though, that’s the wrong discipline. What we’re after there is what we call intelligent failures. So carefully plan, contain the down side, and learn a lot from the expenditures that you make. So the way that we try to talk about that is, you can’t really do too much about the rate of failure in a new environment, because there are so many uncertainties that you just can’t know about. What you can manage is the cost. So manage the cost of failure, not the rate of failure. You can afford a lot of failures if they’re cheap. So we like to borrow a line from Silicon Valley there, which is, fail fast, fail cheap, move on. Now if as a leader, as the senior executive in charge of this, what you can measure is not, did somebody succeed at what they hoped to achieve. The right measure is, if they failed, did they do it cheaply? If they failed, did they learn a lot? Have they now incorporated that learning into what next step they’re going to take? And that’s the judgment you can make, so it’s not undisciplined, and it’s not dumb. It’s very intelligent management of failure to promote learning.
PAUL MICHELMAN: One of the things you talk about in the book as an analogous point to this, is how important the process of disengagement from an initiative can be. Now as you note, no matter how well you do following this process, the majority of your initiatives are not going to be great commercial successes. Can you talk a little bit more about the importance of disengagement and how to do it well?
RITA MCGRATH: Sure, I’d be pleased to. And it’s interesting, because you don’t see a lot of that in business books. Business books love to write about growth and opportunity and everything. When it comes to the gritty business of getting out of something that really was not working out the way you hoped, people are much less enthusiastic to write about it. The first issue about disengagement is recognizing that it’s necessary. And that requires some judgment. It’s this notion of, Wendy, stop throwing good resources after bad. We’ve been talking about living dead ventures for a long time, the zombie ventures, right? They never quite fail, they never quite succeed, but they go on and on, sort of absorbing organizational energy and resources. And so as a leader there comes a point you have to say, you know, sure, I can never say definitively, it won’t have worked out. It could be the next Post It Note, but I’ve given it two years, I’ve given it three years, I really think we need to move people on. So the first challenge is recognizing that disengagement is necessary. Second challenge is having a look at all those key stakeholders that might be affected. And this is where I think people could do a much better job. Most of the time there’s something you can do to make them whole. So let’s say you’ve got suppliers who’ve co-invested with you in developing a technology. Well, maybe you can help them find the resources to take that technology to some other use. What unfortunately happens is people very often get so emotional about something that needs to be stopped that they never go that next step. And so it’s like working systematically through each person whom you counted on, each person who supported you, each person who has some investment emotional or otherwise in the business, and really thinking through how could I do better? And then lastly one of the best practices we talk about a lot is, even if the business didn’t succeed as a business, very often you can find things you’ve learned, capabilities you’ve built, skills you’ve honed that are really useful somewhere else. So at Nokia, for example, one of the things they’ve done is developed a system where technologies that were originally developed in a venture could be migrated somewhere else. So we’ve seen several cases where things that came out of some wacky little venture in Oulu in the outermost reaches of Finland actually became valuable to their core business, and has now made them more competitive in the core things that they’re doing in mobile handsets and devices, and that kind if thing. The key thing to remember is a venture is not a unitary thing. It is comprised of components. And sometimes to recoup successfully from a disengagement, you can take it to the level of the technology, or the capability, or the individual skill, or the network, and use those constructively somewhere else in your company.
What a lot of companies do is, oh my god, this is a failure. It has to stop. There’s like this black hole that opens up in the middle of the building. Everybody that was involved falls into it, and nobody speaks about it ever again. And that’s just the wrong way to do it. I mean, my way of looking at it is, you’ve paid the tuition, benefit from it.
PAUL MICHELMAN: So the key is not to throw the baby out with the bath water. Got it. So step four, develop appropriate measurement and reward systems.
RITA MCGRATH: Yeah, and that’s really, really key. One of the most profound things I’ve ever heard from an executive I had in class was he said, you know, Rita, when somebody in business is doing something really stupid, chances are they believe they’re going to be rewarded for it. And that stuck with me so much, because, what you’ll find is, without anybody meaning to, the measurement and rewards systems in most companies are antithetical to the kinds of things you need to do to learn. They place a premium on being right. You know, real red-blooded managers are right at all times. They place a premium on meeting your goals. Well, what if the goals themselves have changed? What if the world has changed? They place a premium on facts, and having lots of facts. And the reality is by the time you have facts, your opportunity for strategic action is very limited. So there’s a whole series of things that get in the way of effectively driving growth. One of the biggest ones is the hangover from our glorious industrial past, where the power of a manager is determined by how many people and assets that person has under management. Well, if that’s what you’re rewarding, guess what you’re going to get, you’re going to get a lot of people and assets under management. In complementary terms, that means your failures, if you have them, are going to be high cost, not low cost. So that whole way of thinking drives the wrong reflexes into your organization. Instead, what we propose is, you want to measure things like, amount of learning. You want to measure things like progress towards a goal, and willingness to stop, and willingness to say, Hey, you know this didn’t work, let’s move on to something else. This is a different way looking at what success means in those environments.
PAUL MICHELMAN: Rita McGrath, thank you very much.
RITA MCGRATH: Thank you. It’s been a real pleasure.
PAUL MICHELMAN: To read more of Rita’s ideas, you can visit her Dynamic Strategies blog at harvardbusiness.org.
HANNAH BATES: That was Columbia Business School professor Rita McGrath – in conversation with Paul Michelman on the HBR IdeaCast. If you liked this episode, check out HBR IdeaCast wherever you get your podcasts. We’ll be back next Wednesday with another hand-picked conversation about business strategy from the Harvard Business Review. If you found this episode helpful, share it with your friends and colleagues, and follow our show on Apple Podcasts, Spotify, or wherever you get your podcasts. While you’re there, be sure to leave us a review. We’re a production of the Harvard Business Review – if you want more articles, case studies, books, and videos like this, be sure to subscribe to HBR at HBR.org. This episode was produced by Anne Saini, Ian Fox, and me, Hannah Bates. Special thanks to Maureen Hoch, Adi Ignatius, Karen Player, Ramsey Khabbaz, Nicole Smith, Anne Bartholomew, and you – our listener. See you next week.