Analysis On Discovery Driven Planning Accounting Essay



Discovery driven planning is a planning technique introduced by Rita Gunter McGrath and Ian C. MacMillan in a Harvard Business Review article in 1995. Discovery-Driven Planning basically converts start-up assumptions into knowledge that grounds the planning of a new initiative in reality. Discovery driven planning is a practical tool that recognizes difference between planning for a new venture and planning for a more conventional line of business. In Discovery Driven Planning, it is assumed that plan parameters may change because new information is revealed; therefore the plan is subject to change. Discovery-driven planning is different from conventional planning. In conventional planning, managers examine future results from a well understood environment of past experience. However, discovery driven planning converts assumptions into knowledge. In conventional planning, success means delivering numbers close to what you thought you would deliver. In discovery-driven planning, success means generating the maximum amount of useful learning for the minimum expenditure.

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Discovery Driven planning works with five steps listed below :

Creating a reverse income statement.

Calculate allowable costs.

A key assumptions check-list.

Revision of reverse income statement.

A milestone planning chart.

Discovery driven planning is a tool that helps to deal with uncertainty - new product or market ventures, technology development, joint ventures, major redevelopment etc. Discovery driven planning helps the managers to learn what they don't know and helps to address new ventures at the lowest possible cost.

REFERENCE: t/an/KEL355-PDF-ENG?N=4294967001&Ntt=Project+Management



However, Discovery driven planning can be better illustrated with the help of an example:

We take a mobile company say XYZ CO. LTD who is going to manufacture a new product in mobile industry. XYZ CO. LTD believes that they can launch a new product with lowest cost and high quality as compared to other competitors.

Hence, following steps of discovery driven planning can determine whether the launch of such product will yield adequate return on investment and required profit.

The Reverse income statement: The reverse income statement is a statement prepared in which we start with the profits required by the company rather than starting with the estimates of revenue to be earned. This statement starts from the bottom and proceeds towards up so as to determine how much revenue will be earned with the required level of profits and how much cost can be allowed.

For example, if the net sales of XYZ company is100 million dollars and

income before taxes are 10 million dollars i.e. 10% return on sales. It will

have to require profit of atleast 10%.

From the given data we can find that XYZ CO. will have to yield profit of 1

million dollars i.e. 10% of 10 million dollars and if the target is to sell the

mobile at 50 dollars per piece then unit sales will amount to 200000

handsets i.e. 10 million dollars divided by 50 dollars per piece.

List all the activities and calculate allowable cost: In this step, we lay out all the activities required to produce, sell and deliver the product to the customer. These activities comprises of allowable costs.

For example, to calculate allowable costs, XYZ CO. has to calculate the cost

incurred in manufacturing, sales etc.

Compile assumption check list: In this step, each assumption is discussed and checked to the best of the company's knowledge.

Revision of reverse income statement: The entire income statement is looked back so as to identify whether that product still yields adequate return and desired profit as in case of XYZ company proposing to sell a new handset.

Milestone planning chart: Milestone planning refers to a technique in which managers test all the assumptions and convert them into knowledge.

For example, can XYZ Company enhance its profit margin and return with all the assumptions is the main motive of milestone planning.



Total Figures

Required profits = 1 million dollars

Necessary revenues to deliver 10% sales margin = 10 million dollars

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Allowable costs to deliver 10% sales margin = 9 million units

Per Unit Figures

Required unit sales at 50 dollars per unit = 200000 units


1. Sales

Required disk sales = 200000 handsets

Average order size = 1000 handsets

Orders required (200000/1000) = 200 orders

Annual salesperson days (100,000/2) = 50,000

Sales force for 250 days per year

50000 salesperson days/20 = 200 people

Salary per salesperson = 10000 dollars

Total sales-force salary cost (10000 x 200) =2 million dollars

2. Manufacturing

Annual production capacity per line = 10 handsets per hour

240 handsets per day x 300 days = 72000 handsets

Production staffing (30 per line x 20 lines) = 600 workers

Salary per worker = 5000 dollars

Total production salaries (600 x 5000dollars) = 3 million dollars


Profit margin = 10%

Revenues = 10 million dollars

Price per unit = 50 dollars

Production capacity per line = 10 handsets per hour

Average order size = 1000

Selling days per year = 250

Annual salesperson's salary = 10000 dollars

Production days per year = 300 days

Workers per production line per day = 30

Annual manufacturing worker salary = 5000 dollars

Material cost = 50 dollars

Packing cost = 20 dollars

Allowable administration costs = 4 million dollars


Required profits = 1 million dollars

Necessary revenues to deliver 10% sales margin = 10 million dollars

Allowable costs to deliver 10% sales margin = 9 million units

Sales force salaries = 2 million dollars

Manufacturing workers salaries = 3 million dollars

Allowable administration cost = 4 million dollars


Profit margin


Price per unit

Production capacity per line

Average order size

Selling days per year

Annual salesperson's salary

Production days per year

Workers per production line per day

Annual manufacturing worker salary

Material cost

Packing cost

Allowable administration costs


XYZ company applied discovery driven planning as a tool and discovered an amount so as to obtain desired return on sales and profit. In this example, the profit margin came out to be 10%, return on sales is 10 million dollars and allowable costs including allowable administration costs came out to be 9 million dollars. In this respect, XYZ Company will be a able to get a clear view of what activities, how much revenue, how much profit is required to make its product a success in the world market. Also the managers of the company will be able to unclear and unfold the activities and convert all the assumptions into knowledge.

Hence, discovery driven planning can be considered a powerful tool for any undertaking in which high risk is involved.