Assumption-based planning: Difference between revisions

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'''Assumption-based planning''' in [[project management]] is a post-planning method that helps companies to deal with uncertainty. It is used to identify the most important assumptions in a company’scompany's [[business plan]]s, to test these assumptions, and to accommodate unexpected outcomes.

== Overview ==

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Assumption-based planning methods include:

* Critical assumption planning (CAP) by D. Dunham & Co.<ref>{{Cite journal |last=Sykes |first=Hollister B. |last2=Dunham |first2=David |date=1995-11-01 |title=Critical assumption planning: A practical tool for managing business development risk |url=https://www.sciencedirect.com/science/article/pii/088390269500085M |journal=Journal of Business Venturing |volume=10 |issue=6 |pages=413–424 |doi=10.1016/0883-9026(95)00085-M |issn=0883-9026|url-access=subscription }}</ref>

* [[Critical assumption planning]] (CAP) by D. Dunham & Co.

* Assumption-based planning by [[RAND]] : raises the visibility of make-or-break uncertainties common to new ventures by forcing managers to admit what they don’tdon't know.

* Discovery-Driven Planning by [[Rita Gunther McGrath]] and Ian C. MacMillan.<ref>McGrath, R. G. & MacMillan, I. C. 1995. Discovery Driven Planning. Harvard Business Review, 73(4): 44-54.</ref><ref>McGrath, R. G. & MacMillan, I. C. 2009. Discovery Driven Growth: A Breakthrough Process to Reduce Risk and Seize Opportunity. Boston: Harvard Business Publishing</ref>

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== Position in business planning process ==

Most business planning methods or books about “how"how to write a business plan”plan" indicate that you should write down your financial assumptions at the end of your plan, but assumption-based planning encourages managers to actively plan and monitor the validation of these assumptions.

The identification of assumptions may lead to a change in the business plan, so advocates of assumption-based planning argue that it should be at the core of business planning.

==Types of assumption==

[[RAND]] defines an assumption as “an"an assertion about some characteristic of the future that underlies the current operations or plans of an organization.”" There are several types of assumption. Include implicit and explicit assumptions, and primary and secondary assumptions, an important aspect of [[Criticalcritical assumption planning]]. The two classifications are not mutually exclusive; an assumption can be both explicit and primary.

=== Implicit and explicit assumptions ===

Explicit assumptions are assumptions of which the intention that is fully revealed or expressed without vagueness, implication, or ambiguity. However, explicit statementsambiguity—though in a plan, they often haverely hiddenon [[implicit assumptionsassumption]]s. Implicit assumptions are assumptions that are not expressed and may go undetected. If implicit assumptions prove to beare wrong, this can damage projects.

{|

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|-

| style="background-color: #CCC; border: 2px solid black" |

# Customers will buy our product because we think it’sit's a good product.

# Customers will buy our product because it’sit's technically superior.

# Customers will agree with our perception that the product is “great”great.

# The product will sell itself

# Distributors are desperate to stock and service the product.

# We can develop the product on time and on budget.

# Competitors will respond rationally.

# We will be able to hold down prices while gaining share rapidly.

# We will have no trouble attracting the right staff.

# Customers will run no risk in buying from us instead of continuing to buy from their past suppliers.

|-

|}

== Process of Assumption-Based Planning (ABP)==

[[File:ABP_process.png|thumb|320px|Assumption-Basedbased Planningplanning (ABP). The blue part of the figure depicts the process steps of a general assumption-based planning method, the white part identifies the separate deliverables. Every step is described in the assumption-based planning process list displayed below the picture.<ref>The modelling method in general is a result from a method engineering approach as proposed by the [[University of Utrecht]] in its "Method Engineering Encyclopedia"</ref>]]

The steps of Assumptionassumption-Basedbased Planningplanning (ABP) are:

* Identify assumptions: Collect all assumptions implicit, explicit, primary and derivative, out of the (business) plan.

* Determine criticality: Try to quantify the assumptions as much as possible in order to determine which assumptions have the greatest (financial) impact.

* Design tests: Design a test for every critical assumption. In a test design you state how to test the assumption and what proves the assumption wrong or right.

* Schedule tests: Every critical assumption needs tomust be tested, but not all assumptions can be tested in the present. So future assumptions tests are scheduled in a test schedule. Some possible reasons to schedule a test in the future are a lack of information in the present or a dependency on the test outcomes of other tests.

* Test assumptions: When an assumption is tested this results in a test outcome, which proves the assumption right or wrong.

* Reassess plan: Based on the test outcomes and the test schedule one might decide to reassess the venture plan and update the business plan with the new insights gathered in the ABP process.

* Plan re-testing: The assumptions need tomust be re-tested regularly if not constantly. There should be a retest schedule offor every critical assumption.

* Create or update the assumption plan: The assumption plan holds all data gathered during the ABP process.

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During this step the assumptions are identified and there is a determination of criticality. The hardest part of CAP is to identify the assumptions that are not written down.

In order toTo determine the criticality of the assumptions, they need tomust be quantified;. itThis ismakes thenit possible to put the financial results in a [[spreadsheet]] and link them together. These financial impacts will change for the various assumptions.

CAP measures the criticality of an assumption as a change in the [[net present value]] of a venture (NPV). To determine criticality each assumption is assigned a range of uncertainty: base case, best and worst case. Then, assumption for assumption, while keeping the other assumptions at [[ceteris paribus|base case]], the NPV changes for each assumption in the worst- and best-case scenarios are checked.

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===Test program design===

The assumptions need tomust be tested. Sometimes good market research is enough,

other times a working prototype needs tomust be developed. The testing order in which thefor assumptions are tested is critical in terms of testing cost. A major focus of the moneyCAP method is to maximize the learning per unit spentexpenditure on testing. One

of the major focuses of the CAP method is to maximize the learning per unit expenditure on testing.

In order toTo determine the best testing option, the test Effectiveness ratio (e)

is calculated for one or more assumptions based on the estimated Costs (C), Time spend on testing (T) and the estimated reduction (R) between the NPV values of the assumptions (P as a percentage of the NPV range). Using these parameters, the effectiveness ratio (e) is calculated:

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===Funding request===

When the test program design is ready and the costs are clear, resources have tomust be allocated to the test program. In most companies or start-ups clearance from senior managers or [[venture capitalists]] is needed to conduct the tests.

===Test implementation===

In this step the actual testing of the assumptions takes place.

===Venture Reassessmentreassessment===

When the results of one or more tests are known, it might be that resources need tomust be re-allocated and business plans have to be updated.

== References ==

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==External links==

*[http://wwwdgital.andrewgrill.comlink/capcritical-assumption-planning Australian CAP Case Study]

[[Category:ProjectSchedule (project management)]]